A moratorium is a stay or suspension of an activity or a law. In a legal
framework, it may denote to the temporary suspension of a law to permit a legal
trial to be carried out. In direction to deliver a “Calm Period” to the
Corporate Debtor, provisions of Moratorium has been introduced in the Insolvency
and bankruptcy code (IBC). The source of the moratorium section in IBC may be
sketched back to former legislation, in Section 446 of the Companies Act, 1956
and in Section 22(1) of the Sick Industrial Companies Act, 1984, similar
limitations used to be present. The intent after the moratorium in IBC was
defined by the apex court in the case of Innoventive Industries Ltd v. ICICI
Bank Ltd“to provide the debtors a breathing spell in which he is to seek to
reorganize his business.” The moratorium in IBC starts from the Insolvency
Commencement date and is in force till the Corporate Insolvency Resolution
Process (CIRP) period and throughout 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.
In this work, only effect of moratorium on Indian Constitution, Sec 138 of Negotiable Instrument Act and Sec 34 of Arbitration and Conciliation act will be discussed and emphasis will be placed on whether proceedings under above mentioned laws are stopped by Sec 14 of IBC or not.
Section 14 of Insolvency and bankruptcy coderead as:
(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,[i] arbitration panel or other authority;
(b) Transferring, encumbering, alienating or disposing of 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 in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 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 such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
(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.
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan in sub-section (1) of section 31 or passes an order for liquidation of corporate debtor in section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.
The language of Section 14 is clear and the moratorium in favor of the Corporate Debtor is also absolute. The intent of the legislature behind such moratorium is to grant a calm period for insolvency resolution Debtor can negotiate in the assessment of viability without any fear of recovery enforcement mechanisms implemented by the Creditors.
The Supreme Court in Innoventive Industries Ltd v. ICICI Bank Ltdobserved that, during the moratorium period, no claim for recovery of debt (existing or new) can be pursued. Clearly, the “calm period” is essentially provided so that the debtor scan negotiate with the creditors to forego a part of the debtor to restructure the payment schedule of the debt. During this “calm period”, no judicial proceedings for recovery, enforcement of security interest, sale or transfer or assets, or termination of essential contracts can take place against the corporate debtor.
Whether moratorium will suspendor stay all the proceedings against Corporate Debtor?
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