Corporate Insolvency and the Need for an Interim Moratorium in India

*Anupam Verma & Jay Kothari

The Insolvency & Bankruptcy Code, 2016 (“Code”) has sought to introduce a self-sufficient code to strengthen the insolvency and bankruptcy regime in India. While the Code has been successful to a great extent, it is felt that gaping holes like the lack of an interim moratorium before the admission of a Corporate Insolvency Resolution Process (“CIRP”) application need to be filled in for its evolution into an effective legislation.

The term “moratorium” has not been defined in the Code. However, it is understood to be the “suspension of all or of certain legal remedies against debtors, sometimes authorized by law during financial distress.”[i] Section 14 of the Code sheds further clarity on the same by providing that upon declaration of moratorium by the adjudicating authority, the institution of fresh suits and continuation of pending suits against the Corporate Debtor (“CD”), including enforcement of an order passed therein shall be prohibited.

The purpose of declaring moratorium during the CIRP is to provide the creditors and the CD with a calm period, during which they can negotiate the restructuring of debt in an orderly manner, which is managed by a qualified Resolution Professional (“RP”). This “calm period” is aimed at improving conflict management between the CD and creditors. This is undertaken while simultaneously preserving the value of assets and ensuring that the CD doesn’t strip itself off of its assets to adversely impact the ability of creditors to satisfy their claims.

The Bankruptcy Law Reforms Committee (“BLRC”) Report, which laid down the bedrock for the Code, envisages two different moratorium mechanisms – one for the CIRP and the other for the Bankruptcy Process. It is interesting to note that while on the one hand the BLRC Report vehemently argues the need for an interim moratorium during the bankruptcy proceedings, which is reflected in Section 81 & 96 of the Code; on the other hand, it does not even discuss an interim moratorium during CIRP.

The need for an interim moratorium in corporate insolvency was considered by the Hon’ble NCLAT in NUI Pulp and Paper Industries Pvt. Ltd. v. M/s. Roxcel Trading GMBH. In this case, the NCLAT upheld an order passed by NCLT, Chennai, where, in the exercise of its inherent powers under Rule 11, the NCLT had declared an interim moratorium on the assets of the CD. It was held that:

“Once an application under Sections 7 or 9 is filed before the Adjudicating Authority, it is not necessary for the Adjudicating Authority to await hearing of the parties for passing order of ‘Moratorium’ under Section 14 of the ‘I&B Code’. To ensure that one or other party may not abuse the process of the Tribunal or for meeting the ends of justice, it is always open to the Tribunal to pass appropriate interim order”

This order points towards the need to have an interim moratorium in the CIRP. One of the major grounds on which the need of an interim moratorium may be justified is mentioned clearly in this order, i.e., reasonable apprehension that the CD might strip itself off of its assets and thereby hurt the ability of creditors to recover their dues. The need for an interim moratorium on the same ground was also deliberated in Section 5 of Chapter 1 of the Insolvency Law Committee Report.

Another concern, which builds a strong case in favour of an interim moratorium is the number of days that elapse between the date of filing a CIRP application and the admission of the same. This has been seen in a plethora of cases; a case in point being Indiabulls Housing Finance Ltd. v. Deltronix India (P) Ltd., where the time between the filing of the application and admission was around 60 days. Similar problems regarding the delay in the admission of CIRP applications arose in Shinoj Koshy v. Granite Gate Properties India Ltd. & Sunil Kumar Kedia In Re.

Such inordinate delays between filing of a CIRP application and its admission, directly chip at the value of the assets of CD and also allow the CD a chance, to adversely deal with its assets. Such situations would defeat the very purpose of rehabilitation and reorganisation of the CD as envisaged under the Code.

While the on-ground situation in India does call for an interim moratorium in corporate insolvency, it is imperative to take a holistic view and analyse the insolvency regimes of developed and business-friendly jurisdictions to understand the global viewpoint on it.

