Moratorium

Case BriefsHigh Courts

Gujarat High Court: G.R. Udhwani, J., dismissed a petition wherein a mandate was sought to issue an order/ circular / instructions directing all non-banking financial companies such as respondent 3 to refrain from taking steps for recall of loans availed by various persons or for liquidating securities pledged or available with them, during the period of a moratorium until 31-08-2020 as may be extended by respondent 1.

The petitioner was a borrower and respondent 3 was a financier. The Court observed that from the bare perusal of the prayer clauses evidently, the petition was more in the nature of requiring this Court to undertake the activity of banking regulations upon itself and pass omnibus orders directing the respondents more particularly the respondent 1 to come up with the policy decision as desired by the petitioner.

The Court held that such a petition cannot be maintained, assuming that it is maintainable, even on merits, no case is made out; inasmuch as, the entire case proceeds on the misconception as to the applicability of the statement on the development and regulatory policy.

The Court was unable to find any provision in the policy above-stated bearing on the maintaining of the margin, consequently dismissed the petition.[Seetha Kumari v. Reserve Bank of India, R/Special Civil Application No. 7942 of 2020, decided on 07-07-2020]

Suchita Shukla, Editorial Assistant has reported this brief.

Op EdsOP. ED.

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.

Hot Off The PressNews

The Government of India sanctioned the Scheme for the amalgamation of the Lakshmi Vilas Bank Ltd. with DBS Bank India Ltd. The amalgamation came into force on the Appointed date i.e. November 27, 2020.

Customers, including depositors of the Lakshmi Vilas Bank Ltd. will be able to operate their accounts as customers of DBS Bank India Ltd. with effect from November 27, 2020. Consequently, the moratorium on the Lakshmi Vilas Bank Ltd. will cease to be operative from that date. DBS Bank India Ltd. is making necessary arrangements to ensure that service, as usual, is provided to the customers of the Lakshmi Vilas Bank Ltd.

[Press Release dt. 25-11-2020]

Reserve Bank of India

Cabinet DecisionsLegislation Updates

Scheme of Amalgamation

The Union Cabinet has given its approval to the Scheme of Amalgamation of Lakshmi Vilas Bank Limited (LVB) with DBS Bank India Limited (DBIL).

On 17.11.2020, to protect depositors’ interest and in the interest of financial and banking stability, on RBI’s application under section 45 of the Banking Regulation Act, 1949, LVB had been under a moratorium for a period of 30 days. In parallel, RBI, in consultation with Government, superseded the Board of Directors of LVB and appointed an Administrator to protect the depositors’ interest.

After inviting suggestions and objections from the public and stakeholders, RBI prepared and provided a scheme for the bank’s amalgamation for the Government’s sanction, well in. advance of the end of the period of moratorium so that restrictions on withdrawal faced by the depositors are minimised. With the approval of the scheme, LVB will be amalgamated with DBIL from the appointed date, and with this there will no further restrictions on the depositors regarding the withdrawal of their deposits.

DBIL is a banking company licenced by RBI and operating in India through wholly-owned subsidiary model, DBIL has a strong balance sheet, with strong capital support and it has the advantage of a strong parentage of DBS, a leading financial services group in Asia, with presence in 18 markets and headquartered and listed in Singapore. The combined balance-sheet of DBIL would remain healthy even after amalgamation and its branches would increase to 600.

The speedy amalgamation and resolution of the stress in LVB is in line with the Government’s commitment to a clean banking system while protecting the interests of depositors and the public as well as the financial system.

Cabinet

[Press Release dt. 25-11-2020]

Business NewsNews

BACKGROUND

The financial position of The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in recent years which have led to the deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.

REVIVAL EFFORTS

The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through the amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank-led efforts through market mechanisms have not fructified. As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the Reserve Bank had made all possible efforts to facilitate such a process and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

MORATORIUM

After taking into consideration these developments, the Reserve Bank has come to the conclusion that in the absence of a credible revival plan, with a view to protecting depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the Central Government has imposed moratorium for thirty days effective.

ASSURANCE TO THE DEPOSITORS

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company. With the approval of the Central Government, the Reserve Bank will endeavour to put the Scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary.

The Reserve Bank has also issued certain directions to the bank under section 35 A of the Act ibid.

Reserve Bank of India

[Dt. 17-11-2020]

Case BriefsHigh Courts

Delhi High Court: A Division Bench of Hima Kohli and Subramonium Prasad, JJ., considered the following question:

Whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), when proceedings under the Insolvency and Bankruptcy Code 2016 (IB Code) have been initiated against the principal borrower and the same are pending adjudication?

Respondent 4 was the principal borrower in the present case who had obtained loans from the State Bank of India. Guarantor was the wife of the promoter of the principal borrower. Further, it has been stated that the bank filed an insolvency petition against the principal borrower under the provisions of the IB Code before the NCLT, Delhi.

At the time of pendency of the insolvency proceedings against the principal borrower, bank issued a notice under Section 13(2) of the SARFAESI Act to the petitioner and another notice under Section 13(4) of the SARFAESI Act was also issued. Both the notices were challenged by the petitioner.

The above-stated notices were challenged before Debts Recovery Tribunal but were later withdrawn in light of negotiation talks between the Bank and the Principal Borrower.

