Status of pending suits during CIRP and Liquidation- An Analysis.
A moratorium is declared under Section 14 of the IBC during the CIRP and Section 33(5) of the Code during the liquidation process. This article explores the fundamental difference between the Moratorium under Section 14 and Section 33(5) of the IBC as far as pending suits are concerned. Section 14 and Section 33 are part of two separate Chapters of IBC. Section 14 is part of Chapter II, which deals with the ‘Corporate Insolvency Resolution Process, whereas Section 33 is a part of Chapter III, which deals with the ‘ Liquidation Process. Chapter II of the IBC deals with the Resolution Process in respect of a ‘corporate debtor’, where the objective is to revive the corporate debtor by coming out with a resolution plan, which is to be approved by the committee of creditors and thereafter, by the Adjudicating Authority. Chapter III of the IBC deals with the liquidation process, which comes into effect upon the failure to come out with a resolution plan within the prescribed time period or a resolution plan not being approved. The moratorium under Section 14 of the IBC comes into effect upon the Adjudicating Authority passing an order declaring a moratorium and continues till the completion of the Corporate Insolvency Resolution Process. Upon the approval of the resolution plan by the Adjudicating Authority or upon passing of a liquidation order under Section 33 of the IBC, the moratorium shall cease to have an effect. After the Adjudicating Authority (NCLT) passes a liquidation order under section 33(4) of the IBC, a fresh moratorium in terms of Section 33(5) of the IBC comes into place.
A moratorium means a temporary prohibition of an activity. Moratorium under the Insolvency and Bankruptcy Code, 2016(IBC) during the Corporate Insolvency Resolution Process (CIRP) is introduced to give breathing space to the Corporate Debtor to stand on its feet during times of financial turmoil and turbulence. The Corporate debtor shall be in nose-deep levels of water and will get badly affected even in a slight wave of water, upon which the revival will remain an oasis. Once the CIRP is commenced based on the order passed by the Adjudicating Authority, the Resolution Professional, who had stepped into the shoes of the promoters, have to manage the activities of the Corporate Debtor in a peaceful atmosphere. Suppose the creditors remain outside the doors of the Corporate Debtor and keep on creating demands in the form of recovery notices, suits etc., and the Courts are issuing judgment or decree or order for the recovery of the dues of the demanding creditors. In that case, the recovery measures will take a back seat, and CIRP will not be completed fruitfully, as desired by the legislator.
As per Section 14 of the IBC, as on the insolvency commencement date, the Adjudicating Authority shall by order declare a 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 judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.
As per subsection (4) of Section 14, the order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process. If 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 the 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.
From the above, it is clear that the moratorium under IBC shall cease either on (1) the Approval of the Resolution Plan by the Adjudicating Authority or (2) on the passing of the order for liquidation of the Corporate Debtor. During the CIRP period, it is categorically mentioned that the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including the execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority, is prohibited. If the Resolution Plan is approved by the Adjudicating Authority, the successful Resolution Applicant will get an opportunity to commence the operations of the Corporate Debtor on a ‘Clean Slate’, and thereby all the pending suits, claims, liabilities etc. shall get fully extinguished. In such a case, the Corporate Debtor will get released from all the rigours of the pending suits due to the operation of the approved resolution plan and shall breathe free and fresh.
However, if the Corporate Debtor is not getting a Resolution Plan or the plan received fails to get the approval of the Committee of Creditors (CoC) or the Adjudicating Authority(AA), the CIRP is deemed to be failed, and liquidation is commenced. On commencement of liquidation under Section 33, the moratorium shall come into force pursuant to subsection (5) of the said Section. Section 33(5) reads that Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor.
As per Section 14(1)(a) of the Code, the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including the execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority is prohibited during the CIRP. Whereas, from the language of Section 33(5) of the IBC, it is clear that the bar/moratorium is only in respect of fresh suits or legal proceedings. Unlike the moratorium under Section 14 of the IBC, where it is clearly noted that the moratorium is in respect of the institution of suits or continuation of pending suits or proceedings against the corporate debtor, the words ‘Continuation of the pending suits or proceedings is conspicuously absent in Section 33(5) of the IBC.
In the matter of Elecon Engineering Company Ltd. Vs. Energo Engineering Projects Ltd. & Ors, (2022) ibclaw.in 221 HC, the Delhi High Court had taken cognizance of the judgment of Kerala High Court in The Liquidator of the Oreion Kuries and Loans Private Limited v.State of Kerala ( MANU/KE/1245/2022) herein, it was specifically observed that unlike Section 14(1)(a) of the IBC, under Section 33(5) of the IBC there is no prohibition for the continuance of already instituted suits and proceedings. The moment the liquidation proceedings commence, there would be a bar only in respect of fresh suits or proceedings in terms of Section 33(5) of the Code. However, the pending suits and proceedings shall continue. It is further observed by the Delhi High Court that the objective of the liquidation process is to derive the maximum value from the assets of the corporate debtor for the benefit of various creditors and other stakeholders in the company under liquidation. The objective is not the revival of the company. It is perhaps for this reason that, unlike Chapter II, no time limits have been provided in Chapter III of the IBC. Therefore, the legislature, in its wisdom, has decided not to include ‘pending suits or legal proceedings within the scope of the moratorium under Section 33(5) of the IBC. It is to be noted that even the proviso to Section 33(5) of the IBC only uses the word ‘instituted’, but does not use the word ‘pending‘. Further, in terms of the said proviso, even a fresh suit or legal proceedings may be instituted by the Liquidator with the prior approval of the Adjudicating Authority. So, unlike Section 14 of the IBC, under Section 33(5) of the IBC there is no absolute bar in a suit or legal proceedings continuing along with the liquidation proceedings.
So, based on the above, it can be concluded that Section 14(1)(a) prohibits the continuance of the pending suits as well as the institution of fresh suits during the CIRP process. Whereas Section 33(5) prohibits only the institution of fresh suits during the liquidation process and does not put any bar on the continuation of the pending suits which are already instituted.
Bijoy P Pulipra LLM, FCS, IP, RV