[Sumer Karekar is a lawyer and is presently undergoing the Graduate Insolvency Programme at the Indian Institute of Corporate Affairs, Gurgaon]
The Insolvency and Bankruptcy Code, 2016 (“IBC”) has sought to implement a time-bound framework for resolution of stressed companies. For this purpose, it prescribes a timeline for the adjudicating authority (“AA”) to admit or reject an application for corporate insolvency resolution process (“CIRP”). However, in practice, there have been excessive delays in the pre-admission stage, thereby resulting in unfavourable outcomes. Considering this scenario, it becomes relevant to discuss the imposition of an interim moratorium upon filing a CIRP application to meet the objectives of the IBC.
This post analyses the problems arising during the pre-admission stage of the CIRP, and considers whether an interim moratorium in the pre-admission stage is a viable solution. In doing so, it explores the available jurisprudence on interim moratorium under the Singaporean insolvency framework and discusses the implementation of such a mechanism under the IBC.
Problems Plaguing the Pre-Admission Stage
The IBC imposes an automatic moratorium after commencement of the CIRP under section 14, and empowers the interim resolution professional (“IRP”) to take control of the assets of the corporate debtor. Notably, sections 7(4), 9(5), and 10(4) require the AA to admit or reject a CIRP application within 14 days of its filing.
However, in practice, the pre-admission stage is prone to inordinate delays. The findings of a 2021 IBBI Survey on CIRP Timelines suggested that, on an average, the National Company Law Tribunal (“NCLT”) took 133 days from the date of filing to decide a CIRP application, as opposed to the prescribed 14-day timeline. It also found that reducing delays in the pre-admission stage would be a key factor for successful CIRPs, according to the responses gathered from various resolution professionals.
For example, in Techno Electric & Engineering Co. Ltd. v. McLeod Russel India Ltd., the applicant was compelled to approach the National Company Law Appellate Tribunal (“NCLAT”) after the CIRP application dated July 8, 2019 was left unattended for almost seven months due to shortage of judges. Such delays may work to the advantage of errant promoters whose actions or omissions may dilute the value of the assets of the corporate debtor, thereby, directly threatening the objectives of the IBC.
Precedents on the Pre-admission Moratorium in India
The Insolvency Law Committee (ILC) Report 2020 noticed the delays in the pre-admission stage, which extended beyond six months in some cases. For instance, in Asset Reconstruction Company Limited v. GPT Steel Industries Limited, Company Appeal (AT) (Insolvency) No. 151 of 2019, the section 7 admission remained at the adjudication stage for more than a year. In this regard, the Committee found that:
- prolonged delay may incentivise siphoning of assets by promoters; and
- creditors of the corporate debtor may attempt to enforce their debts in this period.
To tackle these issues, the Committee recommended the imposition of an ‘interim moratorium’ upon the filing of an application for initiation of CIRP.
Interestingly, in NUI Pulp and Paper Industries Pvt. Ltd. v. Roxcel Trading GMBH, the NCLAT upheld an interim order of the NCLT (Chennai), where it prohibited the corporate debtor and its directors from alienating, encumbering or creating any third-party interests on its assets, until the admission or rejection of the application. This order was made based on an apprehension of the creditors that the corporate debtor intended on transferring its assets. The NCLT found that the apprehension was reasonable, and imposed a pre-admission moratorium – in exercise of its inherent powers under rule 11 of the NCLT Rules, 2016.
Likewise, in F.M. Hammerle Textiles Limited, the corporate debtor filed a section 10 application after receiving letters from creditors seeking to initiate action for recovery of dues. The adjudicating authority directed the applicant to cure defects in the application, and granted “an interim moratorium in terms of Section 14 of the IBC”. It appears that the NCLAT has deemed it necessary to impose an interim moratorium in circumstances where it believed there to be a reasonable apprehension of misappropriation of assets, even though it has been in merely two cases. This adds to the need for a mechanism to prevent siphoning of assets during the pre-admission stage.