Petitioner alleged that without issuing a Notice under Section 1(4) of SARFAESI Act, the Bank issued  Sale Notice under Rule 8 (6) of Security Interest (Enforcement) Rules for sale of her residential house.

In the instant matter, the prime question for consideration was confined to the action of the Bank of initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the Principal Borrower under the IB Code and the same are pending before the NCLT.

Analysis & Decision

Bench referred to the relevant provisions, Sections 14 and 31 of the IB Code and Section 128 of the Contract Act.

Section 14 of the IB code related to Moratorium, Section 31 of the IB Code refers to the approval of the resolution plan and Section 128 of the Contract Act provides the Surety’s liability.

Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor.

Bench cited the decision of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478.

Court held that since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

Bench stated that the question raised with regard to whether the bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled and is squarely covered by the Supreme Court’s decision in SBI v. V. Ramakrishan, (2018) 17 SCC 394.

The above-cited decision holds that Sections 14 and 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

View of the Supreme Court amply demonstrated that neither Section 14 nor Section 31 of the IB Code place any fetters on banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.

Therefore, Court held that,

“…petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”

In view of the above, no merit was found in the petition and hence was dismissed. [Kiran Gupta v. State Bank of India, 2020 SCC OnLine Del 1390, decided on 02-11-2020]

OP. ED.SCC Journal Section Archives

The National Company Law Appellate Tribunal (hereinafter “Nclat”) recently in Shah Bros. Ispat1, approved parallel continuation of proceedings under the Negotiable Instruments Act, 1881 (hereinafter “the NI Act”) against a company subjected to moratorium while undergoing resolution process under the Insolvency and Bankruptcy Code, 2016 (hereinafter “the IB Code”). The decision of Nclat raises multiple issues ranging from an apparent conflict between the NI Act and the IB Code to practical impossibilities in allowing both the proceedings to continue simultaneously. The object of the article is to discuss the legal problems that may arise in light of the decision in Shah Bros. Ispat1, and why the decision needs to be revisited in light of the settled law.

DECISION IN SHAH BROS. ISPAT2

The appellant creditors before Nclat had initiated two separate proceedings under Section 138 of the NI Act, one prior to the admission of insolvency proceedings under the IB Code and one post the admission of insolvency proceedings under the IB Code. The respondent debtor contended that once a moratorium is imposed under Section 14(1)2 of the IB Code, proceedings under the NI Act would have to be halted. Nclat categorically rejected the submission and held:

6. … as Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, [and] cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code.3

The major precise for allowing parallel continuation of proceedings was that the moratorium does not cover criminal proceedings, but it is submitted that while this position might be true, proceedings under the NI Act cannot be classified as criminal proceedings in strict sense. The decision of Nclat raises multiple issues, namely:

(a) whether proceedings under the NI Act are purely criminal in nature,

(b) whether the accused company’s right to compose (and put an end to) a cheque bounce case is circumvented during the imposition of moratorium, and

(c) whether continuation of parallel proceedings under the NI Act and the IB Code conflict with the object as well as the procedure of the resolution process and if whether it affects the rights of other creditors.

For the purposes of the argument, the article does not distinguish between the NI proceedings initiated prior to the initiation of proceedings under the IB Code and the NI proceedings initiated post the initiation of proceedings under the IB Code since the reasoning of Nclat permeates both the scenarios.

NATURE OF PROCEEDINGS UNDER NI ACT

The Supreme Court in a catena of cases has laid down that the proceedings under Section 138 of the Negotiable Instruments Act, 1881 are civil in nature with the primary object to be compensatory. In Kaushalya Devi Massand4, the Supreme Court categorically held that “the gravity of a complaint under the Negotiable Instruments Act cannot be equated with an offence under the provisions of the Penal Code, 1860 or other criminal offences.”

The extent to which the proceedings under Section 138 of the Negotiable Instruments Act, 1881 have been categorised to be civil in nature can also be gauged from the question of law that was before the Hon’ble Court in the aforesaid case of Meters and Instruments5. The Court was confronted with the issue as to whether the consent of the complainant is required to bring an end to the proceedings under Section 138 of the Negotiable Instruments Act, 1881 or not. And noting the legislative history of the Act, it stated:

11. … The statutory scheme post-2002 amendment … has brought about a change in law and it needs to be recognised. … [b]asic object of the law is to enhance credibility of the cheque transactions by providing speedy remedy to the complainant without intending to punish the drawer of the cheque whose conduct is reasonable or where compensation to the complainant meets the ends of justice.6

(emphasis supplied)

The Court ultimately held that:

18. ***

18.2. The object of the provision being primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element, compounding at the initial stage has to be encouraged….

18.3. Though compounding requires consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused.7

From the above percipience, it becomes clear that a crucial element of a proceeding under Section 138 of the NI Act is its nature that basically involves an in personam legal action. Generally criminal law as enshrined under the Penal Code, or special Acts like the Narcotics, Drugs and Psychotropic Substances Act involves legal action in rem with the State initiating legal action against an accused. While understandably, the reason behind providing criminal overtone to the proceedings under Section 138 of the NI Act is to instil faith in the mode of conducting business, but the inherent nature of the cases under Section 138 of the NI Act remains the same i.e. to provide for a mechanism wherein a debtor can recover its dues from the creditors in a timely and more secured manner since fear of incarceration is the stick that dangles over the head of the accused debtor.

