The following document takes an exhaustive look at Section 14 of IBC, i.e. Moratorium Period.
The term has been defined in Merriam Webster Dictionary to mean “legally authorized period of delay in the performance of a legal obligation or the payment of a debt; a waiting period set by an authority; or a suspension of activity.
In Cambridge Dictionary, moratorium refers to period of time during which a particular activity is stopped. In the Code, Section 33(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) stipulates “Subject to Section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor: Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.”
It is a general notion that moratorium exists only at the time of corporate insolvency resolution process; the article discusses whether moratorium exists during liquidation as well. Further, based on precedents, the author has also tried to explain the exclusions and inclusions in the term “other legal proceedings” as mentioned in Section 33(5) of IBC.
Moratorium created a clam period wherein negotiations can be made effectively. It enables the creditors and different stakeholders to think clearly over the resolution process and discuss positively the methods of restructuring the going concern. It also helps the corporate debtor to its assets from any downfall. So that the motive behind it i.e. maximization of assets is maintained.
However, it does not limit or restricts the institution of any proceeding under Article 32 and 226 of the Constitution of India as stated in Section 63 of the Insolvency and Bankruptcy Code, 2016.
Section 14, Indian Bankruptcy Code
Sec 14 of the IBC Act, 2019 i.e. moratorium period bars any kind of suit or activity that may affect the assets. But in 2018 an amendment was made which made and exception for the guarantors. Now under this new amendment the creditors can go after the guarantors to recover their debt. Quite many judgments until then have delivered clarifying whether moratorium period prohibits the creditor to go after the assets of the guarantor or whether CIRP can be initiated against the corporate guarantor even before the same is initiated for corporate debtor.
But the question that looms in the shade is whether the creditors can go after the guarantors after the conclusion of CIRP. Because as of now, after the CIRP is concluded, the corporate debtor is discharged of all the debt and is deemed to be settled as per Section 31 which is binding on the corporate debtor, employees, members, creditors, guarantor and stakeholders involved in the resolution plan. Hence no one can initiate any proceeding against the corporate debtor for its previous conduct.
However, the creditors are granted such relief under Section 14. Creditors possess the right under the law to go against the guarantors as it is assumed that the liabilities are co-extensive with the borrower. While these are independent in it, so the contract of guarantee is assumed to be independent as well.
The guarantors are impaired in such a scenario. The defence which guarantors generally take under the ICA is Section 133,134 and 140. But herein Section 134, if the creditors discharges the principal debtors voluntarily then the guarantors gets discharged as well. The voluntary discharge of the principal debtors is the fundamental ingredient that discharges the guarantors altogether. But here in IBC the corporate debtor is discharged by operation of law and not voluntarily. Thus, the creditors are allowed to go against their recovery of debt.
The defence of Section 140 is also of no avail. Guarantors cannot use right of subrogation and sue corporate debtor. In Lalit Mishra & Ors. v. Sharon Biomedicine Ltd. it was said that since the resolution process is not a recovery process and thus the guarantors cannot use Section 140 to recover the debt. Hence it is evident that the creditors are quite independent.
Moratorium for the corporate debtor is enshrined in Section 10 of the IBC whereas for personal guarantor it is in Section 101 of the IBC. To avail the benefit of moratorium for the personal guarantor, separate resolution process is required to be filed. Majorly NCLT is for the corporate persons and DRT for individuals and partnership firms.
However, as per Section 60(2) when a resolution process is under process or pending before NCLT, then is such a situation the personal guarantor of such corporate debtor must file insolvency before such NCLT. The benefit from such moratorium can be construed only if the application of insolvency resolution process gets accepted as per Section 94-101 of the IBC. But as the provisions of Part III of the IBC has not yet been notified containing Section 94-101, so currently this route is not available. However, when notified, this route shall be available only the personal guarantors separately files for insolvency resolution process.
If the guarantors fail to pay the guaranteed amount, it would be upon the lender if they want to invoke Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) or initiate insolvency proceeding under Section 95 of the IBC. But in a situation where the moratorium has not been declared, the SARFRAESI proceedings will continue.
Thus, it can be construed that the benefit under Section 14 is applicable only to the corporate debtor. Hence supreme court in the matter of Allahabad High Court in the matter of Sanjeev Shriya vs. State Bank of India & Ors., rightly mentioned the distinction between Section 14 and Section 101.
IBC is silent on whether the criminal proceeding during the resolution process is permissible or not. This has brought up another hole in the said act. In the case of Shah Brothers Ispat Limited v. P Mohanraj & Others, the appellant initiated a corporate insolvency resolution process and also sued under Section 138 of the Negotiable and Instrument Act, the corporate debtors and its directors because its cheque was dishonoured due to insufficient money in the account. The corporate debtor went on to the tribunal for quashing the criminal suit against them as it cannot be instituted during the moratorium period.
NCLT accepted the contention made by the corporate debtor and passed the order in favour of the corporate debtor. However, on further appeal NCLAT set aside the order made by the NCLT and ruled that since it is not a recovery claim the suit can be instituted against the corporate debtor. It also said that the criminal proceeding does not come under the ambit of the moratorium and a competent court can proceed with the suit.
Proceedings notified by the Central Government
Section 35(6) stipulates that the provisions of sub-Section (5) shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator, however, no such legal proceedings has been notified till date.
