Insolvency Code: Beneficial Proceedings Relating to Corporate Debtor outside the Scope of Moratorium

[Aayush Mitruka is a lawyer based in Delhi]

The Delhi High Court’s ruling in the case of Power Grid Corporation of India Limited Jyoti Structures Limited (11 December 2017) assumes importance because it is one of the very few decisions interpreting section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) that deals with moratorium. In a significant outcome, the Court travelled beyond the apparently plain statutory language to determine the true and correct meaning of the provision and its effect on ongoing legal proceedings pertaining to the corporate debtor.

The sequence of events leading to the present case are as follows. Power Grid had approached the Delhi High Court under section 34 of the Arbitration and Conciliation Act, 1996 (Act) for setting aside an arbitral award passed in favour of Jyoti Structures. Interestingly, the award passed in favour of Jyoti Structures is in the nature of a pure money decree. However, during the pendency of these proceedings, an application filed by a financial creditor against Jyoti Structures under section 7 of the Code seeking initiation of the corporate insolvency resolution was admitted by the National Company Law Tribunal – Mumbai, (NCLT).

In light of the above, Power Grid argued that pursuant to section 14 (1) (a) of the Code, the present proceedings under section 34 of the Act must be stayed. Notably, once the NCLT admits an application under the Code, the corporate debtor is put into the insolvency resolution process and the section 14 moratorium gets triggered. During such period, no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the corporate debtor. It will be beneficial to reproduce the relevant portion of section 14 below:

(1) Subject to provisions of subsections (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]

The main question on which the controversy has centered is whether the ongoing challenge proceedings ought to be stayed until the moratorium is lifted. Accordingly, the Court was tasked with the job of constructing the word ‘proceedings’ used in section 14(1)(a) of the Code.[1] The Court emphasized that it is important to understand the nature of a proceeding before staying it pursuant to a moratorium under the Code. Referring to the report of the Bankruptcy Law Reform Committee and the Supreme Court’s decision in the case of Innoventive Industries Limited v ICICI Bank & another, the court held that:

the object of the Code is to provide relief to the corporate debtor through ‘standstill’ period during which its assets are protected from dissipation or diminishment, and as a corollary, during which it can strengthen its financial position, extending of the unexecutability of the award would rather prevent the corporate debtor from recovering money due to it and adding to its financial corpus. Such a consequence would infact be directly contrary to the object of the Code.”

The Court thereby concluded by holding that:

the present proceeding would not be hit by the embargo of Section 14(1)(a) viz., (a) ‘proceedings’ do not mean ‘all proceedings’;(b) moratorium under section 14(1)(a) of the code is intended to prohibit debt recovery actions against the assets of corporate debtor; (c) continuation of proceedings under section 34 of the Arbitration Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the code; (d) term ‘including’ is clarificatory of the scope and ambit of the term ‘proceedings’;(e) the term ‘proceeding’ would be restricted to the nature of action that follows it i.e. debt recovery action against assets of the corporate debtor; (f) the use of narrower term “against the corporate debtor” in section 14(1)(a) as opposed to the wider phase “by or against the corporate debtor” used in section 33(5) of the code further makes it evident that section 14(1)(a) is intended to have restrictive meaning and applicability; (g) the Arbitration Act draws a distinction between proceedings under section 34(i.e. objections to the award) and under section 36(i.e. the enforceability and execution of the award). The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a).”

It is now evident that all proceedings against the corporate debtor may not be stalled merely because a moratorium under section 14 of the Code has been triggered. Setting a precedent, the Court has made it clear that the nature of proceedings against the corporate debtor must be evaluated to understand the effect of moratorium on it (if at all). Considering the far reaching consequences of the Code, it is of utmost importance that the courts and tribunals adopt an interpretation which advances the object of the Code rather than defeating it. Arguably, the Code has numerous wrinkles that need to be ironed out; however they can be addressed by an effective reading of the Code by the judiciary.

– Aayush Mitruka

[1] Although in a somewhat different context, I have discussed earlier on this Blog (here and here) the issue of whether the moratorium will suspend all the proceedings against the corporate debtor. Hence, I refrain from reiterating those points here.

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