RIGHT TO COMPOSE A CHEQUE BOUNCE CASE IS CIRCUMVENTED DURING THE IMPOSITION OF MORATORIUM

The decisions of the Supreme Court in Meters and Instruments5, Kaushalya Devi Massand4 and Damodar Prabhu8, categorically lay down the option of paying reasonable compensation to the cheque-holder and thereby putting an end to the proceeding under Section 138 of the NI Act. It is submitted that this particular right gets circumvented when insolvency proceedings are admitted against a corporate debtor and a moratorium is imposed.

The IB Code has led to considerable change in the legal landscape pertaining to corporate entities and has brought in radical shift to the bankruptcy and insolvency process. Under the IB Code, in order to initiate resolution process of an insolvent company, it is necessary to prove that the alleged corporate debtor is insolvent. Once an insolvency petition is “admitted”, the resolution process is initiated and the current management is suspended and an Interim Resolution Professional (IRP) is appointed.9 Section 17 of the IB Code is categorical in its ambit when it stipulates:

17. Management of affairs of corporate debtor by interim resolution professional.—(1) From the date of appointment of the interim resolution professional—

(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

(b) the powers of the Board of Directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(emphasis supplied)

IRP is mandated to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.10 The Resolution Professional who replaces IRP carries forward the mandate to protect and preserve the assets of the “corporate debtor company”11 and is statutorily mandated to conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.12

Subsequent to all these steps, the resolution plan submitted by any resolution applicant is required to be presented for the approval of the “committee of creditors”13. Section 3114 of the Insolvency and Bankruptcy Code, 2016 stipulates that the resolution plan once approved would be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. In case the resolution plan is not approved, then the company goes into liquidation. However, during all this time, the Board of Directors of the company are suspended and possess no control over the financial decisions or the functioning of the company.

The Code in order to give full effect to its provisions and the object of insolvency resolution of companies, unencumbered by any other pending legal proceedings or legal right, provides for the imposition of moratorium that prohibits any interference with the assets of the company. The object of moratorium under Section 14 IBC is to keep the corporate debtor’s assets together during the corporate insolvency resolution process and to facilitate orderly completion of the entire process. A “moratorium” ensures that the company continues as a “going concern”, as long as the creditors take a view on the resolution of default. In its report, the Bankruptcy Law Reforms Committee states that the motivation behind the “moratorium” is that it is value-maximising for the entity to continue operations even as the company’s viability is being assessed by the Interim Resolution Professional. The same report further states that:

there should be no additional stress on the business after the public announcement of the Interim Resolution Professional. The order for the moratorium during the Interim Resolution Professional imposes a stay not just on debt recovery actions, but also any claims or expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity.

The report added that the moratorium would be active for the period over which IRP is active.

In light of the above-mentioned discussion, the position under the Insolvency and Bankruptcy Code can be summarised in the following terms:

(a) once proceedings for Insolvency and Bankruptcy against a company are initiated and “admitted” before the National Law Company Tribunal, the company goes into resolution process,

(b) once resolution process is initiated the Board of Directors of the debtor company are suspended from their positions,

(c) during the resolution process, the operations of the company are carried on by the “interim resolution process” only,

(d) during the resolution process there is an imposition of “moratorium” which prohibits institution of suits or continuation of pending suits or proceedings against the corporate debtor; also prohibits transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; and

(e) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the “Resolution Professional” only and in relation to such accounts and furnish all information relating to the corporate debtor available with them to the “Resolution Professional”.

Therefore, it is clear that the proceedings under Section 138 of the NI Act cannot be composed/settled during the time moratorium is operational since the control over the financial and functioning of the Company is tied up in the hands of the Resolution Professionals with the object of allowing the “committee of creditors” explore and evaluate better plans to make the company solvent again.

POSSIBLE CONFLICT BETWEEN THE NI ACT AND THE IB CODE

It is submitted that carrying on of the proceedings under the Negotiable Instruments Act, 1881 also conflicts with the overriding, non obstante clause in the Code under Section 23815. Once an insolvency application is admitted by the adjudicating authority, it is mandated that a public announcement be released intimating admission of insolvency proceedings against a company and imposition of a moratorium.16 The same is required so that all the creditors can submit their respective claims before IRP who can process them further.17 Consequently, all the creditors have to submit their claims to the committee of creditors that has to evaluate the claims and prepare a resolution plan that once approved, is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.14

Therefore, if a creditor seeks recovery of its dues independent of the resolution proceedings, there is an attempt to reclaim dues by two parallel proceedings. Furthermore, by allowing parallel proceedings, rights of other creditors according to the “priority” list prescribed under the IB Code are compromised:

178. Priority of payment of debts.—(1) Notwithstanding anything to the contrary contained in any law enacted by Parliament or the State Legislature for the time being in force, in the distribution of the final dividend, the following debts shall be paid in priority to all other debts—

(a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full;

(b) secondly—

(i) the workmen’s dues for the period of twenty-four months preceding the bankruptcy commencement date; and

(ii) debts owed to secured creditors;

(c) thirdly….

