NO EMBARGO ON PROCEEDINGS IN FAVOUR OF CORPORATE DEBTOR U/S 14(1) OF THE CODE

-By Sikha Bansal & Vishal Hablani (resolution@vinodkothari.com)

Introduction:

The Insolvency and Bankruptcy Code, 2016 (“the Code”) facilitates resolution of corporate entities by providing for a “calm period” during which institution or continuation of suits or “proceedings” against the corporate debtor is prohibited. Recently in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[1] (Order dated 11^th December, 2017), the Delhi High Court ruled that the moratorium provisions would apply to “debt recovery actions” against the corporate debtor and not to proceedings beneficial to corporate debtor.

Brief Facts of the Case:

Power Grid Corporation of India (i.e. the financial creditor in the present case)  filed an application under section 7 of the Code against Jyoti Structures Limited (i.e. the corporate debtor). However, when the application was filed, proceedings under section 34 of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) for setting aside the arbitral award passed in favour of the corporate debtor were already pending.  The award was in nature of pure money decree in favour of the corporate debtor.

The question was if such a proceeding under the Arbitration Act would be stayed because of the moratorium provision of section 14(1)(a) of the Code.

The corporate debtor submitted that the proceedings are in favour of the corporate debtor (i.e. the arbitral award is in favour of the corporate debtor), and that, granting a stay would defeat its efforts to recover money and so the object of the Code. Hence, the core issue is interpretation of the word “proceedings” as used in section 14(1)(a) of the Code – whether it shall be interpreted to mean “all legal proceedings” or a particular type of legal proceedings which may have an adverse impact on the assets or financial condition of the corporate debtor during the resolution period.

Observations of the Court

Section 14 (1) (a) of the Code provides as under:

“Moratorium – (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, arbitration panel or other authority;

XXX”

The Court placed reliance on Canara Bank v. Deccan Chronicle Holdings Limited (Company Appeal No.147/2017) that since the word ‘proceedings’ under section 14(1)(a) is not preceded by the word ‘all’, the provisions of moratorium would not apply to all the proceedings against the corporate debtor. The Court observed:

“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. To determine the true meaning of the statute, the provision would have to be construed in the context of the statute as a whole, for which purpose interpretative criteria may have to be applied even when the statutory language is apparently free from any semantic ambiguity.”

The Court stated that section 14 of the Code would be inapplicable to the proceedings which are beneficial for the corporate debtor, as the conclusion of these proceedings would not have any impact over the assets during the insolvency resolution process. Reliance was placed on the report of the Bankruptcy Law Reforms Committee, and it was construed that the objective behind the moratorium is to protect the assets of the corporate debtor from additional stress. The Court, however, stated that if the counter claim is allowed against the corporate debtor, in that scenario, section 14(1)(a) of the Code would come into play then, and the decree then would not be executed against the corporate debtor.

Therefore, one needs to see the nature of the proceedings; if such proceedings are against the corporate debtor or in its favour. Stay of proceedings against an award in favour of the corporate debtor would rather be stalking the debtor’s effort to recover its money and hence would not fall in the embargo of section 14 (1) (a) of the Code.

Hence, “proceedings” do not mean “all proceedings” – the term would be restricted to the nature of action that follows it, i.e. debt recovery action against the corporate debtor. Section 14(1)(a) is intended to have restrictive meaning and applicability as evident from use of the words “against the corporate debtor” and not “by or against the corporate debtor” as used under section 33(5) of the Code. As such, 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

Author’s Note

The Notes on Clauses to section 14 states:

“The moratorium on initiation and continuation of legal proceedings, including debt enforcement action ensures a stand-still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the corporate insolvency resolution process. The prohibition on disposal of the corporate debtor’s assets would ensure that the corporate debtor or its management is not able to transfer its assets, thereby stripping the corporate debtor of value during the corporate insolvency resolution process. The moratorium also extends to recovery of any property occupied by or in possession of the corporate debtor.”

In Law Relating to Insolvency and Bankruptcy Code 2016[2], the authors note:

“The Code intends to provide a ‘calm period’ to the corporate debtor to facilitate the corporate insolvency resolution process. As such, any proceeding or suit against the corporate debtor that may, potentially, have a negative impact on the revival process shall be seen as those covered under the moratorium provisions.”

In fact, international laws and rulings reflect similar tendencies. In terms of the UK Insolvency Act, 1986, no legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except with the consent of the administrator or with the permission of the Court. Stay provisions are also contained in Chapter 11 of the US Bankruptcy Code covering those actions which are targeted against the property of the debtor. In Thomas Cook v. Mortgage Debenture Limited [2016] EWCA Civ 103, the Court of Appeal held that defensive actions by the company under administration were not affected by the moratorium. In re Siciliano, 13 F.3d 748, 750 (3d Cir. 1994); Maritime Electric Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991), etc., it has been emphasized that the purpose of the automatic stay is to grant the debtor a breathing spell, so as to consider ways of reviving business, by stopping all creditor action, harassment, foreclosure and enforcement actions.

In view of the discussion above, the ruling seems to be in consonance with the intent of the legislation.

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[1] https://indiankanoon.org/doc/43260542/

[2] Vinod Kothari & Sikha Bansal, Taxmann, 2016. For detailed commentary, refer to notes under section 14 of the Code as given in the book.