Section 14 of the Insolvency and Bankruptcy Code (IBC) was enforced with effect from 1 December 2016 through Notification No. S.O. 3594(E) dated 30 November 2016. Since its introduction, Section 14 has undergone two amendments. The first amendment was made through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, dated 17 August 2018, effective from 6 June 2018. Before the amendment, sub-section (3) of Section 14 read as follows: “The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.” After the amendment, sub-section (3) was revised to state that the provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator or any other authority, and to a surety in a contract of guarantee to a corporate debtor.
The second amendment to Section 14 came through the Insolvency and Bankruptcy Code (Amendment) Act, 2020, dated 13 March 2020, effective from 28 December 2019. Through this amendment, an explanation was inserted after sub-section (1) clarifying that, notwithstanding anything contained in any other law in force, a license, permit, registration, quota, concession, clearance, or similar grant or right given by the Central Government, State Government, local authority, sectoral regulator, or any other authority shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising from the use or continuation of such rights during the moratorium period.
The same amendment inserted sub-section (2A) after sub-section (2). It provided that where the interim resolution professional or resolution professional considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage its operations as a going concern, the supply of such goods or services shall not be terminated, suspended, or interrupted during the moratorium period, except where the corporate debtor has not paid dues arising from such supply during the moratorium or in such other specified circumstances. Additionally, clause (a) of sub-section (3) was amended to include transactions, agreements, or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
Overview of Moratorium Provisions
Section 14 provides for a moratorium commencing from the insolvency commencement date, which is the date on which the Adjudicating Authority admits an application for initiating the corporate insolvency resolution process under Sections 7, 9, or 10 of the Code. Under sub-section (1), specific actions are prohibited during the moratorium. These include the institution or continuation of suits or proceedings against the corporate debtor, including the execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority; the transferring, encumbering, alienating, or disposing of by the corporate debtor any assets or any legal right or beneficial interest therein; any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property, including action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.
With the 2020 amendment, an explanation was added to clarify that licenses, permits, registrations, quotas, concessions, clearances, or similar grants given by any authority cannot be suspended or terminated due to insolvency, provided the current dues for their use are paid during the moratorium. Sub-section (2) specifies that the supply of essential goods or services to the corporate debtor, as may be prescribed, shall not be terminated, suspended, or interrupted during the moratorium. Further, sub-section (2A) states that where the resolution professional deems the supply of goods or services critical to preserve value and continue operations, such supply shall be maintained except where dues remain unpaid or in other specified situations.
Sub-section (3) clarifies that the moratorium does not apply to transactions, agreements, or arrangements as notified by the Central Government in consultation with any financial sector regulator or other authority, and to a surety in a contract of guarantee to a corporate debtor. The moratorium remains in force from the date of the order until the completion of the corporate insolvency resolution process. If, during this period, the Adjudicating Authority approves a resolution plan under Section 31 or orders liquidation under Section 33, the moratorium ceases from the date of such approval or order.
Meaning and Objective of Moratorium
The term moratorium is not defined in the Code. However, in Words and Phrases, Permanent Edition, Volume 27A, page 210, it is described as the suspension of all or certain legal remedies against debtors, sometimes authorized by law during financial distress. The Supreme Court in Shiv Kumar Tulsian v. Union of India observed that a moratorium implies the postponement of obligations of the debtor to pay creditors. An effective insolvency law aims to protect the value of the insolvency estate from diminution by the actions of parties to the proceedings while ensuring the fair and orderly administration of the process. The parties from whom protection is most needed are the debtor and the creditors.
Insolvency proceedings are collective, requiring the protection of all creditors’ interests against individual enforcement actions. Many insolvency laws include a mechanism to prevent creditors from commencing or continuing actions to enforce their rights during insolvency proceedings. This mechanism, known as a moratorium, suspension, or stay, also halts actions already underway against the debtor. The immediate benefit of imposing a stay is to limit creditor actions, providing the debtor with breathing space. However, the stay must be balanced to avoid undue interference with contractual relations, especially with secured creditors.
