Striking a Balance: Specific Orders for Moratorium and Creditor Hardships

Introduction

Section 13 of the Insolvency and Bankruptcy Code, 2016 (IBC) mandates the imposition of a moratorium upon the admission of an insolvency petition by the Adjudicating Authority. It also requires a public announcement of the initiation of the Corporate Insolvency Resolution Process (CIRP) and the appointment of an Interim Resolution Professional (IRP). Section 14 delineates the scope of the moratorium period, while Section 15 specifies the contents of the public announcement. Section 16 mandates the appointment of the IRP on the insolvency commencement date. According to Section 10(5), the CIRP commences from the date of admission of the petition under Section 10(4).

Conflicting Interpretations

However, ambiguity remains in Sections 13 and 14, which require an order to “declare a moratorium.”” Similarly, Section 14 states that the Adjudicating Authority shall declare a moratorium by order. A literal interpretation suggests a specific declaration of the moratorium and public announcement. However, the Supreme Court’s judgement in Alchemist Asset Reconstruction interpreted the moratorium to automatically impose upon the admission of the insolvency petition. Despite this, subsequent decisions by the NCLT and NCLAT have diverged, leading to inconsistent rulings.

Alchemist Asset Reconstruction

In the case of M/s. Alchemist Asset Reconstruction v. M/s. Hotel Gaudavan Pvt. Ltd. & Ors. (2017), the Respondent invoked the arbitration clause despite a moratorium being in place. Justices Nariman and Kaul strongly criticized the Sole Arbitrator and lower courts for allowing the arbitration, as it undermined the mandate of the IBC. The Court emphasized that “the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts the institution or continuation of pending suits or proceedings against Corporate Debtors.” The Supreme Court adopted a purposive interpretation, clearly stating that the triggering point for the moratorium is the admission of the insolvency petition, not a specific declaration order.

Case of Straight Edge Contracts

In this case, operational creditor M/s Straight Edge Contracts Private Ltd. filed an insolvency petition against Three C Shelters Private Ltd. The Hon’ble Adjudicating Authority admitted the insolvency petition without issuing a specific order to impose a moratorium or appoint the Interim Resolution Professional (IRP). Later, the Adjudicating Authority issued a separate order imposing the moratorium, appointing the IRP, and announcing the initiation of the Corporate Insolvency Resolution Process (CIRP).

During the interim period between these orders, Orris Infrastructure Private Ltd. took over the development of the Greenopolis Project following an order by the Haryana Real Estate Regulatory Authority (HARERA) due to ongoing delays. Orris argued that the transfer was valid, claiming that the later order imposed the moratorium in accordance with Sections 13 and 14, which require a specific declaratory order to impose the moratorium. On the contrary, Three C Shelters contended that the admission of the insolvency petition automatically imposed the moratorium.

NCLT’s Decision

On 29.03.2022, the NCLT issued a judgment that took an opposing view, holding that the tribunal must issue a specific order to impose a moratorium as outlined in Section 14 of the IBC. The tribunal ruled that merely admitting an insolvency petition does not automatically trigger a moratorium. It emphasized that for a valid moratorium, there would have to be a public announcement within three days of the petition’s admission and the transfer of control and custody of the Corporate Debtor’s (CD) property to the IRP.

Furthermore, the tribunal misinterpreted the Alchemist Asset Reconstruction case, concluding that an order merely “allowing”” the insolvency petition does not activate the moratorium without a specific declaration.

NCLAT’s Decision and Doctrine of Merger

On 28.08.2023, the NCLAT allowed the appeal, but only reversed the decision concerning the issue of fraud and its effect on the proceedings, as well as the NCLT’s power to recall its previous order if fraud vitiated it. The appellate tribunal did not address the legal question of whether the admission of the insolvency petition or the issuance of a detailed order begins the moratorium.

According to the doctrine of merger, the decision of a lower court merges with that of a higher appellate court. However, this doctrine applies restrictively, requiring explicit reversal of an issue; otherwise, the operative part of the lower court’s decision continues to bind the parties, and the law point remains. The Supreme Court, in Shanmugavel Nadar v. State of T.N. (2002), confirmed this principle and held that “the operative part of the order of the Division Bench stood merged in the decision of this Court, the remaining part of the order of the Division Bench of the High Court cannot be said to have merged in the order of this Court dated 10-9-1986 nor did the order of this Court make any declaration of law within the meaning of Article 141 of the Constitution either expressly or by necessary implication.”

Therefore, as it stands now, there are two diverging decisions on the same issue: one from the Supreme Court (Alchemist Asset Reconstruction) and one from the NCLAT (Straight Edge Contracts).

Impact on Creditors’ Rights

The delay in publicly announcing the initiation of the CIRP can potentially undermine creditors’ right to be informed, as the Supreme Court’s interpretation allows the moratorium to take effect automatically. However, without the issuance of specific orders, creditors cannot reasonably be expected to become aware of the CIRP’s commencement. Furthermore, without the appointment of an Interim Resolution Professional (IRP), there would be no avenue for creditors to submit their claims.

This “communication gap” can significantly impair the recovery proceedings that creditors might initiate during the interim period, leaving them in a precarious situation where they are unable to either submit their claims or recover their monies. Consequently, although the lack of a specific order may not diminish the moratorium’s effectiveness, the adjudicating authority must remain cognizant of the potential hardships it may impose on stakeholders.

Conclusion

The creditors’ rights to be informed and to submit their claims are crucial aspects of the CIRP, and any delay or lack of communication can jeopardize the entire resolution process. It is imperative that the adjudicating authority strike a balance between the automatic operation of the moratorium, as interpreted by the Supreme Court, and the need to ensure that creditors are promptly notified and provided with the necessary channels to participate effectively in the resolution proceedings.

Given the divergent decisions from the Supreme Court and NCLAT, it is crucial for the Apex Court to provide clarity on this issue to ensure uniformity in the interpretation and application of the IBC provisions, keeping in mind the right of the creditors.

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