ARTICLE ON MORATORIUM UNDER THE IBC

SUBMITTED BY:

VISHRUTI CHAUHAN

2ND YEAR BA LLB STUDENT

SYMBIOSIS LAW SCHOOL, HYDERABAD

 Moratorium under the IBC
As per the Oxford Dictionary, the term ‘moratorium’ means ‘temporary prohibition of an
activity’. The said definition seems to be reflective of the intention of the Bankruptcy Law
Reforms Committee which had recommended that a provision relating to a ‘calm period’ be
introduced to the IBC. Moratorium is defined in Section 141 of the Insolvency and Bankruptcy
Code, 2016. It basically defines a period where no judicial proceedings for recovery,
enforcement of security interest, sale or transfer of assets, or termination of essential contracts
can be instituted against the corporate debtor. It is made sure that the corporate debtor has the
chance to evaluate the possible option and ways for revival during the time proceedings are still
on. The scope of Section 14 is wide enough to include legal proceedings of any nature. Section
14 (1) (a) of the said act defines- “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”. It ensures that after the
declaration of moratorium, the creditors do not resort to individual enforcement action, which if
not done would frustrate the very object of the insolvency resolution process. This is time bound
and the relief of moratorium is available to the corporate debtor only during the CIRP period, i.e.
for 180 days, which can be extended by 90 days. Even the period of 180 days is not absolute

1
Section 14.“(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;
(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.
(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or
suspended or interrupted during moratorium period.
(3) 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.
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate
insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating
Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of
corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or
liquidation order, as the case may be.”

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because the committee of creditors, at any time within such period, may decide to liquidate the
corporate debtor and the moratorium will cease.

ISSUES REFERRING TO SCOPE OF MORATORIUM UNDER IBC

There have been unlimited issues regarding the scope of IBC since its institution in 2016. The
court has not been able to come to terms on many level regarding the issue of proceeding
instituted and its effect on guarantors. However, there have been various judicial
pronouncements where there has been an attempt to solve these issues.

Regarding matter of proceedings

In matter of Power Grid Corporation of India Limited v. Jyoti Structures Limited2, a petition was
filed under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral
award, in the nature of pure money decree, which was passed in the favour of corporate debtor.
During the pendency of these proceedings, an insolvency application was filed against the
corporate debtor and the moratorium was declared under section 14 of IBC. The issue before the
Hon’ble Delhi Court was whether the ‘proceedings’ under Section 34 of the Arbitration and
Conciliation Act, 1996 must be stayed within the ambit of Section 14 of the IBC. The Court held
that the object of the IBC is to ensure that the corporate debtor is provided relief during the ‘calm
period’ or the ‘standstill period’ as one may say. It was done to ensure that the financial position
of the corporate debtor is not fortified. It was held that if the corporate debtor will be unable to
recover his dues if the arbitral award is not executed and thus it would infringe the basic idea and
purpose of IBC. Thus, it would not fall within the scope of Section 14 of the IBC. It was held
that the term ‘proceedings’ referred to in Section 14 of IBC does not mean all proceedings and it
is restricted to debt recovery actions against the assets of corporate debtor. Also, there is no
prohibition of continuation of proceedings under section 34 of the Arbitration and Conciliation
Act, 1966 as under the moratorium provisions of Section 14 of IBC.

Regarding matter of suits in Supreme Court and High Court

There has also been an issue regarding whether the moratorium will affect the proceedings
initiated or pending before the Supreme Court or the High Court. In the case of Canara Bank v.

2
246 (2018) DLT 485

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Deccan Chronicle Holdings 3, the NCLAT opined that in Section 14(1)(a) of IBC, there is no
specific exclusion of any court including Hon’ble High Court and Hon’ble Supreme Court. It is
observed that the Hon’ble Supreme Court has power under Article 32 of the Constitution and
Hon’ble high Court has power under Article 226 of the Constitution of India, which cannot be
curtailed by any provision of an Act or a court. The NCLAT held that the moratorium will not
affect any suit pending before the Supreme Court or any High Court or when any order is passed
under Article 1364 of the Constitution of India. However, so far as suit, if filed before any High
Court under Original Jurisdiction, which is money suit or suit for recovery against corporate
debtor, such suit cannot proceed after the declaration of ‘moratorium ’ under Section 14 of IBC.