In reorganisation proceedings, the stay facilitates continued operations, allowing the debtor time to reorganise, prepare, and seek approval for a resolution plan. It also enables shedding unprofitable activities and contracts. This is more crucial in reorganisation than liquidation and may incentivise debtors to initiate such proceedings. Nevertheless, the moratorium signals uncertainty to suppliers, customers, and employees regarding the business’s future. Under the Code, the moratorium period serves as a calm period to preserve asset value during the corporate insolvency resolution process. Courts, such as in Lanco Infratech Limited v. Isolloyd Engineering Technologies Limited, have noted that Section 14 is prohibitive, limiting actions against the corporate debtor and preserving the company’s focus on resolution. This provision is not intended as a benefit to the corporate debtor beyond its stated limits.
Recommendations of the Bankruptcy Law Reforms Committee
The Bankruptcy Law Reforms Committee (BLRC), which drafted the Code, discussed the motivation behind the moratorium. In its report, paragraph 5.3.1 states that the moratorium is intended to maximise value by allowing the entity to continue operations while viability is assessed. There should be no additional stress on the business after the public announcement of the insolvency resolution process. The moratorium order imposes a stay not only on debt recovery actions but also on any claims, whether from old lawsuits or new ones, to recover from the entity. This makes the strict enforcement of the moratorium essential for an effective and timely resolution.
Institution of Suits or Continuation of Pending Suits or Proceedings Against the Corporate Debtor
Section 14(1)(a) of the Code provides that on the insolvency commencement date, the Adjudicating Authority shall by order declare a moratorium prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority. Once the moratorium is in effect, this provision expressly stops the initiation or continuation of proceedings against the corporate debtor. This principle was upheld by the Supreme Court in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd., where it was clarified that the moratorium has a binding effect and any proceedings initiated during the moratorium are prohibited.
Continuation of Proceedings and Procedural Steps
A significant legal issue has arisen regarding whether procedural steps, such as the filing of a written statement, constitute continuation of proceedings in violation of Section 14. In Golden Jubilee Hotels Limited v. EIH Ltd., the trial court had reasoned that merely filing written statements would not breach the moratorium, as the civil court could not pass any order imposing liability during this period. The trial court opined that procedural orders not affecting the substance of the case could proceed and that written statements could assist the interim resolution professional in resolving disputes.
The High Court of Andhra Pradesh, however, disagreed. It held that continuation of suit proceedings encompasses every step, procedural or adjudicatory. Once a moratorium order is passed, pending suit proceedings must come to a complete halt. The court also noted that the interim resolution professional does not play an adjudicatory role in testing creditor claims and that the defendants’ written statements would not assist in dispute resolution. Therefore, requiring such procedural actions during the moratorium was found to be a violation of Section 14.
Counterclaims Against the Corporate Debtor
Another important question has been whether counterclaims against a corporate debtor fall within the moratorium’s scope. In SSMP Industries Ltd. v. Perkan Food Processors (P.) Ltd., the High Court of Delhi considered whether a counterclaim should be stayed under Section 14. The court observed that a counterclaim is, in essence, a proceeding against the plaintiff, who in this case was the corporate debtor. Strictly speaking, such claims fall under the prohibition in Section 14(1)(a).
However, the counterclaim in question was directly connected to the transaction forming the basis of the corporate debtor’s claim. The court noted that if the corporate debtor’s claim were allowed to proceed without the counterclaim, there could be conflicting decisions on the same transaction. It concluded that both claims should be adjudicated in the same forum to avoid inconsistency. Importantly, the court emphasised that until the counterclaim is decided, there is no immediate threat to the corporate debtor’s assets, and therefore, continuing the counterclaimwould not adversely affect the moratorium’s purpose.
