EFFECT OF MORATORIUM UNDER IBC, 2016

Black’s Law dictionary defines Moratorium as, “Delay in performing an obligation or taking
an action legally authorized or simply agreed to be temporary”. Whereas in the Oxford
Dictionary, the term ‘moratorium’ means ‘temporary prohibition of an activity’. The said
definition seems to be reflective of the intention of the Bankruptcy Law Reforms Committee
which had recommended that a provision relating to a ‘calm period’ be introduced to the IBC.

The origin of the moratorium section under IBC may be traced back to erstwhile legislations,
in the sense that under Section 446 of the erstwhile Companies Act, 1956 and under Section
22(1) of the Sick Industrial Companies Act, 1984, similar restraints used to exist. The said
section of SICA ,1984 advanced the object of the statute by ensuring that a ‘proceeding’ having
an effect on the working and finances of a sick industrial company shall not be filed or
continued.

The moratorium in terms of Insolvency and Bankruptcy Code, 2016 (‘IBC’) means a period
wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer
of assets, or termination of essential contracts can be instituted or continued against the
Corporate Debtor [14(1)]. The applicability of moratorium on proceedings under various
statutes instituted or pending against the corporate debtor has been delved into by the courts,
thereby explaining the scope of moratorium.

In the case of Leo Edibles & Fats Limited and The Tax Recovery Officer (Central), Income Tax
Department, Hyderabad and other1, the High Court of Telangana dealt with the issue of settling
the dues of the Income Tax authority during liquidation of the company. The High Court held
that in the event that the assessee company is undergoing the liquidation process under the IBC,
the Income Tax authority can no longer claim a priority in respect of clearance of tax dues
under the IT Act. The High Court further held that assets that are under attachment (though
encumbered) will not create any interest in favour of the Income Tax authority as a secured
creditor under the IBC. Additionally, the High Court further set out that the moratorium in
terms of proceedings as set out under the IBC ensures that any pending litigation initiated prior
to commencement of the insolvency proceeding are suspended. Accordingly, assets under an
order of attachment issued prior to liquidation commencement shall be sold along with the
other unencumbered assets of the assessee company.

However, there are certain exceptions to section 14(1) in consequence of which certain
proceedings are excluded from the ambit of moratorium. In Canara Bank v. Deccan Chronicle
Holdings Limited2 the Hon’ble NCLAT categorically carved out an exception holding that the
moratorium will not affect any proceedings initiated or pending before the Supreme Court
under Article 32 of the Constitution of India or where an order is passed under Article 136 of

1
Writ Petition No. 8650 of 2018.
2
Company Appeal (AT) (Insolvency) No. 147 of 2017
the Constitution of India. The NCLAT also concluded that the moratorium will not affect the
powers of any High Court under Article 226 of the Constitution of India.

Further, the Bombay High Court, in Tayal Cotton (P.) Ltd. Vs. State of Maharashtra3 discussed
whether moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code)
includes criminal proceeding within its ambit. After considering the legislative intent behind
introducing the provision for a moratorium in the Code, the Bombay High Court held that
Section 14 of the Code, clearly excludes criminal proceedings. The section only prohibits a suit
or legal proceedings of like nature including the execution of judgment; decree or order in any
court of law, arbitral tribunal or other authority.
Section 14(2) further provides :“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.” Regulation 32 of Insolvency & Bankruptcy (CIRP) Regulation, 2016
given an exhaustive definition as to what comprises of Essential supplies under the said
subsection. It states:
“Essential Supplies
The essential goods and services referred to in section 14(2) shall mean-
(1) electricity;
(2) water;
(3) telecommunication services; and
(4) information technology services,
to the extent these are not a direct input to the output produced or supplied by the corporate
debtor.
Illustration– Water supplied to a corporate debtor will be essential supplies for drinking and
sanitation purposes, and not for generation of hydro-electricity.”
The NCLAT in Uttarakhand Power Corporation Limited v. ANG Industries Limited4 had the
opportunity to answer some questions in relation to section 14(2). The Uttarakhand Power
Corporation Limited (“UPCL”) disconnected electricity to the corporate debtor for non-
payment of dues. Subsequently, an application for CIRP was moved under section 10 of the
Code and the same was admitted. The Insolvency Resolution Professional (“IRP”) then filed
an application for restoration of electricity under section 14(2) and the same was allowed by
the National Company Law Tribunal (“NCLT”). The question before the NCLAT was whether
corporate debtor is required to clear the dues pending at the stage of admission of CIRP before
moving under section 14(2). The NCLAT held that the corporate debtor need not clear pending
dues but is required to pay at regular intervals for electricity consumed subsequent to the order

3
Criminal Writ Petition 1437 Of 2017
4
Company Appeal (AT) (Insolvency) No. 298 of 2017
passed pursuant to section 14(2). As regards pending dues, the NCLAT held that it will be open
for UPCL to submit the claim before the IRP.
Before the 2018 amendment to the code , section 14(3) provided that “The provisions of sub-
section (1) shall not apply to such transaction as may be notified by the Central Government
in consultation with any financial regulators;”
However after the amendment another subclause was added to provide that 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; as well as a (b) a surety in a contract
of guarantee to a corporate debtor.
The Supreme Court in the case of State Bank of India v. V. Ramakrishnan & Anr.5 held that,
moratorium under Section 14 of the IBC does not intend to bar actions against assets of
guarantors in respect of recovery of the debts of the corporate debtor. The scope of the
moratorium may be restricted to the assets of the corporate debtor only. Enforcement of
guarantee entails a shift of the right of the creditor against the principal debtor to the surety.
Thus, contractual principles of guarantee require being respected even during a moratorium.
The court further held the 2018 amendment in this regard to be retrospective.

Further, subsection (4) of section 14 provides that “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 under sub-section (1) of section 31 or
passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease
to have effect from the date of such approval or liquidation order, as the case may be.”

Therefore, Moratorium, as envisaged in the Insolvency and Bankruptcy Code, 2016 comes into
effect immediately after the application under section 7, 9 or 10 of the Code, as the case may
be, is admitted by the adjudicating authority. The day the insolvency application is admitted
and moratorium is applied is referred to as the ‘Insolvency Commencement Date’. The
Corporate Insolvency Resolution Process is time bound and the relief of moratorium is
available to the Corporate Debtor only during the Corporate Insolvency Resolution Process
period i.e. for a period of 180 days which can further be extended to 90 days but not thereafter
and even the period of 180 days is also not absolute because the Committee of Creditors
anytime within such period may conclude to liquidate the Corporate Debtor and the moratorium
will cease to have its effect.

5
CA No. 3595 of 2018.