[Raghav Bhatia is an Advocate, currently practising at the Supreme Court of India. The author would like to acknowledge Diali Sahana, 3rd Year Law Student of NUJS Kolkata, for her assistance]
Recently, the Supreme Court of India in New Delhi Municipal Council v. Minosha India Limited explained the scope of section 60(6) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Under section 60(6) of the IBC, the entire period during which a moratorium was in operation has to be excluded while computing limitation in respect of a proceeding “by or against a corporate debtor”. The author is of the opinion that, given the statutory scheme of IBC, the decision of the Supreme Court is in the right direction.
In the present case, the New Delhi Municipal Council (“NDMC”) had placed a purchase order worth Rs.16,20,00,000 with the corporate debtor, Minosha India Limited (“MIL”), following an agreement dated 20 February 2015. However, a termination notice was issued by the NDMC to MIL on account of the latter’s “inaction and conduct which is described as non-responsive”. Subsequently, after being approached by MIL, the High Court of Delhi directed the NDMC to hear MIL and “consider its representation”. Through its communication dated 17 May 2016, however, the NDMC rejected the representation of MIL. Following this, MIL invoked the arbitration clause in the contract in its communication dated 7 June 2016. The NDMC, in its reply dated 20 July 2016, refused to give consent for either of the two names suggested by MIL as arbitrators. Instead, the NDMC proposed to refer the disputes for arbitration through Delhi International Arbitration Centre (“DIAC”).
In the meanwhile, the National Company Law Tribunal (“NCLT”), Mumbai declared a moratorium in respect of the corporate debtor under section 14 of the IBC on 14 May 2018, after admitting an application filed under section 10 of the IBC. A resolution plan was also approved by the NCLT on 28 November 2019.
Subsequently, on 25 November 2020, MIL filed an application under section 11(6) of the Arbitration and Conciliation Act, 1996 which was allowed by the High Court in its impugned order dated 14 December 2020. Thereafter, the NDMC approached the Supreme Court in the present proceedings.
Issue before the Supreme Court
The sole issue before the Supreme Court was whether under section 60(6) of the IBC, the entire period during which a moratorium is imposed would be excluded while computing limitation in respect of proceedings initiated by a corporate debtor.
Analysis of the Supreme Court
At the outset, the Supreme Court observed that once an application under section 7, section 9 or section 10 of the IBC is admitted, a moratorium gets imposed and all the proceedings contemplated under section 14 of the IBC are put in abeyance. However, the IBC does not expressly bar the corporate debtor from initiating proceedings against another party during moratorium.
Further, placing reliance on section 17 of the IBC, it was noted that the management of the corporate debtor is taken over by an interim resolution professional (“IRP”). Thereafter, a resolution professional (“RP”) takes over as appointed by the committee of creditors (“COC”). Finally, under section 31(3) of the IBC, once a resolution plan has been approved by the NCLT, the moratorium imposed under section 14 of the IBC ceases to have an effect.
The Supreme Court held that during this entire period as discussed above, while the corporate debtor continues to exist and is being represented by an RP, “the erstwhile management of the corporate debtor is displaced”. Therefore, the said period cannot be described as “a period of calm”, but rather it is “a period of turbulent churning”.
The Supreme Court noted that although the proceedings by the corporate debtor through the RP are possible by virtue of section 25(2)(b) of the IBC, there might be situations where the RP fails to “discharge his duties and conduct proceedings”. Thus, the Supreme Court held that this might be a reason that the Parliament has excluded “the period of limitation in regard to suits or applications at the instance of the corporate debtor under Section 60(6)”.
Therefore, by relying on the principles of literal as well as purposive interpretation, the Supreme Court observed that under section 60(6) of IBC, the period during which a moratorium was imposed under section 14 of the IBC shall be excluded in respect of proceedings instituted by corporate debtor.
While section 60(6) of the IBC excludes the period during which a moratorium has been imposed under section 14 of the IBC for the purpose of computing limitation, the IBC does bar institution of proceedings by a corporate debtor during the moratorium period. However, while discussing the said ambiguity in detail, the Supreme Court observed that the expression “the words for which an order of moratorium has been made under this part” is the point of reference in excluding time while computing the period of limitation and the said expression is also the sine qua non for the application of section 60(6) of the IBC. The Supreme Court also noted that section 60(6) is integral to the scheme of the IBC, as it enables a resolution applicant “to ventilate its legitimate grievances by excluding the period during which a Moratorium was enforced for the purpose of computing the period of limitation”.
Lastly, the NDMC had argued that the expression “for which an order of moratorium has been made under this part” appearing in section 60(6) of the IBC has been used to limit “the benefit of the exclusion to only suits which would be covered by or come under a cloud as a result of the moratorium”. Rejecting this argument, the Supreme Court held that the same would run contrary to the plain and literal interpretation which has been employed in the present case to interpret section 60(6) of the IBC.
Therefore, the Supreme Court concluded that section 60(6) excludes the entire period during which the moratorium was imposed under section 14 of the IBC for the purpose of calculating the limitation in respect of proceedings at the hands a corporate debtor. As the expression “any suit or application” in section 60(6) would include an application filed under section 11(6) of the Arbitration Act, the present appeal by the NDMC was dismissed.
The Supreme Court’s interpretation of section 60(6) of IBC has thus effectively given a new “lease of life” to proceedings at the hands of the corporate debtor which otherwise would have been barred under the Limitation Act. The author submits that the Supreme Court has rightly concluded that the entire period of the moratorium will be excluded in computing limitation in respect of proceedings at the hand of a corporate debtor. This is so because the IBC does not expressly deal with a situation where an RP fails to initiate a legitimate proceedings on behalf of a corporate debtor.
However, the author respectfully submits that the Supreme Court could have considered the impact of section 208(2)(a) of the IBC in the present case. As per the said Section, an insolvency professional shall “take reasonable care and diligence while performing his duties”. Further, the relevant part of section 5(27) of the IBC defines an RP as an insolvency professional who has been appointed to conduct the corporate insolvency resolution process. Finally, according to section 25(2)(b), an RP shall “represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings”. Therefore, reading these three statutory provisions together would suggest that an RP has a duty, inter alia, to initiate legal proceedings on behalf of the corporate debtor during moratorium. However, as rightly noted by the Supreme Court, there is no express provision in the IBC which deals with a situation where an RP has failed to initiate legal proceedings on behalf of the corporate debtor during moratorium. Rather, the statute has relaxed limitation by virtue of section 60(6) of the IBC.
Also, while it is true that the IBC does not expressly bar the corporate debtor from instituting proceedings itself during moratorium, the author respectfully submits that the same cannot be the criterion to decide the scope of section 60(6) of the IBC. This is simply because the ability of a corporate debtor (a distressed entity) to initiate and maintain legal proceedings during moratorium would not be the same as it would be otherwise. Therefore, given the scheme of IBC, the judgement of the Supreme Court is in the right direction and it would be interesting to see if any statutory or judicial developments in the future change the position of law on this aspect.
– Raghav Bhatia