Proceedings Against Directors Linked to the Corporate Debtor
Another legal question concerns whether suits against the directors or officers of a corporate debtor can continue during the moratorium. In Golden Jubilee Hotels Limited v. EIH Ltd., the company was the first defendant, and its Director and CEO was the second defendant. The trial court initially allowed the suit to proceed against the director, reasoning that the moratorium applied only to the company.
The High Court disagreed, noting that the cause of action against the director was not independent but inextricably linked to the company’s liability. The cheques forming the basis of the suit were issued by the company, and the director was impleaded only in his capacity as CEO. Section 14, after its 2018 amendment, excludes only sureties in a contract of guarantee from the moratorium. There is no provision exempting directors from its protection when the cause of action is tied to the corporate debtor’s liability. Therefore, the High Court held that proceedings could not continue against the director under these circumstances.
Arbitration Proceedings During Moratorium
Section 14’s application to arbitration proceedings has been the subject of multiple court decisions. The Supreme Court in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd. held that any arbitration initiated after the moratorium is null and void. Similarly, in K.S. Oils Ltd. v. State Trade Corporation of India Ltd., the National Company Law Appellate Tribunal held that arbitral proceedings pending between a corporate debtor and a financial creditor could not be initiated or continued during the moratorium.
In Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd., the Delhi High Court examined whether proceedings under Section 34 of the Arbitration and Conciliation Act, which involve challenging an arbitral award, fall within the moratorium. The court concluded that such proceedings were not barred because they did not directly threaten or diminish the corporate debtor’s assets. It distinguished between Section 34 proceedings, which are pre-enforcement steps, and Section 36 proceedings, which deal with enforcement and execution of awards.
However, the Supreme Court in P. Mohanraj v. Shah Brothers Ispat (P.) Ltd. disagreed with this interpretation. It held that Section 34 proceedings are indeed proceedings against the corporate debtor because they pertain to challenges to arbitral awards that may result in monetary liabilities. Upholding such awards would directly lead to enforcement actions against the debtor, and therefore, Section 34 proceedings are covered by the moratorium.
Legal Consequences of Moratorium on Creditors and Debtors
When a moratorium is imposed under the Insolvency and Bankruptcy Code, it has immediate and binding consequences for both creditors and debtors. This period effectively freezes certain legal and financial activities to maintain the status quo while the corporate insolvency resolution process takes place. For creditors, the moratorium prevents them from initiating or continuing legal proceedings for the recovery of debt. They cannot enforce any security interest or repossess property that has been given as collateral. Even operational creditors, such as suppliers or service providers, must halt recovery actions, including arbitration proceedings, unless explicitly allowed by the adjudicating authority. For debtors, the moratorium offers protection from aggressive recovery actions, enabling them to continue business operations without the fear of immediate legal enforcement. This breathing space allows the corporate debtor to focus on preparing and implementing a resolution plan that benefits all stakeholders.
Effect on Secured Creditors
Secured creditors, such as banks and financial institutions holding mortgages or other security interests, are significantly impacted during the moratorium. Normally, they would have the right to enforce their security interest in case of default. However, under Section 14 of the IBC, the moratorium temporarily suspends such rights. They cannot sell, transfer, or take possession of secured assets without the approval of the resolution professional and the adjudicating authority. This restriction ensures that secured creditors do not gain an unfair advantage over unsecured creditors during the resolution process. The moratorium thus upholds the principle of equitable treatment of all creditors. While this may seem restrictive for secured lenders, it serves the larger purpose of preserving the corporate debtor’s value for collective benefit.
Effect on Operational Creditors
Operational creditors, who provide goods and services to the corporate debtor, also face limitations during the moratorium. They cannot initiate legal proceedings for non-payment of dues or enforce any arbitral award during this period. This ensures that operational creditors do not disrupt the debtor’s ongoing operations, which could otherwise hinder the chances of a successful resolution. However, operational creditors are not without recourse. They can file claims with the resolution professional, who will verify and include them in the list of creditors for consideration in the resolution plan. This system ensures that operational creditors’ interests are safeguarded while maintaining the debtor’s operational stability.