Multiple jurisdictions provide for diverse business rescue regimes, employing sundry mechanisms through which interim moratorium is granted for resolution of stressed companies.

In Argentina, with the filing of the application for Concurso Preventio De Acreedores (Court-Sanctioned Reorganisation Proceedings), the debtor remains in possession of his assets. The debtor can only execute transactions that are in the realm of the ordinary course of business and any transactions apart from the aforesaid requirement demand permission from the court as well as Sindico (Resolution Professional) and Committee of Creditors. This prohibits the debtor from stripping off of its assets, thereby granting a limited protection to the interests of the creditor.

The highly developed insolvency regime of United Kingdom (“UK”) vide A7 (1) of Corporate Insolvency and Governance Act, 2020 bestows the court with the right to grant interim moratorium when the directors of the company file an application along with relevant documents stated under A6 with the court. This interim moratorium is also applicable to companies which are subject to winding-up petition as well as overseas companies. Further, interim moratorium is applicable in case a company delves into administration.

In Hungary, the debtor is granted a limited automatic moratorium as soon as the request for a bankruptcy proceeding is published in Company Gazette with the explicit assent of the Tribunal. The permission of the Tribunal is granted within the statutorily mandated time limit of one day; hence, marking no delay between the filing of application and commencement of moratorium.

Switzerland which is among the World’s Top 50 insolvency regimes according to World Bank’s Ease of Doing Business Report, 2020 begins their proceedings with provisorische Nachlassstundung, a provisional composition moratorium (interim moratorium) as mandated by Article 293(a) of the Swiss Federal Debt Enforcement and Bankruptcy Act, 1889. The validity of this moratorium is 4 months; after its expiry, definitive composition moratorium is granted by the court, which can last up to 24 months.

In the Dubai International Financial Centre (DIFC) Special Economic Zone of United Arab Emirates, companies are governed through a separate insolvency regime.  Under this system, by application of Section 16 of DIFC Insolvency Law, 2019, courts grant an automatic moratorium from the ‘Notification Date’ till a period of 120 days. The ‘Notification Date’ is described under Section 15(2) as the day on which the board of distressed company notifies the court (in writing) their intention to propose Rehabilitation Pan with relevant documents for the company.

Our neighbouring Asian insolvency regimes such as Malaysia and Singapore provide for an automatic stay with the filing of the petition for Judicial Management vide Section 410 of Malaysian Companies Act and Section 93 of Insolvency, Restructuring and Dissolution Act, 2018 respectively. In Malaysia with the filling of application for judicial management order, no resolution order, winding up order, legal proceedings, enforcement of securities, etc. can be granted with respect to the company under distress. Under Singaporean Law, during the period between filing and determination of Judicial Management Application, the court, if requested by any creditor, can issue an order barring the distressed company to dispose of its assets with exception to any act done in good faith and the ordinary course of business of the distressed company. Further, the court via its order can restrict the transfer of rights or change in the status of any member of the company.

Therefore, it may be concluded that the Hon’ble NCLT Chennai in NUI Pulp and Paper Industries Pvt. Ltd. v. M/s. Roxcel Trading GMBH, rightly acknowledged the imminent threat of the CD stripping off its assets as detrimental to the CIRP. It is interesting to observe that while a considerable number of developed and evolving insolvency regimes across the globe provide for an interim moratorium while dealing with corporate insolvency, India has overlooked the need for one. This oversight is also reflected in the BLRC report, as far as it concerns corporate insolvency. It would not be erroneous to say that the Code is still in its infancy. Nevertheless, if emerging needs, such as the need for an interim moratorium during CIRP are not recognised and addressed by effective and prompt legislative action, the Code might fall short of fulfilling the vision of the BLRC.

*The authors are students pursuing the Graduate Insolvency Programme at the Indian Institute of Corporate Affairs, Gurgaon.

[i] Henry Campbell Black, Black’s Law Dictionary, (4th Ed. West Publishing Company, 1968), Pg. 1160.