NCLAT Excludes Proceedings under the Constitution from Moratorium

[Guest post by Aayush Mitruka, a lawyer based in Delhi.]

In an earlier post, I had discussed the moratorium provision (i.e., section 14) under the Insolvency and Bankruptcy Code, 2016 (the “Code”), the legislative intent behind the provision and its impact on proceedings for dishonor of cheques under the Negotiable Instruments Act, 1881. More recently, in Canara Bank v Deccan Chronicle Holdings Limited (decided on 14 September 2017), the National Company Law Appellate Tribunal (the “NCLAT”) had the occasion to consider section 14 of the Code. 

The controversy arose when the appellant, a financial creditor had dragged the respondent, corporate debtor to the National Company Law Tribunal (the “NCLT”) under section 7 of the Code. The Hyderabad Bench of the NCLT admitted the section 7 application and consequently passed the following order of moratorium. For the sake of brevity only the relevant portion of the same is reproduced below:

(c) We hereby declared the following Moratorium by prohibiting the following actions: –

i)  The institution of suits or continuation of pending suits or proceedings except before the Hon’ble High Court (s) and Hon’ble Supreme Court of India, against the Corporate Debtor including execution of any judgement, decree or order in any court of law, Tribunal, arbitration panel or other authority;

(Emphasis supplied)

Note that the NCLT specifically excluded suits and proceedings pending before the High Courts and the Supreme Court from the purview of its moratorium. It is worthwhile to mention that section 14 does not explicitly exclude any court, including either the High Courts or the Supreme Court of India. An appeal was preferred against this order by the financial creditor, and the short question before the NCLAT was whether such an order was tenable in the absence of any specific exclusion in the Code. 

The NCLAT, after closely scrutinizing the provision, laid down two broad propositions. The first is that the powers of the Supreme Court under Articles 32 and 136 of the Constitution of India, and of the High Court(s) under Article 226, cannot be curtailed by any provision of the Code. This appears to be a fair view as there is broad consensus in judicial decisions and scholarly views that the constitutional powers of the Supreme Court and High Courts cannot be taken away by any statute. 

The second proposition was that in the event that a suit or proceeding in relation to recovery of monies is pending before the High Court under its original jurisdiction, such suit cannot proceed after the declaration of moratorium, under Section 14 of the Code. It will be beneficial to reiterate that the Supreme Court in its recent decision of Innoventive Industries Ltd. v ICICI Bank Ltd. (discussed here) held that the provision is intended to “to provide the debtors a breathing spell in which he is to seek to reorganize his business.” The NCLAT, in no uncertain terms, made it clear that provision is intended to stall all recovery proceedings irrespective of the court where the same is pending. 

The NCLAT in its order observed the following:

There is no provision to file any money suit or suit for recovery before the Hon’ble Supreme Court except under Article 131 of the Constitution of India where dispute between Government of India and one or more States or between the Government of India and any State or States on one side and one or two or more States is filed. Some High Courts have original jurisdiction to entertain the suits, which may include money suit or suit for recovery of money. 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.

The present decision is more in the nature of a clarification. It does not delve into other questions pertaining to and surrounding section 14 of the Code, and leaves that task to future courts. 

– Aayush Mitruka

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