(emphasis supplied)

Once the drawee complainant is provided compensation under the NI Act, the priority list of the creditors is affected and the entire purpose of all the creditors submitting their claims for the resolution process to collate is defeated.

Furthermore, while proceedings under Section 138 of the NI Act are against “individuals” and result in personal liability of the person implicated and charged, in case a cheque is issued by an artificial person i.e. “company”, the liability is put primarily on the issuing company. If the company were solvent, then it would not be undergoing an insolvency resolution process, but if it has to escape prosecution under Section 138 of the NI Act, it would have to pay the amount in toto. On account of the insolvency of a company and the consequent inability to pay the cheque amount, the criminal liability in effect falls upon the Directors of a company, who are more often than not, the signatory on the cheques when acting on behalf of the company. On the other hand, the Directors cannot take the funds of the company to settle the NI proceedings, since they are suspended from their positions in the company. Clearly, there is an inherent contradiction between the two Acts and the respective framework they envisage.

CONCLUSION

Due to the admission of insolvency proceedings against a company under the IB Code, and imposition of moratorium, two consequences arise, namely, (a) the option to compose a cheque bounce is not available to the company and its erstwhile Directors, and (b) since the claims of the creditors have to be submitted before a committee of creditors, there would result a scenario where two separate recoveries over same cause of action would be carried on. The primary liability in a cheque bounce case is upon the drawer company, and since the accounts of the same are under the control of a resolution professional, there is a sword hanging over the former suspended Directors of the company whereby vicarious criminal liability is imposed on them.

Apart from the practical impossibilities that arise by carrying on proceedings under the Negotiable Instruments Act, 1881, there are legal conflicts that result. Proceedings under Section 138 of the NI Act are not purely criminal in nature with the provision for incarceration and fine provided only to pressurise the accused debtor to repay the debt owed to the complainant. When all types of civil proceedings are suspended, allowing continuation of proceedings under Section 138 of the NI Act results in defeating the object of resolution process. Also, the resolution process and the resolution plan caters to the claims of all creditors since under Section 31 of the IB Code once a resolution plan is approved, it binds all the creditors. By allowing independent recovery process to the drawee complainant, the entire process of resolution stands undermined.

In light of the above discussion, it is needed that this issue is thoroughly addressed in light of the letter and spirit of the IB Code.

† Advocate, Punjab and Haryana High Court, Chandigarh, BA LLB (Hons.) and Executive Member, Bar Association of Punjab and Haryana High Court. Graduated in 2016 from National Law University, Delhi. Ph. No: +918447586173. Email Address mittalakaant@gmail.com, akaant.mittal.alumni@nludelhi.ac.in.

** This article was first published in Supreme Court Cases (2020) 1 SCC J-23. It has been reproduced with the kind permission of Eastern Book Company

[1] Shah Bros. Ispat (P) Ltd. v. P. Mohanraj, 2018 SCC OnLine NCLAT 415.

[2] Insolvency and Bankruptcy Code 2016, Section 14(1) states:

14. Moratorium.—(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)

[3] Shah Bros. Ispat (P) Ltd., 2018 SCC OnLine NCLAT 415, para 6.

[4] Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593, 595, para 11.

[5] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.

[6] Id, 568, para 11.

[7] Id, 571-72, para 18.

[8] Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663. The Court framed guidelines for compounding cases under Section 138 of the NI Act.

[9] Insolvency and Bankruptcy Code, 2016, Section 17.

[10] Insolvency and Bankruptcy Code, 2016, Section 20.

[11] Insolvency and Bankruptcy Code, 2016, Section 25.

[12] Insolvency and Bankruptcy Code, 2016, Section 23.

[13] Insolvency and Bankruptcy Code, 2016, Section 30.

[14] Insolvency and Bankruptcy Code, 2016, Section 31 stipulates:

31. Approval of resolution plan.—(1) If the adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

(emphasis supplied)

[15] Insolvency and Bankruptcy Code, 2016, Section 238 states:

238. Provisions of this Code to override other laws.—The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

(emphasis supplied)

[16] Insolvency and Bankruptcy Code, Section 13.

[17] Insolvency and Bankruptcy Code, Section 15.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench comprising of Justice S.J. Mukhopadhaya (Chairperson) and Justice B.L. Bhat (Judicial member) rejected an appeal challenging an NCLT judgement where it allowed a liquidator to sell the assets of a company which had been attached by the Directorate of Enforcement (ED) during the period of ‘Moratorium’.

The Resolution Professional had filed an application before the NCLT for releasing the attachment of certain assets of Varrsana Ispat Limited (Corporate Debtor) by the ED. The NCLT held that ordering the release of the attached assets would not be maintainable since the attachment order was issued before the order of declaration of ‘Moratorium’ in the present case. The aforesaid NCLT order had been challenged in this appeal.

The Tribunal rejected the appellant’s contentions that Section 14 of the Insolvency and Bankruptcy Code, 2016 would have an overriding effect over the Prevention of Money Laundering Act, 2002 and that creditors and investigative agencies could not disrupt the ‘Corporate Insolvency Resolution Process’ during the period of ‘Moratorium’. The bench observed that since the provisions of the Prevention of Money Laundering Act, 2002 pertained to ‘proceeds of crime,’ Section 14 of the I&B Code would not be applicable to such a proceeding.

