Moratorium under Insolvency and Bankruptcy Code 2016
Gourav Bavishi
5th Year, BBA LL.B.(Hons.), NMIMS, Indore
Insolvency and Bankruptcy Code, 2016[1] nowhere defines the term Moratorium. It is one of the concepts enumerated by the Insolvency and Bankruptcy Code. As per the Cambridge dictionary, the term moratorium is “cessation of activity for an agreed period of time”. It is also commonly defined as a debtor’s legal authority to postpone his payment. To understand it in terms of IBC, it’s a period in which no new suits can be instituted against the Corporate Debtor along with the prohibition of continuing the pending judicial proceedings/suits as well.
There can be no recovery of any property by the lessor wherein the possession of the said property is with the corporate Debtor. Sale, transfer, alienating, disposing of assets, and termination of contracts are all prohibited in this period. This period known as the Moratorium is necessary and very important for the Corporate insolvency resolution process and altogether for the Insolvency and bankruptcy code. The main aim of the moratorium period is to keep the assets of the corporate debtors intact so an effective resolution plan can be formed and implemented and the assets of the corporate debtors are not attached to any other proceedings by any other competent court. The concept of moratorium has been evolving and is prominent because it suspends various insolvency actions along with other suits that are instituted against corporations and it has mostly evolved with the help of orders by tribunals.
Under the Insolvency and Bankruptcy Code, although moratorium is not defined but it does contain various provisions relating to the moratorium period and the role of adjudicating authorities in declaring and implementing the moratorium. It was observed by the Supreme Court in the case of Shiv Kumar Tulsian vs UOI[2] that “moratorium implies the postponement of obligations of the debtor to pay his creditors”. Section 13[3] of the IBC states that while admitting the application for initiation of the corporate insolvency resolution plan, whether made by a financial creditor, operational creditor, or corporate applicant, the adjudicating authority must declare a moratorium for the purposes which are mentioned in section 14 of the same act by order.
As per section 14[4] of the Insolvency and Bankruptcy Code, 2016 Once a petition for an insolvency resolution plan has been admitted by the Adjudicating authority, It is the duty of the Adjudicating authority to declare Moratorium for prohibiting the following that were mentioned below,
“Section 14 – on the insolvency commencement date, the Adjudicating Authority shall by order declare a 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 judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b)transferring, encumbering, alienating or disposing off 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 (54 of 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.”[5]
From the above section, it can be interpreted that the recovery of debts, institution of new suits, continuation of pending suits, transferring, disposing, and sale of assets are all prohibited in the moratorium period. Protecting the assets of the corporate debtor is the purpose of the moratorium and it also ensures that the corporate insolvency resolution process is completed timely and orderly and the assets are kept together. It bars directors from withdrawing finances from the corporation and tries to withhold the situation and financials of the corporation as they are. It tries to create a calm period that guarantees the creditors that the corporate debtor is able to realize the maximum from the assets and properties it has and form an effective repayment plan rapidly.
On reading of section 14(1)[6] of IBC, It further explains that a license, registration, permit concessions, quotas, or any type of rights or grants which are given by a local authority, or any other authority, or by state or central government will not be terminated or suspended during the period of moratorium, in cases of insolvency, except to the condition that there should be no default or dues in payment for using or continuing such grants, rights, licenses, etc.
Similarly, sub-clause 2 of section 14[7] also states that the supply to corporate debtors of essential goods and services, as specified should not be interrupted or terminated. And sub-clause 2A[8] of the same section talks about that situation when the resolution or interim resolution professional thinks that the supply of goods or services is necessary to protect the value of the corporate debtor, then the same should not be suspended or terminated. The following provisions mention above protect corporate debtors by limiting the extent of the powers of moratorium.
The following section 14 in its sub-clause 3[9] also provides situations when the prohibitions under this section would not apply –
- When there are any agreements, transactions, or arrangements, as notified by the central government after consultation with authorities or regulators in financial sectors.
- To sureties of the corporate debtors as per the contract of guarantee.
Moratorium generally continues till the corporate insolvency resolution process comes to an end. Section 12[10] of the Insolvency and Bankruptcy Code talks about the time limit till when the insolvency resolution process should be completed. CIRP is to be completed within 180 days from its date of admission of application for its initiation as per IBC. On an application by the resolution professional, the adjudicating authority can extend this limited period for completion of the insolvency resolution process, provided that the adjudicating authority is satisfied that the process cannot be completed within the time frame of 180 days, thus it may extend this period by order as it thinks fit, but not exceeding 90 days. It is also provided in the same section that this extension cannot be granted more than once.