Regarding the impact on Section 138 of Negotiable Instruments Act, 1881

Section 1385 of the NI Act, 1881 deals with the Dishonour of cheque for insufficiency, etc., of
funds in the account. The moratorium has to apply to all proceedings where the primary liability
is that of a corporate debtor. In case of cheque bounce, the director signs the cheque on behalf of

3
Company Appeal (AT) (Insolvency) No. 147 of 2017
4
Section 136.- Special leave to appeal by the Supreme Court-

(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion, grant special leave to appeal
from any judgment, decree, determination, sentence or order in any cause or matter passed or made by any court or
tribunal in the territory of India

(2) Nothing in clause ( 1 ) shall apply to any judgment, determination, sentence or order passed or made by any
court or tribunal constituted by or under any law relating to the Armed Forces

5
Section 138- Dishonour of cheque for insufficiency, etc., of funds in the account. —Where any cheque drawn by a
person on an account maintained by him with a banker for payment of any amount of money to another person from
out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank
unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank,
such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of
this Act, be punished with imprisonment for 19 [a term which may be extended to two years], or with fine which may
extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply
unless—

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or
within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the
said amount of money by giving a notice in writing, to the drawer of the cheque, 20[within thirty days] of the receipt
of information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case
may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation.— For the purposes of this section, “debt or other liability” means a legally enforceable debt or other
liability.]

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the corporate debtor. Thus, no doubt the liability of director is attracted but primary liability of
corporate debtor is also there because the director signed on behalf of him. However, whether the
moratorium will cover proceedings against the directors of the corporate debtor under section
138 of the NI Act is still in doubt. This is because the primary liability is that of the corporate
debtor and if there is a stay of proceedings against the corporate debtor, it will automatically
result in shifting the primary liability to the director of the corporate debtor. This ultimately will
result in the opening of floodgates and will mean that the creditors will chase the directors during
what is supposed to be a period of calm6. It can be seen in the case of BSI Ltd. & Anr v Gift
Holdings Pvt Ltd & Anr (2000)7, the Supreme Court held that the proceedings under Section 138
of the NI Act were not covered within the scope of Section 22 (1)8 of the SICA. However, in the
SICA the period for rehabilitation of revival of the corporate debtor was neither time bound nor
was there a shift in the management of the operations of the corporate debtor envisaged under the
IBC. Thus, the scope of Section 14 in this aspect is very wide.

Recently in the case of Shah Brothers Ispat (P) Ltd. v. P. Mohanraj, Company Appeal (AT)9,
NCLAT held that Section 138 NI Act proceedings not covered within the period of moratorium
under Section 14 of IBC. It held that it is pertinent to note that Section 14 of the Insolvency and
Bankruptcy Code, 2016 prohibits any proceeding or judgment or decree of money claim against
the corporate debtor after the order of moratorium which is passed on the insolvency
commencement date. The Appellate Tribunal observed that Section 138 is a penal provision; the
imposition of a fine cannot be held to be a money claim or recovery against the Corporate

6
Moratorium under Insolvency and Bankruptcy Code, 2016- Impact on Pending Proceedings, Kunal Godhwani,
Dhir & Dhir (November 8, 2017)
7
I (2000) BC 292 (SC)
8
Section 22(1)- Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme
referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or
where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything
contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association
of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for
the winding up of the industrial company or for execution, distress or the like against any of the properties of the
industrial company or for the appointment of a receiver in respect thereof 32 [and no suit for the recovery of money
or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or
advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the
Board or, as the case may be, the Appellate Authority.
9
(Insolvency) No. 306 of 2018, dated 31-07-2018

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Debtor. As such, the said section is not covered within the purview of Section 14 of IBC. In fact,
no criminal proceeding is covered under the section10.

Regarding the applicability of the moratorium in case of guarantors-

There have been various debates regarding the applicability of the moratorium on the assets of
the guarantors. However, recently National Company law Appellate Tribunal (NCLAT) has
made it clear that the moratorium does not restrict the filing of application for initiating
insolvency resolution process against guarantors under IBC. NCLAT chairperson S J
Mukhopadhaya and member, judicial, Bansi Lal Bhat stated11 ,”If the Corporate insolvency
Resolution Process has been initiated against the corporate debtor, the Insolvency and
Bankruptcy Resolution Process against the Personal Guarantor can be filed under Section 60(2)
before the same adjudicating authority (NCLT) and not before the Debt Recovery Tribunal
(DRT).”

CONCLUSION-

I would like to conclude by saying that Moratorium under IBC is still in need to be discussed
more with the upcoming judgments. The language of Section 14 of IBC is wide enough for
various sort of interpretation. There are still questions about the proceedings taking place with
reference to moratorium and there are issues with the Section 138 of NI Act.

Thus more judicial assessment is needed to solve these issues and be clear on the terms of
moratorium. The absence of clarity in IBC regarding the treatment of guarantee during the
moratorium period has caused confusion and insecure feeling about guarantees to the bankers.
Thus, in my view, there is a need to address this issue as soon as possible and there has to be a
clear information about the extent and scope of moratorium under IBC.

10
Section 138 of NI Act not covered within the period of Moratorium, Devika, SCC Case Briefs August 7, 2018
11
Moratorium no restriction for insolvency proceedings against guarantors, M Allirajan, The Times of India (May
1, 2018)

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