The Order stated that the offence of money-laundering has nothing to do with the ‘Corporate Debtor’ but will be applicable to individuals such as ex-Directors and shareholders of the ‘Corporate Debtor,’ who cannot be given protection from the Prevention of Money Laundering Act, 2002 by taking advantage of Section 14 of the I&B Code. Rather, it held that both the Acts would be invoked simultaneously. Since the attachments were made by the ED long before the initiation of the Corporate Insolvency Resolution Process, this would disallow the ‘Resolution Professional’ from taking advantage of Section 14 of the I&B Code. [Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018, decided on 27-07-2020]

Case BriefsCOVID 19High Courts

Karnataka High Court: Suraj Govindaraj, J., dealt with a petition which was filed in order to enforce the regulatory package announced by the RBI by issuing directions to the RBI to  monitor the implementation of the Circular, including verification  of whether there are Board-approved policies formulated by each of the lenders, direct all the banks to submit the Board-approved policies for approval to the RBI, to approve such board-approved policy, verify if such a board-approved policy contains objective criteria, set up a proper and effective grievance redressal forum for any aggrieved borrower to approach on account of the  improper or non-implementation of the Policy and/or Circular etc.

The Petitioner had availed term loan facilities from respondents namely HDFC Bank Limited, Federal Bank and Aditya Birla Finance Limited. The Petitioner has been in the business of running an Information Technology Park, a 5 star Hotel, both of which have been constructed on the land belonging to the Petitioner. In order to service the aforesaid loan, there was an agreement arrived at between lenders that the revenue from the lease rentals of the Technology Park would be credited into Escrow Account and revenue from the  Petitioner’s hotel business would be credited into another Escrow Account. Respondents were entitled to appropriate the Equated Monthly Installment payable on the loans due to them from the Escrow Account where the lease rentals were deposited; the excess rental was to be released from the Escrow Account to the current account of the Petitioner for utilization by the Petitioner to meet its expenses. Similarly, the revenue arising out of the hotel business was to be deposited in the Escrow Account relating to the hotel business, from and out of which, the Petitioner was entitled to draw monies to its current account on a daily basis for use in connection with its hotel business and from the balance, make payment of the equated monthly installment on the loan borrowed on account of the hotel business to respondent on the due date that was 13th of every month. The RBI had set out the various development and regulatory policies to address the stress in the financial condition caused by COVID-19 so as to ease the financial stress which included relaxing  the repayment pressures on the borrowers and by improving access to the working capital by such borrowers. On the basis of which the petitioners had filed the present petition. The Respondents had filed objections contending that the Petitioner had suppressed the material facts in that the Petitioner was receiving rentals from the Technology Park, merely because income/revenue was not being received from the hotel, the Petitioner would not be eligible for any moratorium and the circular issued by the RBI was not mandatory in nature, only directory.

The Court while answering if the writ of Mandamus could be issued against a private bank to implement the circular issued by RBI, held that the writ would be maintainable for the enforcement of public duty. Answering next two questions of whether the circular was mandatory, directory or discretionary and whether grant of moratorium was at the discretion of the bank the Court said that the circular was no doubt discretionary but as far as the power to grant or not a moratorium by a bank, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business and because of the nature of the circular being discretionary any directions cannot be issued to the respondents 1 & 2 to for implementation of the circular.

The Court while disposing of the petition directed the respondents to grant the petitioner with the moratorium period and restrained them from either jointly or severally recovering the loan repayment installments/EMI due in respect of loan accounts of the petitioner during the period of moratorium. It further directed to reverse the recovery of loan repayment installments/EMI already affected and transfer the same to the Current Account of the Petitioner. [Velankani Information Systems Ltd. v. Union of India, 2020 SCC OnLine Kar 835 , decided on 08-07-2020]

Banking Sector
COVID 19Op EdsOP. ED.

In order to soften the global impact of COVID-19 on the banking sector, Reserve Bank of India on 27-3-2020 announced a moratorium for a period of 3 months starting from 1-3-2020 to 31-5-2020 on repayment of all term loans by borrowers including individuals and companies. Clause 5 of RBI statement did not make the moratorium mandatory rather discretionary meaning thereby if a borrower wants, he can pay the EMI with interest and opt out of the moratorium option. On the other hand, if a borrower does avail such a moratorium then that would not lead to downgrading of the borrower’s credit rating or affect the risk classification of the loan. Further, availing the moratorium will not entail any change in the existing terms and conditions of the loan. The interest on EMI, however, shall continue to accrue on the outstanding amount and the collective interest for the 3 months shall become due and payable only after the expiry of deferment period.

This article addresses a set of peculiar issues that have arisen in view of the arrangement of repayment of loans in terms of RBI guidelines and the view taken by Courts in a few cases. The most glaring issue relates to the date of coinciding of an account becoming NPA with the declaration of 3 months moratorium period starting from 01.03.2020.

The Income Recognition and Asset Classification Guidelines (IRAC Guidelines) of RBI provide for a three-stage process before an account is declared as NPA. On default of the first 30 days, the borrower’s account is classified as Special Mention Account–1 (SMA-1) and if the instalment is overdue by 60 days, the account is classified as Special Mention Account–2 (SMA-2) and if the instalment is overdue by a period of 90 days, the account is classified as Non-performing Asset (NPA).

