India: Imposition Of Moratorium Before Initiation Of Corporate Insolvency Resolution Process – A Crowning Stroke

The Hon'ble National Company Law Appellate Tribunal ('NCLAT'), has recently in its sui-generis judgment in UI Pulp and Paper Industries Pvt. Ltd. vs. M/s Roxcel Trading GMBH Company Appeal (AT) (Insolvency) No. 664 of 2019 ('Roxcel Trading'), affirmed the view of the National Company Law Appellate Tribunal, wherein, it had imposed 'moratorium' on the Corporate Debtor even before initiation of corporate insolvency resolution process.

Analysis of the Judgement- Imposition of Pre IBC 'Moratorium'

In UI Pulp and Paper Industries Pvt. Ltd. vs. M/s Roxcel Trading GMBH Company Appeal (AT) (Insolvency) No. 664 of 2019, the applicant M/s Roxcel Trading GMBH ('Roxcel') has filed an application against NUI Pulp and Paper Industries Pvt. Ltd. ('Paper Industries') under Section 9, IBC for an amount of Rs. 7,64,54,283. The application was yet to be admitted by the adjudicating authority-National Company Law Tribunal ('NCLT') Chennai.

The NCLT gave the parties time to file their reply. However, in the meantime the applicants comprehended that the Corporate Debtor- Paper Industries and its Directors intended to sell the assets of the company. This would defeat the purpose of IBC and would also cause wrongful loses to all the creditors including Roxcel.

The applicant-Roxcel, therefore moved an application under Section 60(5)(c), IBC praying the NCLT to pass an interim order under Rule 11, National Company Law Tribunal Rules, 2016 ('NCLT Rules'), restraining the Corporate Debtor and its directors from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor, until the insolvency petition was not adjudicated upon by NCLT. It is also pertinent to note that the Corporate Debtor neither furnished any undertaking nor made any reply or refusal to the fact that they had no such intention.

The Hon'ble NCLT in this case used its inherent powers to address the grievance and apprehensions of the applicant. Rule 11 of NCLT Rules, 2016 deals with the inherent powers of NCLT/NCLAT. It states:

"11. Inherent Powers. - Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal."

The Hon'ble NCLT vide its order dated 15th July, 2019 has restrained the Corporate Director and its Directors from alienating, encumbering or creating any third-party interest on the assets of the respondents till further orders. The NCLT has imposed such restraint in exercise of the powers conferred under Rule 11 of NCLT Rules, 2016. The relevant extract has been reproduced below:

"However, the apprehension of the Applicant can be taken note of till the time either the Application is admitted or rejected, the assets and the accounts of the Company need to be maintained on date except withdrawal of the legitimate expenses required for carrying on the day-to-day expenses. Therefore, this Authority in exercise of the powers conferred under Rule 11 of the NCLT Rules, 2016, restrains the Corporate Debtor and its Directors from alienating, encumbering or creating any third-party interest on the assets of the 1st Respondent Company till further orders."

The order of the NCLT was further confirmed by the Hon'ble NCLAT in appeal. The Hon'ble NCLAT while upholding the impugned order of the NCLT held that it had the inherent power under Rule 11, NCLT Rules, 2016 even at the stage of pre-admission of application to pass appropriate interim orders under Section 7 ,9 and 10 of IBC, as the case may be.

The NCLAT further clarified that once the application is admitted under Section 7 ,9 or 10 of IBC, as the case may be, the order of 'Moratorium' under Section 14, IBC would automatically kick-in. On the other hand, if the application was rejected, the interim order would automatically seize to exist.

Conclusion

This shift from Post-IBC to Pre-IBC Moratorium is a welcoming step and quantum leap in the insolvency and bankruptcy law regime. Though, the IBC provides a strict deadline of 14 days for admission of an insolvency application under Section 7, 9 or 10, as the case may be, however, there are several instances where pre-admission of an insolvency application has taken more than a year and are still pending, for instance, in Asset Reconstruction Company Limited v. GPT Steel Industries Limited Company Appeal (AT) (Insolvency) No. 151 of 2019. In this case, the Hon'ble NCLAT had dismayed over the fact an application filed on under Section 7, IBC was still at the pre-admission stage for over a year, owing to repeated adjournment time and again. Therefore, in such cases, it becomes pertinent to bar the errant defaulter companies to sell off or alienate their asset, or transfer or create any third-party interest on the assets, which not only causes wrongful loses to the Creditors but also defeats the purpose of IBC. Therefore, in the view of the authors this judgment is a breakthrough and will bar the errant defaulter to make merry due to pending litigation cases. This step would also ensure that the interest of the Creditors is safeguarded and that the assets of the corporate debtor remains intact, should an application under Section 7, 9 or 10, as the case may be is admitted.

About the Author

Mr. Karan Sahi

Lawyer and Company Secretary by profession.

Email: karan.sahi@vaishlaw.com

Mr. Suprabh Garg

3rd year student, pursuing BA LLB (Hons.) from National Law University Odisha.

Email: 17ba106@nluo.ac.in .

© 2018, Vaish Associates Advocates,
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