Revisiting the P. Mohanraj Judgment: Advocating for a Case-by-Case Approach to the Moratorium
Onik Joshi
Final year, LL.B. , Government Law College, Mumbai
The Insolvency and Bankruptcy Code (“IBC”) was enacted in 2016 as a comprehensive legislation to consolidate and amend the laws relating to reorganization and insolvency resolution in India. A key feature of the Corporate Insolvency Resolution Process (“CIRP”), under the IBC is the imposition of a moratorium under Section 14, which suspends certain legal proceedings against the corporate debtor to provide a breathing space for its revival.
The Supreme Court’s decision in P. Mohanraj & Ors. v. M/S Shah Brothers Ispat Pvt. Ltd., (2021) ibclaw.in 24 SC has been a landmark judgment in interpreting the scope of the moratorium under Section 14 of the IBC. The Court held that the moratorium applies not only to suits and proceedings against the corporate debtor but also to proceedings initiated by the corporate debtor itself thereby effectively imposing a blanket ban on all type of proceedings. While this ruling aims to provide a protective shield for the corporate debtor during the CIRP, it raises critical questions about whether a blanket ban was necessary or if a more nuanced, case-by-case approach would better serve the interests of justice. This article critically examines the P. Mohanraj judgment and argues for a more flexible application of the moratorium provisions.
A Brief Overview of the P. Mohanraj Judgment
The issue that arises in this case is whether the institution or continuation of a proceeding under Section 138 and 141 of the Negotiable Instruments Act, 1881 (“NI Act”) can be said to be covered by the moratorium Provision under Section 14 of the IBC which imposes a halt on legal proceedings, extends to proceedings initiated under the NI Act. The Court ruled that the moratorium indeed covers such proceedings, thereby preventing any action that could be detrimental to the corporate debtor during the (“CIRP”). The Court’s reasoning was based on the need to provide a “calm period” to the corporate debtor, ensuring that no legal or financial distractions impede the resolution process.
The Supreme Court justified its decision by emphasizing the importance of the moratorium in preventing the erosion of the corporate debtor’s assets and in maintaining the status quo. The Court’s view was that any legal proceedings, whether initiated by or against the corporate debtor, could potentially disrupt the resolution process. Therefore, a blanket ban was seen as necessary to achieve the objectives of the IBC, which include maximizing the value of assets, ensuring fair distribution to creditors, and facilitating the revival of the corporate debtor.
Critique of the Blanket Ban: A Case for Flexibility
While the intention behind the blanket ban is understandable, it is also necessary to consider the potential drawbacks that comes with such a rigid approach. A blanket ban may lead to many unintended consequences, for example
- Stifling the Corporate Debtor’s Rights: By imposing a blanket ban, the Court effectively restricts the corporate debtor from pursuing legitimate claims or enforcing rights that could be beneficial to its revival. For instance, if the corporate debtor is engaged in litigation to recover a substantial sum from a third party, halting such proceedings could adversely affect its financial position.
- One-Size-Fits-All Approach: The blanket ban fails to account for the unique circumstances of each case. Different corporate debtors may face different challenges during the CIRP, and a uniform application of the moratorium may not always serve the best interests of all stakeholders.
- Potential for Abuse: Creditors or other interested parties could potentially exploit the blanket ban to delay or frustrate the resolution process. Like a creditor might initiate proceedings just before the CIRP is admitted, knowing that the moratorium will put a halt to those proceedings, thereby affecting the debtor’s ability to resolve its financial issues.
Advocating For a Case-By-Case Approach
A more flexible, case-by-case approach to the application of the moratorium would allow the adjudicating authority to consider the specific circumstances of each case and make decisions that balance the interests of the corporate debtor, creditors, and other stakeholders. Some of the important factors are:
- Judicial Discretion: Empowering the National Company Law Tribunal (NCLT) to assess whether certain proceedings initiated by the corporate debtor should be allowed to continue during the moratorium would provide a more tailored solution. The NCLT could consider factors such as the nature of the proceedings, their potential impact on the CIRP, and whether allowing them to continue would benefit the corporate debtor and its creditors.
- Safeguards against Abuse: By allowing the continuation of proceedings only in cases where it is demonstrably in the best interest of the corporate debtor and the resolution process, the case-by-case approach could prevent potential abuses of the moratorium.
- Preserving the Debtor’s Rights: An individualistic approach would ensure that the corporate debtor retains the ability to assert its rights and pursue legitimate claims, thereby enhancing its prospects for successful resolution.