The case of Anant Raj Ltd. v. Yes Bank[1] filed before the Delhi High Court appears to be the first case on the issue as to whether an account having being declared SMA-2 on 01.03.2020 would be eligible to avail the moratorium period or not? The Delhi High Court interpreted the Guidelines in a manner that it provides a status quo even in the classification of any account which is already in default. The Court held that:

“The restriction on change in classification as mentioned in the regulatory package shows that RBI has stipulated that the account which has been classified as SMA-2 cannot further be classified as a non-performing asset in case the instalment is not paid during the moratorium period i.e. between 01.03.2020 and 31.05.2020 and status quo qua the classification as SMA-2 shall have to be maintained.”

The Court further held that:

‘…for a period of three months there will be a moratorium from payment of that instalment. However, stipulated interest and penal charges shall continue to accrue on the outstanding payment even during the moratorium period. If post the moratorium period, borrower fails to pay the said instalment, classification would then automatically change as per the IRAC Guidelines.”

A similar proposition arose before the Bombay High Court in Transcon Sky City Pvt. Ltd. v. ICICI Bank [2], where the question for consideration was whether the moratorium period is excluded in the computation of the 90-day period for amounts that fell due prior to 1-3-2020 and which remain unpaid or in default. The Court prima facie held that the protection sought to be availed by Transcon Sky City by virtue of RBI circulars would clearly apply to all amounts due after 01.03.2020.

Another interesting yet distinct controversy has arisen before the Delhi High Court in Indiabulls Commercial Credit Ltd. v. SIDBI[3] where ICCL challenged the demand raised by Small Industrial Development Bank of India (SIDBI) for the month of April 2020. The Court considered whether the 3-months’ RBI moratorium is applicable to Non-Banking Financial Institutions (NBFC) or not? Unfortunately, RBI has not given any clarity on this issue and to twist the knife, the Indian Bank’s Association (IBA) circular leaves out NBFCs as beneficiaries of 3 month moratorium period. An indisputable argument of the NBFCs is that money is borrowed from the financial institutions in order to disburse loans to low income earners and smaller sectors. Naturally, these sectors will default in repayment by availing moratorium and if the financial institutions do not ease the repayment terms by NBFCs then it would be calamitous.

The orders passed by Delhi High Court and Bombay High Court have met with some criticism from the banking industry, apprehending its possible rippling effect on other accounts, and a possibility of other defaulters taking a shield of such orders to protect their accounts from any further downgrading.

The borrowers claim that the Courts have correctly interpreted RBI circulars to mean that status quo shall be maintained for all term loan accounts maintained with the banks as on 01.03.2020.

It would be interesting to see if the judgments are challenged by the banks or financial institutions, and what is the outcome. For the present however, the Courts have acted with a pragmatic approach to find a solution to the economic and financial difficulties of the borrowers.

*Arjun Garg is Advocate on Record and Partner at GSL Chambers

**Rati Tandon is an Advocate and Associate at GSL Chambers

[1] 2020 SCC OnLine Del 543 

[2] 2020 SCC OnLine Bom 626 

[3] 2020 SCC OnLine Del 573

Case BriefsCOVID 19High Courts

Delhi High Court: Sanjeev Sachdeva, J. addressed the urgent matter with regard to a direction being sought to Yes Bank regarding not taking any coercive steps against petitioner.

Yes Bank Limited had through emails informed the petitioner that his account will be declared as non-performing asset, due to non-payment of installments for the months of January and February, 2020.

Advocates for the petitioner, Saket Sikri and Nikhil Singhvi, contended that in view of the RBI Circular dated 27-03-2020, respondent cannot declare the account of petitioner as a non-performing asset and any action in that regards needs to be deferred till 01-06-2020.

Advocate for the respondent Ashwani Chawla submitted that,

Moratorium is applicable only with regard to instalments which fell due after 01-03-2020 and are not applicable in respect of the instalments that had fallen due as on 01-03-2020

Further the advocate has asked time to file response for the same.

Thus Court while providing time for response has listed the matter for 03-04-2020. [Anant Raj Ltd. v. Yes Bank Ltd., 2020 SCC OnLine Del 493 , decided on 01-04-2020]

COVID 19Hot Off The PressNews

Significant pointers placed by RBI Governor Shaktikanta Das in the press conference:

  • Liquidity in markets
  • 150 RBI Staff quarantined.
  • Minimise market volatility.
  • Sizeable reduction in repo rate.
  • Relax repayment pressures.
  • Food prices expected to soften further.
  • Lending institutions to allow moratorium of 3 months.
  • Reduction in repo rate to 4.4%
  • Reduction in reverse repo rates by 90 basis points
  • 3 Month interest deferment on loans
  • Governor states that the Indian Banking System is safe and sound
  • Volatility in markets  would
  • Cash Reserve Ratio reduced by 3%
  • Banks can defer EMI Payments.