Impact on Ongoing Legal Proceedings
One of the primary features of a moratorium is the suspension of all ongoing legal proceedings against the corporate debtor. This includes suits in civil courts, arbitration proceedings, and execution of decrees. The aim is to prevent a multiplicity of actions that could dissipate the debtor’s assets and hinder the resolution process. By halting these proceedings, the moratorium channels all disputes and claims into the insolvency resolution process, which is designed to address them collectively. This avoids inconsistent judgments and promotes a coordinated approach to resolving the debtor’s liabilities. However, proceedings initiated after the moratorium’s commencement or unrelated to debt recovery may not always be covered, depending on the adjudicating authority’s interpretation.
Restrictions on Asset Transactions
During the moratorium, the corporate debtor is restricted from transferring, encumbering, alienating, or disposing of any assets. This prohibition is crucial for preserving the debtor’s asset base, which forms the foundation for repayment under the resolution plan. Any transaction that violates this restriction may be deemed void unless approved by the resolution professional and the adjudicating authority. This safeguard ensures that the debtor does not engage in activities that could deplete the value available to creditors. It also prevents preferential, undervalued, or fraudulent transactions that might favor certain parties at the expense of the creditor body as a whole.
Treatment of Essential Services
The IBC recognizes that essential services, such as electricity, water, and telecommunication, are necessary for the continued operation of the corporate debtor’s business during the moratorium. Therefore, Section 14(2) of the Code mandates that such services cannot be terminated or suspended during the moratorium period. This ensures that the debtor can continue its operations without disruption, which is vital for preserving value and maintaining business viability. However, the debtor must continue to pay for these services as per contractual terms, and failure to do so may allow the service provider to seek relief from the adjudicating authority.
Effect on Government Dues and Enforcement Actions
Government authorities, including tax departments, are also bound by the moratorium provisions. This means they cannot initiate or continue proceedings for the recovery of statutory dues during the moratorium period. However, the treatment of government dues under the IBC has been subject to debate and evolving judicial interpretation. While the moratorium halts coercive actions, government claims must still be filed with the resolution professional and addressed in the resolution plan. This ensures that government dues are treated at par with other unsecured claims unless specifically prioritized under law.
Protection for Guarantors and Third Parties
The moratorium applies only to the corporate debtor and its assets, not to guarantors or third parties. This means that creditors may still pursue guarantors for recovery during the moratorium. However, in certain cases, courts have extended limited protection to guarantors to ensure that recovery actions against them do not indirectly undermine the resolution process. The exact scope of such protection depends on judicial interpretation and the facts of each case. This distinction ensures that the corporate debtor’s protection under moratorium is balanced against creditors’ contractual rights against guarantors.
Role of the Resolution Professional During Moratorium
The resolution professional plays a central role during the moratorium period. They take over the management of the corporate debtor, replacing the board of directors, and are responsible for ensuring compliance with the moratorium provisions. This includes monitoring transactions, preventing unauthorized asset transfers, and coordinating with creditors to verify claims. The resolution professional also ensures that the debtor continues operations smoothly, with necessary approvals for transactions that are essential for day-to-day business. Their role is critical in preserving the debtor’s value and preparing for the formulation and approval of a viable resolution plan.
Consequences of Violation of Moratorium
Violating the moratorium provisions can attract serious legal consequences. Any action taken in contravention of the moratorium may be declared void by the adjudicating authority. Parties who violate the moratorium may also face penalties under the IBC. For corporate debtors, unauthorized asset transfers can be reversed, and those involved may face personal liability. For creditors, pursuing recovery actions in violation of the moratorium can result in dismissal of proceedings and potential cost implications. These consequences underscore the binding nature of the moratorium and its importance in the insolvency resolution framework.