Interim moratorium
The concept of Interim Moratorium also exists and it has been discussed in part III of the Insolvency and Bankruptcy Code. Section 81(1)[11] of the Code states that whenever a debtor makes an application to an adjudicating authority for a fresh start, an interim moratorium relating to debts commences from the date of such application and it continues till the application is admitted or rejected by the adjudicating authority. In this interim moratorium period –
- Any pending proceedings or legal actions in relation to any debts are deemed to have been stayed; and
- The creditors are not allowed to initiate any proceedings, suits, or legal action against the debtors relating to any debts.
When the Moratorium ceases to have an effect
Insolvency and Bankruptcy Code has also emphasized the events when the moratorium period ceases to exist or have effects. The proviso of section 14 of the IBC,2016[12] states that if an adjudicating authority during the corporate insolvency resolution process accepts the resolution process which is formed by the resolution profession and debtor under section 31[13], or whenever an order of liquidation is passed by the adjudicating authority under section 33[14] of IBC, the moratorium ceases to have effect.
As per section 31(1) of IBC, once the adjudicating authority is satisfied by the resolution plan as approved by the committee of creditors, it shall also approve the resolution plan by order and once it approves the resolution plan, section 31(3) states that the order of moratorium passed under section 14 of IBC, by the adjudicating authority will cease to have any effect.
Section 33 of IBC when read can lead us to the conclusion that there is no strict moratorium in cases where the liquidation is initiated. Section 33(5) states that whenever an order of liquidation is passed by an adjudicating authority, no suits or legal proceedings can be instituted against or by the corporate debtor however its proviso states that the liquidator has the ability to institute on behalf of the corporate debtor, new suits or legal proceedings after attaining prior approval form the adjudicating authority. A liquidator has also the power to defend or institute any prosecution, suit, or any other legal proceedings on behalf of the corporate debtor under section 35(k)[15]. This suit or proceeding can be of one from civil or criminal nature and for this, no prior or special approval is needed by the adjudicating authority.
Punishment for contravention of moratorium
There are many instances where the provisions and orders related to the moratorium and the resolution plan are contravened by corporate debtors, creditors, or other officers or parties. Whenever there is a contravention of the resolution plan or moratorium, section 74[16] of the Insolvency and Bankruptcy Code comes into play. This section talks about Punishments that are given in this legislation for the contravention of the moratorium and resolution plan. Sub-clause (1) and (2) of section 74 talk about punishments for corporate debtors and creditors who violate the provisions related to moratorium whereas 74(3) talks about punishments that are to be given to the corporate debtors or creditors for contravention of the provisions related to resolution plan.
As per section 74(1) of IBC, whenever there is a situation of violation of provisions relating to the moratorium that is section 14 of the IBC, by the corporate debtor or any of its officers, knowingly or wilfully, then they should be –
- Imprisoned for a term that can extend up to 5 years and which shall not be less than 3 years, and/or,
- Fine which should not be less than Rs 1 lakh, but it can extend up to Rs 3 lakh.
As per section 74(2) of IBC, whenever there is a situation of violation of provisions relating to the moratorium that is section 14 of the IBC, by the creditor, or knowingly and wilfully permitting or authorizing such contravention, then the creditors should be –
- Imprisoned for a term that can extend up to 5 years and which shall not be less than 1 year, and/or,
- Fine which should not be less than Rs 1 lakh, but it can extend up to Rs 1 cr.
References:
[1] Insolvency and Bankruptcy Code, 2016.
[2] Shiv Kumar Tulsian and another v. Union of India (1990) 68 Comp. Cas. 720.
[3] Insolvency and Bankruptcy Code, 2016, § 13.
[4] Insolvency and Bankruptcy Code, 2016, § 14.
[5] Insolvency and Bankruptcy Code, 2016, § 14(1).
[6] Insolvency and Bankruptcy Code, 2016, § 14(1).
[7] Insolvency and Bankruptcy Code, 2016, § 14(2).
[8] Insolvency and Bankruptcy Code, 2016, § 14(2A).
[9] Insolvency and Bankruptcy Code, 2016, § 14(3).
[10] Insolvency and Bankruptcy Code, 2016, § 12.
[11] Insolvency and Bankruptcy Code, 2016, § 81(1).
[12] Insolvency and Bankruptcy Code, 2016, supra note 4,at 1
[13] Insolvency and Bankruptcy Code, 2016, § 31.
[14] Insolvency and Bankruptcy Code, 2016, § 33.