[To be updated with official press release]

What all does the Press Release statement consists? Read below:

  • MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.
  • Simultaneously, the fixed rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4.0 per cent, thus creating an asymmetrical corridor. The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy. It may be recalled that during the month of March so far, banks have been parking close to Rupees 3 lakh crore on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down.
  • This decision and its advancement has been warranted by the destructive force of the corona virus. It is intended to (a) mitigate the negative effects of the virus; (b) revive growth; and above all, (c) preserve financial stability.
  • We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode. Life in the time of COVID-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do.
  • In the recent period, the Reserve Bank has been in action on a daily basis with efforts to alleviate financial stress, build confidence and keep the financial system sound and functioning. Measures taken by the Reserve Bank are given below.

 -a cumulative reduction in the policy repo rate of 135 basis points;

-accommodative stance of monetary policy as long as necessary to revive growth, while keeping inflation within the target. – two USD buy/sell swap auction of USD 5 billion each conducted on March 26 and April 23, 2019, injecting liquidity into the banking system amounting to ?34,561 crore and ?34,874 crore, respectively.

– seven open market purchases, injecting ?92,500 crore into the system.

– four simultaneous purchase and sale of government securities under Open Market Operations (special OMOs or what is known as operation twist) during December and January (December 23 and 30, 2019 and January 6 and 23, 2020) to ensure better monetary policy transmission.

– five long term repo operations (LTROs) between February 17 and March 18, 2020 for one-year and three-year tenors amounting to ?1,25,000 crore of durable liquidity at reasonable cost (fixed repo rate).

– exemption on incremental credit disbursed by banks between January 31-July 31, 2020 on retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) from the maintenance of cash reserve ratio (CRR).

– two 6-month US Dollar sell/buy swap auction providing dollar liquidity amounting to USD 2.71 billion.

– fine-tuning variable rate repo auctions of ?50,000 crore and ?25,000 crore of 8 days and 3 days maturity on March 26 and March 31, respectively, with standalone primary dealers (SPDs) allowed to participate.

– fine-tuning variable rate Repo auction of 16-day maturity amounting to ?81,585 crore on March 23-24, 2020.

-The amount under the Standing Liquidity Facility (SLF) available for standalone primary dealers was enhanced from ?2,800 crore to ?10,000 crore on March 24, 2020 and this will be available till April 17, 2020.

*To read the detailed press note, please follow the link given below:

PRESS NOTE

Reserve Bank of India

Business NewsNews

The financial position of Yes Bank Ltd. (the bank) has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering the invocation of bond covenants by investors, and withdrawal of deposits.

The bank has also experienced serious governance issues and practices in recent years which have led to steady decline of the bank. The Reserve Bank has been in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020. These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

After taking into consideration these developments, the Reserve Bank came to the conclusion that in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, the Central Government has imposed moratorium effective from today.

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation and with the approval of the Central Government, put the same in place well before the period of moratorium of thirty days ends so that the depositors are not put to hardship for a long period of time.

The Reserve Bank has also issued certain directions to the bank under section 35A of the Act ibid.

Reserve Bank of India

[Press Release dt. 05-03-2020]

Business NewsNews

The Reserve Bank filed an application for initiation of corporate insolvency resolution process against Dewan Housing Finance Corporation Limited (DHFL) under Section 227 read with clause (zk) of sub-section (2) of Section 239 of the Insolvency and Bankruptcy Code (IBC), 2016 read with Rules 5 and 6 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 (“FSP Insolvency Rules”).

As per Rule 5 (b) (i) of the FSP Insolvency Rules, an interim moratorium shall commence on and from the date of filing of the application till its admission or rejection. The explanation to Rule 5 (b) provides that “interim moratorium” shall have the effect of the provisions of sub-sections (1), (2) and (3) of Section 14. Sub-sections (1), (2) and (3) of Section 14 of the IBC have been reproduced below:

“(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 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.

(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 —

(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;

(b) a surety in a contract of guarantee to a corporate debtor.

Reserve Bank of India

[Press Release dt. 29-11-2019]

Hot Off The PressNews

Bar Council of India (BCI) has unanimously approved the proposal of Sh. Ved Prakash Sharma, Member, BCI to put moratorium for three years w.e.f the academic year 2020-21, on approval of affiliation of new Law Colleges in the country except for State-run NLUs’.

About Bar Council of India:

The Bar Council of India is a statutory body created by Parliament to regulate and represent the Indian bar. They perform the regulatory function by prescribing standards of professional conduct and etiquette and by exercising disciplinary jurisdiction over the bar and also sets standards for legal education and grants recognition to Universities whose degree in law will serve as qualification for enrolment as an advocate.

In addition, they also perform certain representative functions by protecting the rights, privileges and interests of advocates and through the creation of funds for providing financial assistance to organise welfare schemes for them.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) allowed an appeal filed against an order of National Company Law Tribunal (Mumbai).

The respondent preferred an application under Sections 433 and 434 of the Companies Act, 1956 before the Bombay High Court for winding up of the Corporate Debtor pertaining to a debt of Rs 21,63,359. The case was transferred pursuant to Rule 5 of the Companies (Transfer of Pending Proceedings) Rule, 2016 before National Company Law Tribunal (Mumbai). The respondent therein filed Form 5 to treat the same as an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. By the order impugned, NCLT admitted the application, passed an order of moratorium and appointed Interim Resolution Professional. The appellant – Director of the Corporate Debtor, challenged the order on the ground that notice under Section 8(1) was issued on the same date when Form 5 was filed.

