“Against the Corporate Debtor”- Ambiguity around Section 14(1) (a) of IBC

The preamble of the Insolvency and Bankruptcy Code, 2016 (IBC) states that, the purpose of IBC is to provide a mechanism for the insolvency resolution of debtors in a time-bound manner in order to enable maximisation of the value of their assets, thereby promoting availability of credit and balance the interests of all the stakeholders. In order to achieve this, Section 14 of IBC has been incorporated, which provides for moratorium, which is 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 or carried on against the corporate debtor. But since the enactment of IBC, moratorium under Section 14(1) (a) of IBC has come under scrutiny and the courts have laid down multiple interpretations and exceptions to the same.

It is in light of the objectives of IBC and the interpretations to Section 14(1) (a) of IBC, that the notice issued by the Supreme Court of India in Malayan Banking Berhad v. Ushdev International Ltd[1]. is of vital importance. In the present case, the counsel of Malayan Banking Berhad submitted that, the point of contention before the Supreme Court of India was that the moratorium imposed under Section 14(1) (a) of IBC would only be applicable in civil suits filed “against the Corporate Debtor” and as the suit before the Bombay High Court was filed “by the Corporate Debtor i.e. Ushdev International Ltd.”, therefore, the Moratorium under Section 14(1) (a) of IBC would not be applicable.

Brief Facts Leading up to the SLP

Malayan Banking Berhad had filed a review petition before the Bombay High Court titled, Malayan Banking BHD v. Ushdev International Ltd.[2] seeking review of the order dated 07th July, 2019 passed by the Bombay High Court in Notice of Motion filed by Malayan Banking Berhadin, a suit initiated by Ushdev International Ltd. During the pendency of the Notice of Motion, a petition against Ushdev International Ltd. under IBC was admitted by the NCLT, Mumbai, thereby initiating CIRP against Ushdev International Ltd. and imposing Moratorium. In lieu of the same, the Bombay High Court vide order dated 07th July, 2019, adjourned the proceedings under the Notice of Motion, sine die.

Malayan Banking Berhad, challenged the order dated 07th July, 2019 vide the aforesaid review petition, wherein the Bombay High Court vide order dated 16th September, 2019 held that, the Notice of Motion would fall within the term “proceeding” as contemplated under Section 14(1) (a) of IBC, as it is a proceeding seeking rejection of the Suit filed by the corporate debtor, which is under CIRP and Moratorium. It was also observed that, the submission of Malayan Banking Berhad that, moratorium does not stay all the proceedings is erroneous. Hence, the Bombay High Court upheld the order dated 07th July, 2019. The order dated 16th September, 2019 passed in the review petition was challenged before the Supreme Court of India and the Supreme Court of India was pleased to issue notice.

Ambiguity in the Legal Position

The contentions of Malayan Banking Berhad as noted in the notice issued by the Supreme Court of India, sheds light on the fact that there exists an ambiguity in the legal position relating to the applicability of Moratorium upon the adjudication of proceedings filed by the Corporate Debtor, as the judicial trend reflects a conflicting and divergent view.

When majority of the petition(s) filed under Section(s) 7, 9 or 10 of IBC before the NCLT, are admitted, moratorium under Section 14(1) (a) of IBC is always imposed, against the proceedings filed or to be instituted by or against the corporate debtor. It is to be noted that, Section 14(1)(a) of IBC specifically states that proceedings “against the Corporate Debtor” are to be stayed, despite the same proceedings filed “by the Corporate Debtor” are also stayed. It was with regards to this ambiguous legal position that Malayan Banking Berhad had filed the SLP before the Supreme Court of India.

This question had come up for interpretation before the Delhi High Court in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[3] , wherein the Single Judge laid down the factors needed to determine the applicability of moratorium to proceedings filed by the Corporate Debtor. The factors were:

  1. “The nature of the proceedings has to be considered; and
  2. it has to be observed whether such proceedings are in the favor of the Corporate Debtor or against the Corporate Debtor.[4]

If the answers to the factors are in favor of the Corporate Debtor then staying such proceedings during moratorium would cause harm to the Corporate Debtor and would also be against the objectives of IBC. The Single Judge was of the considered view that the application of moratorium should not be used to impose a blanket stay on all proceedings, rather in proceedings initiated by the Corporate Debtor, it should be considered if the continuation of the proceeding would benefit the Corporate Debtor. It was also observed that, a proceeding would not be prohibited under Section 14(1) (a) of IBC, unless it has the effect of endangering, diminishing, dissipating or adversely impacting the assets of Corporate Debtor.