Interim Moratorium under the Singaporean Insolvency Law
The Singaporean framework is governed by the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”), which provides for judicial management of a company. Section 93 of the Act empowers the courts to restrict the performance of any act or exercise of any powers of the company, or disposal of any assets of the company, except in ordinary course of business. The court may also prohibit transfer of shares, or alteration of the rights of any members of the company. Such restrictions may be imposed for a specified time period, and the court may appoint an “interim judicial manager” under the IRDA for supervision.
Further, from the Report of the Insolvency Law Review Committee of Singapore (2013), it appears that the interim moratorium provision in the IRDA was crucial because the relevant look-back period for avoidance transactions extends backwards from the date of filing the application, and not from the date of admission. While the look-back period for avoidance transactions under the IBC begins from the insolvency commencement date, imposing pre-admission restrictions on the corporate debtor, akin to those in the IRDA, can provide an additional layer of protection over its assets.
Analysis: Application and Scope of a Pre-admission Moratorium
Whether Automatic or Discretionary
In this regard, the ILC Report recommended that the power to impose such moratorium should be within the discretion of the adjudicating authority, where it deems it urgent and necessary in light of meeting the objectives of IBC. Additionally, it found that the interim moratorium may include all or any of the situations envisaged under section 14 of the IBC, based on the facts of the case, which would allow a smooth transition into the moratorium after admission. However, such a discretionary interim moratorium may add to the pre-existing causes for delay, i.e. case backlog and judicial procedure. Therefore, an automatic interim moratorium may be considered.
Notably, the MCA Discussion Paper dated January 18, 2023 has proposed involving information utilities (“IUs”) in the ascertainment of default before filing a CIRP application, to streamline the admission process and remove delays. Herein, the IUs shall verify evidence of default with the available financial records, and direct the corporate debtor to authenticate it within a given time-period. Upon lapse of this period, the information shall be deemed authenticated, thereby establishing default. Such ascertainment would be considered “conclusive proof about the occurrence of default”. Therefore, this proposed change can support the automatic commencement of the interim moratorium, from the date of filing the CIRP application (upon service of notice to the corporate debtor).
Imposition of Restrictions on the Corporate Debtor
Given that the main issue, as observed above, is the misappropriation of assets by promoters during the pre-admission stage, the interim moratorium should selectively restrict the corporate debtor’s activities. Taking key aspects from the IRDA and section 14 of the IBC, it shall impose statutory restrictions on:
(a) alienation or disposal of the assets of the corporate debtor;
(b) transfer of shares in the debtor;
(c) creation of third-party interest on the debtor’s assets; and
(d) initiation of any legal action by creditors, including under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Additionally, these restrictions would require certain exceptions, wherein the management is enabled to transact in the ordinary course of business, while maintaining detailed records of such transactions conducted during this period.
Duration
The ILC suggested a 60-day interim moratorium in its 2020 Report. However, in case the time taken for adjudication extends beyond 60 days, another application would have to be made to the adjudication authority, thereby defeating the purpose of the automatic stay. For this reason, the interim moratorium should continue until admission or rejection of the CIRP, as seen in NUI Pulp and Paper Industries.
Conclusion
According to the findings of a 2022 Survey in an IBBI Publication, more than 60% of respondents agreed that most promoters attempt to misappropriate assets prior to the admission of the CIRP. In consideration of the above, it is argued that the “interim moratorium” idea takes birth from two issues, i.e. the prolonged pre-admission period, and the possibility of siphoning of assets by promoters. Additionally, the heavy judicial backlog warrants an automatic interim moratorium. Regardless of this idea, certain disadvantages and barriers cannot be ignored. Genuine businesses may face trouble due to the restrictions imposed. Moreover, given the delay in the pre-admission stage, the interim moratorium could run indefinitely.
However, in the present-day insolvency landscape, an interim moratorium with selective restrictions on the corporate debtor shall be beneficial until the problem of judicial backlog is solved. Especially with the proposed changes to the IBC in relation to the role of IUs in ascertaining default, such a mechanism can effectively safeguard the objectives of the IBC.
– Sumer Karekar
Brilliant analysis