The Appellate Tribunal perused Section 9 of the I&B Code and observed that an application under Section 9 preferred before the completion of 10 days from the giving of notice under Section 8(1) cannot be entertained and admitted by the Adjudicating Authority. Holding the application under Section  9 as not maintainable on the date on which it was filed, the High Court set aside the order impugned. Resultantly, the order passed by NCLT appointing Interim Resolution Professional, declaring moratorium, freezing of account, etc. were declared illegal. The appeal was, thus, allowed. [Jaya Patel v. Gas Jeans (P) Ltd., 2018 SCC OnLine NCLAT 783, dated 08-10-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), allowed an appeal filed against the order of the National Company Law Tribunal, Chennai whereby the appellant was directed to withdraw the complaint case filed under Section 138 of the Negotiable Instruments Act, 1881.

The appellant had filed a complaint case under Section 138 against the defendants before the Metropolitan Magistrate after initiation of Corporate Insolvency Resolution Process and the order of moratorium. The respondents-Directors moved the NCLT which directed the appellants to withdraw the case treating it as a proceeding filed after order of moratorium with observations that such action amounts to misuse of power. Aggrieved thus, the appellant approached the Appellate Tribunal. The question that arose for consideration was ‘whether the order of moratorium covers a criminal proceeding under Section 138 of the NI Act which provides punishment of imprisonment or imposition of fine’.

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 Debtor. As such, the said section is not covered within the purview of Section 14 I&B Code. In fact, no criminal proceeding is covered under the section. It was held that the NCLT failed to appreciate the law, and therefore, the order impugned was set aside. [Shah Brothers Ispat (P) Ltd. v. P. Mohanraj,2018 SCC OnLine NCLAT 415, dated 31-07-2018]

 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: In the judgment delivered by S.J. Mukhopadhaya (Chairperson), A.I.S. Cheema (Judicial Member) and Balvinder Singh (Technical Member) dismissed all the appeals arising out of the Corporate Insolvency Resolution Process initiated against the appellants (corporate debtors).

National Company Law Tribunal had admitted the application against the appellants under Section 7 of the Insolvency and Bankruptcy Code, 2016 and passed an order of moratorium and had further appointed an ‘Interim Resolution Professional’ with certain directions.

The corporate debtor thereafter filed a writ before the Rajasthan High Court, but the High Court refused to look into the merits, so he then moved before the Supreme Court challenging the order passed by the Adjudicating Authority, but the Apex Court also dismissed it, and then further moved before the Appellate Tribunal which was withdrawn later. In the end, the Corporate Debtor, moved before the Arbitral Tribunal and against this action the Insolvency Resolution Professional moved NCLT which decided the matter against the corporate debtor. The Financial Creditor moved before the Supreme Court which allowed the appeal and stated that the arbitration clause cannot be invoked during the period of moratorium.

This Tribunal held the judgment of the Supreme Court to be final and imposed a cost of Rs 25,000 each on the appellants in the present case, to be paid by bank draft in favour of the Registrar, National Company Law Appellate Tribunal within thirty days of the receipt of this order. [M/s. Hotel Gaudavan Pvt. Ltd. v. Alchemist Asset Reconstruction Co. Ltd., 2017 SCC OnLine NCLAT 439, decided on 30- 11-2017]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: Canara Bank, the appellant-financial creditor, challenged the impugned order passed by National Company Law Tribunal, Hyderabad Bench whereby while admitting the application preferred by Appellant under Section 7 of the Insolvency and Bankruptcy Code, 2016 passed an order of moratorium thereby prohibiting the institution of suits or continuation of pending suits or proceedings except before the High Courts and Supreme Court of India, against the Corporate Debtor including execution of any judgment, decree or order in any court of law, Tribunal, arbitration panel or other authority.

The counsel appearing on behalf of the appellant contended that the Adjudicating Authority cannot exclude any court from the purview of moratorium for the purpose of recovery of amount or execution of any judgment or decree, including the proceeding, if any, pending before the High Courts and Supreme Court of India against a ‘corporate debtor’. NCLAT while adjudicating the matter opined that Section 14 relates to ‘Moratorium’ which the Adjudicating Authority is required to declare at the time of admission of the application for ‘corporate insolvency resolution The NCLAT stated that,

“from Section 14(1) (a), it was clear that institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order by any court of law, tribunal, arbitration panel or other authority come within the purview of ‘moratorium’ and that the said provision specifically did not exclude any Court, including the Hon’ble High Courts or Hon’ble Supreme Court of India.”

The NCLAT, dismissing the appeal, and further clarifying the impugned order passed by Tribunal relating to ‘moratorium’ held in clear terms that,

“The Hon’ble Supreme Court has power under Article 32 of the Constitution of India and Hon’ble High Court under Article 226 of Constitution of India which power cannot be curtailed by any provision of an Act or a Court. In view of the aforesaid provision of law, we make it clear that ‘moratorium’ will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. ‘Moratorium’ will also not affect the power of the High Court under Article 226 of Constitution of India. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the ‘corporate debtor’ such suit cannot proceed after declaration of ‘moratorium’, under Section 14 of the I&B Code.”

 [Canara Bank v. Deccan Chronicle Holdings Limited, 2017 SCC OnLine NCLAT 255, decided on 14.9.2017]