The Single Judge was of the opinion that, the legislative intent was to restrict the meaning and applicability of moratorium under Section 14(1)(a) of IBC to proceedings filed against the Corporate Debtor and not to proceedings filed by the Corporate Debtor, which is evident from the narrow construction of the phrase “against the Corporate Debtor” in Section 14(1)(a) of IBC as compared to the wider phrase “by or against the Corporate Debtor” as under Section 33(5) of IBC.

Recently, the Delhi High Court in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd.[5] was called upon to decide on whether the adjudication of a suit filed by the Corporate Debtor and counter-claim filed in the same could be carried on during moratorium imposed under Section 14(1) (a) of IBC. The Single Judge relied upon the reasoning of the  Delhi High Court in Power Grid Corporation of India (Supra) and did not stay the adjudication of the suit and counter-claim, holding that the assets of the Corporate Debtor were not under any threat till the adjudication of the counter-claim and Section 14 of IBC can only be triggered at the stage when the counter-claim is adjudicated upon and the amount to be paid/recovered has been determined or when the execution proceedings are filed against the Corporate Debtor and these were subject to the prevalent situation. The Single Judge was also of the considered opinion that, with regards to the applicability of moratorium on proceedings filed by the corporate debtor, it has to be observed, whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated and a blinkered approach cannot be followed, whereby the Court stays the proceedings and refers the defendant to the NCLT/RP for filing its claims.

A similar reasoning is also found in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd. (Corporate Debtor)[6] , wherein the NCLAT was called upon to adjudicate on the issue, whether a claim filed by the Corporate Debtor and a counter-claim filed in the same arbitral proceedings could be heard, during the Moratorium period. The NCLAT allowed the claim of the Corporate Debtor along with the counter claim to be heard by the arbitral, as there is no bar regarding the same under IBC and held that, if it is found that the Corporate Debtor is liable to pay a certain amount, then in such case, no recovery can be made during the period of moratorium.

From the aforesaid cases, it can be observed that, there is an ambiguity with regards to the proceedings filed by the corporate debtor and their adjudication during moratorium, where one school of thought is of the opinion that the moratorium covers all proceedings filed by or against the corporate debtor, but on the other hand the other school of thought is of the view that due to the restrictive wordings of Section 14(1) (a) of IBC and due to the objectives of moratorium, it is only applicable upon proceedings filed against the corporate debtor and when it comes to proceedings filed by the corporate debtor, moratorium should be applicable only after considering the benefit to the corporate debtor.

The Balancing Act

The interpretation put forward by the Delhi High Court and the NCLAT in the aforesaid cases, does raise a pertinent issue with regards to the interpretation and applicability of the phrase “against the corporate debtor” as under Section 14(1)(a) of IBC. Upon prima facie reading it would appear that the legislative intent was to restrict the applicability and meaning of moratorium as under Section14(1) (a) of IBC and this interpretation would also benefit the Corporate Debtor, its corpus and the creditors. Despite the clear advantages to this interpretation, there are a few drawbacks too, which are:

  1. If the proceedings filed by the corporate debtor are allowed to continue, it might delay the entire process and the statutorily mandated time lines;
  2. if the proceedings are allowed to continue, it could cause financial stress in the form of additional litigation expenses; and
  3. if the Courts are called upon to observe whether a proceeding is in favour or against the Corporate Debtor, it is as good as pronouncing an assessment based on a preliminary understating of the proceeding, which could be detrimental to the parties involved and might lead to situations of overlapping of judicial powers and functions.

If the interpretation is to be carried out and applied, certain stringent checks/factors would be needed to be put in place, such as the factors delineated by the Delhi High Court and in addition to those some other factors such as, the status/stage of the proceeding should also be considered and a stringent timeline should be imposed for completion of adjudication of the pending proceedings, etc. Thereby balancing the positives and the drawbacks.

Conclusion

The interpretation would definitely help the corporate debtor and would also be in line with the objectives of IBC, but without stringent judicial guidelines to determine which proceedings should be stayed and which shouldn’t, it could be detrimental to everyone involved. A balanced approach with stringent guidelines to be followed to determine whether the proceedings filed by the corporate debtor can be adjudicated upon during the moratorium period is needed, as the same would have a positive impact on the corporate debtor, its creditors and related parties. It remains to be seen how the Supreme Court of India deals with the issue and settles the position. But, for now, the interpretation of staying all the proceedings filed by or against the corporate debtor, seems to be the way.


Advocate at Bombay High Court and National Company Law Tribunal, Mumbai.

[1] 2020 SCC OnLine SC 1068

[2] 2016 SCC OnLine Bom 6962 

[3] 2017 SCC Online Del 12729

[4] ibid

[5] 2019 SCC Online Del 9339

[6] 2018 SCC Online NCLAT 296.

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