The Firm is grateful to Advocate & Solicitor Chirag Sancheti and Advocate Rachita Chatter for their contribution in making this Research Update.
Introduction
In the recent judgement (given on December 11, 2017), in the case of Power Grid Corporation of India (‘Petitioner’) vs Jyoti Structures Limited (“Respondent”), the Delhi High Court had to decide on the question whether, after an insolvency application is admitted by the National Company Law Tribunal (“NCLT”), can it declare a ‘Moratorium’, i.e. stay on proceedings) which are apparently beneficial for the corporate debtor.
The Court clarified that,- the object of Moratorium was to prohibit debt recovery actions against the corporate debtor and to ensure that the assets of the debtor are not endangered, diminished, dissipated or adversely impacted. Therefore, the Court held that, if Moratorium prevented the corporate debtor from recovering money due to it, then it cannot be declared.
Legal Background (Provisions relating to Moratorium as prescribed under the Code)
After an application of insolvency is admitted under the Insolvency and Bankruptcy Code, 2016 (“Code”), the corporate debtor is put into the insolvency resolution process and the section 14 (declaration of moratorium period) of the Code gets triggered. During the Corporate Insolvency Resolution Process period (i.e. for a period of 180 days which can further be extended to 90 days), no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the corporate debtor.
Section 14(1)(a) of the Code relating to ‘Moratorium’ has been reproduced for reference hereunder:
“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—
(a) 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; [Emphasis supplied]
(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”
Facts of the Case
Certain dispute had arisen between the Petitioner and the Respondent and the same was adjudicated by an arbitral tribunal which gave its award (in the nature of a pure money decree) in favour of the Respondent (Jyoti Structures). The petitioner sought for setting aside the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”).
During the pendency of the said proceedings under the Act, an application seeking to initiate the insolvency proceedings against the Respondent was filed by a financial creditor under Section 7 of the Code before the NCLT, Mumbai Bench. NCLT, by its order dated July 4, 2017, admitted the said application and declared a Moratorium in terms of Section 14 of the Code.
Power Grid argued that,- pursuant to section 14(1)(a) of the Code (which related to moratorium period), the aforesaid proceedings under section 34 of the Act must be stayed. The Respondent on the other hand argued that,- if proceedings under section 34 of the Act were stayed, then the Respondent would be unable to execute the arbitration award given in its favour, during the extended period till the Moratorium exists and be thus unable to recover its dues from the Petitioner, that would further impede its financial condition.
Issue which arose before the Delhi High Court
Whether the proceedings under Section 34 of the Act could be stayed, as per Section 14(1)(a) of the Code?
Ruling of the Delhi High Court
The object of the Code is to provide relief to the corporate debtor through ‘standstill’ period during which its assets are protected from dissipation or diminishment to strengthen its financial position. Extending of the unexecutability of the award would rather prevent the corporate debtor from recovering money due to it and adding to its financial corpus. Such a consequence would in fact be directly contrary to the object of the Code.
While giving its ruling, the Court relied upon the report of the Bankruptcy Law Reforms Committee which demonstrated that the purpose behind moratorium is that there should be no additional stress on the assets of the corporate debtor.
The Court concluded that moratorium is intended to prohibit debt recovery actions against the assets of corporate debtor, the continuation of proceedings under section 34 of the Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the Code;
The use of narrower term “against the corporate debtor” in section 14(1)(a) as opposed to the wider phase “by or against the corporate debtor” used in section 33(5) of the Code further makes it evident that section 14(1) (a) is intended to have restrictive meaning and applicability;
The Act draws a distinction between proceedings under section 34 (i.e. objections to the award) and under section 36 (i.e. the enforceability and execution of the award). The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a).
The continuation of the proceedings in the present case shall hence cause no harm to either party’s rights to seek determination of issues under section 34 of the Act and object of the Code shall be preserved rather than defeated.
Concluding Remarks
It is be noted that, even when the Court ordered for the continuation of proceedings under section 34 of the Arbitration Act (relating to deciding on an appeal made for setting aside an arbitral award), at the same time, Court also clarified that,- if the appeal was decided against the corporate debtor, then, such appellate decision shall not be enforced until the moratorium subsists.
The continuation of aforesaid legal proceedings (which involves the corporate debtor), adds to the duties of the insolvency resolution professional appointed under the Code to manage all the affairs of the company.
About Bulwark Solicitors
The firm has been established by Advocate & Solicitor Chirag Sancheti and Advocate Deep Shridharani. It offers “in-house”, a range of premium legal services to domestic and international clients across various sectors.
It has expertise in both, Litigation and Non – Litigation areas of legal practice. Under the non-litigation legal practice, the firm practices Corporate Law, Intellectual Property Law, Competition Law, Insolvency Law, Real Estate and Conveyancing Laws and DTAA Advisory; and further, under Corporate Law area, it practices Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.