An exemption was granted to cases pending before High Courts or Supreme Court, but no such exemption has been provided for under the IBC. The issue was discussed in Canara Bank v. Deccan Chronicle Holdings Limited. The appellant (i.e. the creditor) submitted that the adjudicating authority cannot exclude any court from the purview of moratorium for the purpose of recovery of amount or execution of any judgement or decree, including the proceeding, if any, pending before the High Courts and the Supreme Court of India against a corporate debtor. The NCLAT acknowledged that clause (a) of Section 14(1) specifically does not exclude any Court, including the High Courts or even the Apex Court.
However, the Hon’ble Bench there are certain constitutional provisions which must be considered. There is no provision to file any money suit or suit for recovery before the Supreme Court except under Article 131 of the Constitution; some High Courts have original jurisdiction to entertain the suits, which may include money suit or suit for recovery of money. However, the writ authority conferred on the Supreme Court and the High Court under Article 32 and Article 226 of Constitution of India, being a constitutional power, cannot be curtailed by any provision of an Act or court. Therefore, ‘moratorium’ will not affect any suit or case pending under Article 32 or 226. However, so far as suit, if filed before any High Court under original authority which is a money suit or suit for recovery, against the corporate debtor such suit will be covered by the bar imposed under Section 33(5).
Moratorium created a deadlock situation when any such situation of arbitration came up. Section 14 of the IBC do not allow any kind of proceeding be it arbitration that can be instituted against the corporate debtor. Backed with Section 238 it even got stronger and a firm ground to hold its position. But this would impair the stakeholders and would deter them from entering into any such agreement later on. As after the conclusion of corporate insolvency resolution process (CIRP), the corporate debtor is deemed to be discharged of all its debt. Hence, in such a situation no claim could be made against the corporate debtor. While in a situation where the claims are made by the Corporate Debtor and no counter claims are made against them, Section 14(1)(a) do not put bar on such arbitration proceeding.
When claims are made against the corporate debtor, the bar is in operation on such arbitration proceeding. This biased stake of the IBC is in contravention with Section 13 and 14 where it invites all the creditors, including parties with arbitration, to file their respective claim. If the act does not want any stakeholder with arbitration clause to file its claim, then it must clearly mention it and provide a proper mechanism to dispose their claims.
This dead silence was broken in Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd and Anr.. In this case it was stated that arbitration proceeding can be taken up by the corporate debtor and proceed with it provided no counter claim is made against the corporate debtor. However, the NCLT left it open for the arbitration tribunal to segregate the claim made by the corporate debtor and counter claim and whether it can be dealt separately or not.
However, NCLAT in Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd and Anr., made a remarkable statement that the unless the counter claim are factored in a justice could not be done. Hence it was of the view that arbitration proceeding must continue in the absence of any bar under IBC. But unfortunately, if the corporate debtor is held liable to pay then no recovery could be made. As it is the fundamental thing that is insolvency is not a recovery process and if it is allowed the motive of this act which maximization of assets would fail.
It can be concluded herein that moratorium will come into effect post award of the arbitrational proceeding and would solely depend upon the nature of the award, whether the recovery will be made or not. The court also made a distinction between Section 34 and 36 of the Arbitration Act i.e. objection and enforceability of the award.
The IBC Act, particularly Section 14 tends to bar all proceeding against the corporate debtor during the insolvency proceeding so that it can peacefully complete the insolvency proceeding without any judicial nemesis. However, there are some actions that may need to be addressed which is not specifically mention and which has caused these conundrums.
The moratorium must be extended to the guarantor of the corporate debtor simultaneously. And the guarantor must not be exempted from its right of subrogation once the corporate debtor has filed for insolvency. If such a right is extinguished, it will possibly deter future guarantors. In another sense as the corporate debtor is discharged of all its debts once the corporate insolvency is complete, so must be its guarantor; or otherwise the right of subrogation must not be extinguished.
Similarly, in a situation where a claim is made before the resolution professional but if it contains arbitration clause with the corporate debtor then RP (Resolution Professional) must wait until the amount is crystallized by the arbitration tribunal. There must also be a bar on resolution professional not to submit the resolution plan for its approval by CoC. Because once the plan gets approved by the CoC and the creditors fail to submit its claim in time then it will impair the creditor which will be violation of his natural rights.
- What do you mean by Moratorium Period?
Moratorium Period is the time wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.
- What proceedings are not covered by Moratorium Period?
The following proceedings are not covered:
- Tax Proceedings
- Writ Proceedings
- Criminal Proceedings
- Any other proceedings as notified by the Central Government.
- Are cases under S.138 NI Act covered by the Moratorium Period?
No, S.138 cases are criminal proceedings and as such would not be covered by Moratorium Period under S.14 of IBC. (See Shah Brothers Ispat Limited v. P Mohanraj & Others).
- Are Arbitration proceedings also blocked by the Moratorium Period?
Yes, any and all sorts of proceedings affecting the assets of the Debtor is stalled during this period.
- What happens in the case of violation?
Under Section 74 of the IBC, officials of the corporate debtor who violate provisions of moratorium can be imprisoned for a minimum of three years, which may be extended up to five years. Such officials will also be fined a minimum of Rs 100,000 but not more than Rs 300,000.
 Lalit Mishra & Ors. v. Sharon Biomedicine Ltd., Company Appeal Insolvency No. 164 of 2018.
 Sanjeev Shriya vs. State Bank of India & Ors., Writ – C No. – 30285 of 2017.
 Shah Brothers Ispat Limited v. P Mohanraj & Others, Company Appeal (AT) (Insolvency) No. 306 of 2018.
 Canara Bank v. Deccan Chronicle Holdings Limited, CA (AT) Insol No. 147 of 2017.
 Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd and Anr., CP (IB) No. 294/7/HDB/2017.
 Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd and Anr., Company Appeal (AT) No. 285 of 2018.