India: Moratorium

DEFINITION

Black Law defines Moratorium as "Delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary".

As per definition provided in the Oxford dictionary Moratorium is "A legal authorization to debtors to postpone payment."

Merriam Webster dictionary provides a more inclusive definition of the term Moratorium and not just related to delay in payment when it says:

  1. A legally authorized period of delay in the performance of a legal obligation or the payment of a debt
  2. A waiting period set by an authority
  3. A suspension of activity

MORATORIUM IN INSOLVENCY PROCEEDINGS

The object of insolvency laws across the world is to protect to the troubled debtor from going into a tailspin and provide him some breathing space to revive his enterprise by protecting it from the claims of its creditors and other stakeholders. As soon as a Moratorium is placed, all proceedings against the Corporate Debtor for recovery of any debt or property come to a standstill for the duration of the moratorium. This provides the debtor the necessary protection from all claims, existing as well as future, for the duration of the moratorium and let the Corporate Debtor focus all his attention towards the revival of the core business. Any distraction in terms of claims and law suits and taken away for a limited period with the sole intent of helping the enterprise stand back on its feet which is not only in the interest of the creditors, promoters and employees but also for the well being of the entire economic system.

WHEN DOES IT COME INTO EFFECT?

The Moratorium, as envisaged in the Insolvency and Bankruptcy Code ("the Code") 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'. Though the moratorium starts from the Insolvency Commencement Date, the Interim Resolution Professional (IRP) maybe appointed at a later date vide a separate order.

WHEN DOES IT COME TO END?

The Moratorium once applied remains in force till the completion of the Corporate Insolvency Resolution Process which has to complete in 180 days from Insolvency Commencement Date and can be extended to 270 days, with the leave of the adjudicating authority after showing sufficient cause. Once the resolution process comes to an end, either the resolution plan is approved by the adjudicating authority or a liquidation order is passed under section 33 and thereafter the moratorium applied ceases to have effect.

EXTENT OF MORATORIUM

Moratorium extends to all suits and proceedings against the corporate debtor in any court of law and includes execution and arbitration proceedings. It also applies to any proceedings initiated by banks under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) as well as any action to evict the corporate debtor from a property. However, the Moratorium only extends to the assets of the Corporate Debtor against whom the insolvency proceedings are initiated and not to the proceedings against its directors and guarantors. While there was little confusion on this aspect, directors and guarantors of the troubled enterprise were trying to find succour in the moratorium to escape from recovery proceedings against them pending before other courts. To settle any confusion and prevent any possible misuse of the moratorium  the NCLT bench at Mumbai, in Schweitzer Systemtek vs. Phoenix ARC limited (T.C.P. No. 1059/I&BP/NCLT/MB/ MAH/2017), recently held that the Moratorium will have no application on the properties beyond the ownership of the Corporate Debtor and the same view was upheld by the Appellate Tribunal when deciding the appeal therein (Company Appeal (AT) (Insolvency) No. 129 of 2017).

POWER TO MODIFY THE TERMS OF THE MORATORIUM

Though section 14 of the Code is clear about the terms of the moratorium and so far all the benches of tribunals across the country have been using the standard language and terms of the moratorium as provided in the Code, recently in two instances the benches have taken the liberty to modify the moratorium by adding riders. In Canara Bank vs. Deccan Chronicle (CP No. IB/41/7/HDB/2017), the Hyderabad bench excluded proceedings pending before the Hon'ble Apex court and Hon'ble High Courts. In Amit Spinning Industries (IB-131(PB)/2017) matter the Principal Bench at Delhi reduced the moratorium period to 100 days in view the previous moratorium already enjoyed by the Debtor under the erstwhile Sick Industrial Companies Act.

As we are witnessing with several other aspects, the Code being in its infancy, it is expected that varying interpretations regarding the extent and the manner of application of moratorium are bound to be taken by different benches. It is only over a period of time that the jurisprudence would crystallize and as officers of the court and followers of law the onus is on the legal practitioners to help the Tribunals in correctly interpreting the provisions of law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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