There have been several cases where this legal question has arisen regarding whether the moratorium also prohibits the continuance of legal proceedings initiated by the corporate debtor itself. This question has been discussed in various cases like in Jharkhand Bijli Vitran Nigam Ltd. vs IVRCL Limited and Anr., (2018) ibclaw.in 222 NCLAT The National Company Law Appellate Tribunal (“NCLAT”) was dealing with the case where an Application has been filed by the Jharkhand Bijli Vitran Nigam Ltd. under section 60(5) of the (“IBC”) raising contentions on the letters issued by the Resolution Professional (“RP”) whereby the (“RP”) has written letters to the Arbitral Tribunal requesting it to continue the proceedings for the claim and the counter-claim of the both the parties simultaneously on the ground that it is in the interest of the corporate debtor i.e. IVRCL Limited to continue with the claims, though the Corporate Debtor is under a Moratorium under section 14 of the (“IBC”) still the letters were issued. The NCLAT allowed the claims to heard simultaneously however, on determination, if it is found that the Corporate Debtor is liable to pay certain amount, in such case, no recovery can be made during the period of moratorium.
Also in the case of Power Grid Corporation of India Limited vs Jyoti Structures Limited (2017) ibclaw.in 12 HC the Delhi High Court in this case was dealing with the question whether a petition under section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) can be continued if during its pendency an Application under Section 7 of the of the (“IBC”) was accepted by the National Company Law tribunal and a moratorium under Section 14 has been imposed The corporate debtor argued that the object of the Code is to provide relief to the corporate debtor through a halt period during which its assets are protected from dissipation or diminishment, and also during which it can strengthen its financial position, Such a consequence would in fact be directly contrary to the object of the Code. Thus the Court was of opinion that Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, and its conclusion would not endanger, diminish or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the process.
There also have some recent cases which concerns the observations made in the P Mohanraj Judgement like in the case of Govind Prasad Todi & Anr. vs Govt. Of NCT Of Delhi & Anr.,(2023) ibclaw.in 1059 HC the Delhi High Court in this case was dealing with the issue which seeks to quash the order of the Patiala house court, New Delhi against the petitioner herein where the respondent no. 2 had supplied paper to M/s Ajanta and the cheques were issued towards the discharge of the liability of M/s Ajanta but before the cheques could be encashed (“CIRP”) was initiated under Section 7 of the (“IBC”) against M/s Ajanta and accordingly it came under Moratorium under Section 14 due to which the cheques could not be encashed. Here the respondent states the proposition of the Hon’ble Supreme Court in P. Mohanraj Judgement that mandates that in view of Section 141 of the NI Act, prosecution under Section 138 of the (“NI Act”) can continue against natural persons i.e., Directors and persons In-Charge of affairs of the company, but in the present case section 14 has also to be read along with Sections 17 and 18 of (“IBC”) which states as Management of affairs of corporate debtor by interim resolution professional and Duties of interim resolution professional, whereby all the authority of Director and person in charge goes to (“IRP”) and in this case the directors, person in-charge does not have any authority to perform their duties and they should not be liable under Section 138 as proceeding against them cannot be initiated or continued without the corporate debtor.
Similarly in the case of Catmoss Retail Pvt. Ltd. (2024) ibclaw.in 115 HC whereby the application is moved under sections 446 and 447 of the Companies Act, 1956 seeking stay of the proceedings initiated against the company under liquidation as well as the applicant under Section 138 of the Negotiable Instrument Act, whereas proceedings which have been filed against director cannot be allowed in view of section 446 and 447, during the proceedings of the case a reference was taken from P. Mohanraj Judgement that as far as the Directors/persons in management or control of the corporate debtor are concerned, a Sections 138/141 proceeding against them cannot be initiated or continued without the corporate debtor. This is because Section 141 of the (“NI Act”) speaks of persons in charge of, and responsible to the Company for the conduct of the business of the Company, as well as the Company, the High Court has taken the view that in case cheque issued prior to the admission of (“CIRP”) can presented for encashment of or during corporate insolvency, Promoters/ Directors of Corporate Debtor being natural persons, cannot be prosecuted under section 138 of (“NI Act”) since the cheque cannot be encashed in view of the mandate of section 14 (“IBC”).
Conclusion
The P. Mohanraj judgment represents an important step in protecting corporate debtors during the CIRP, but the blanket ban on all proceedings may not always serve the best interests of the insolvency process. A more flexible approach by making sure that the interest of neither parties have been prejudiced would allow courts to balance the need for a moratorium with the corporate debtor’s rights and the broader objectives of the (“IBC”). By empowering the (“NCLT”) to exercise judicial discretion, the law can be applied more flexibly, ensuring that the moratorium serves its intended purpose without unnecessarily hindering the resolution process.