Interaction with Other Laws
The moratorium under the IBC overrides other laws to the extent of inconsistency, as provided under Section 238 of the Code. This means that even if other laws allow recovery actions or legal proceedings, they cannot be enforced during the moratorium if they conflict with the IBC provisions. This overriding effect ensures uniformity and prevents creditors from bypassing the moratorium through alternative legal routes. However, certain proceedings, such as criminal actions or regulatory compliance matters, may continue if they do not directly affect the debtor’s assets or debt recovery process.
Impact of Moratorium on Creditors and Debtors
The moratorium creates a balanced approach by pausing aggressive recovery measures, thus ensuring that creditors cannot take disproportionate actions against the debtor during insolvency proceedings. For creditors, it guarantees a fair distribution of available assets rather than allowing individual recoveries that might leave some parties unpaid. For debtors, it offers breathing space to negotiate and work towards resolution without the constant threat of asset seizure or litigation. The moratorium ensures that no creditor gains an undue advantage over others and promotes equality among all stakeholders.
Duration of the Moratorium Period
The moratorium period typically begins from the date of admission of the insolvency application by the Adjudicating Authority under Section 7, 9, or 10 of the Insolvency and Bankruptcy Code (IBC). It continues until the completion of the Corporate Insolvency Resolution Process (CIRP), which is normally 180 days but can be extended by a maximum of 90 days in specific circumstances. In certain cases, the moratorium may end earlier if a resolution plan is approved or liquidation proceedings commence before the maximum period expires.
Restrictions Imposed During the Moratorium
During the moratorium, the following restrictions are imposed:
- No suits or continuation of pending suits or proceedings against the corporate debtor are allowed.
- No action to foreclose, recover, or enforce any security interest is permitted.
- The transfer, encumbrance, or disposal of any assets of the corporate debtor is prohibited.
- No recovery of property by an owner or lessor is permitted if it has the corporate debtor.
These restrictions aim to maintain the corporate debtor’s assets intact for the benefit of all creditors and to enable the insolvency professional to carry out the process effectively.
Role of the Adjudicating Authority
The National Company Law Tribunal (NCLT) acts as the adjudicating authority for corporate insolvency cases. It is responsible for declaring the moratorium once an application for insolvency is admitted. The NCLT also monitors compliance with the moratorium provisions and has the power to penalize violations. This ensures that the purpose of the moratorium is preserved, and all parties adhere to the rules laid down under the IBC.
Termination of Moratorium
The moratorium ends upon the approval of a resolution plan by the Adjudicating Authority or when an order for liquidation is passed. Once the moratorium is lifted, creditors regain the right to enforce their claims as per the terms of the resolution plan or liquidation proceedings. The termination marks the end of the protective shield around the debtor, shifting focus to execution and implementation of the insolvency outcome.
Importance of Compliance
Strict compliance with moratorium provisions is essential for the integrity of the insolvency process. Any violation can undermine the fairness and equality that the moratorium seeks to uphold. Non-compliance can also lead to legal consequences, including penalties and contempt proceedings. Therefore, both creditors and debtors must ensure adherence to the moratorium provisions to facilitate a smooth and equitable resolution.
Conclusion
The moratorium under the Insolvency and Bankruptcy Code (IBC) serves as a critical safeguard in the insolvency resolution process. By halting legal proceedings, recovery actions, and enforcement measures against the corporate debtor during the resolution period, it ensures that the debtor’s assets remain protected and available for restructuring. This temporary pause gives the resolution professional and stakeholders the necessary breathing space to evaluate the financial position, negotiate with creditors, and work toward a viable resolution plan. Without the moratorium, the risk of asset depletion, chaotic recovery actions, and creditor conflicts would significantly undermine the effectiveness of the insolvency framework. In essence, the moratorium embodies the spirit of the IBC to maximize asset value, protect stakeholders’ interests, and promote the revival of financially distressed entities in an orderly and fair manner.