2025 (6) TMI 1514 - HC - IBC

Rejection of application for rejection of plaint under Order 7 Rule 11 of Code of Civil Procedure - suit filed by the respondent against the applicant company during the subsistence of the moratorium u/s 14 of the Insolvency and Bankruptcy Code 2016 (IBC) is maintainable or barred by law - HELD THAT - In view of this settled position of law and provision of IB Code the day on which suit is filed was barred by the order of NCLT which has overriding effect over other enactment and provisions. In the said order itself the moratorium period shall be in effect till approval of plan submitted by the resolution professional. The moratorium came to an end on 19.05.2023 which was came into effect on 30.08.2021. Admittedly the suit was filed on 21.02.2022 suppressing this fact. As held by the Hon ble Apex Court therefore suit is not only liable for rejection under Order 7 Rule 11 but also under Section 151 of C.P.C. It is not necessary at all to look only into the pleadings in the plaint while considering the application under Order 7 Rule 11 specifically when the IB Code is special legislation which empowers NCLT to pass orders prohibiting parties to initiate proceedings while moratorium period is in effect. As such impugned erroneous order is liable to be set aside as passed without considering the law position. Conclusion - The plaint is liable to be rejected under Order 7 Rule 11 read with Section 151 of the Code of Civil Procedure as the suit is barred by the moratorium imposed under the Insolvency and Bankruptcy Code. The order dated 23.11.2023 passed by the Joint Civil Judge Junior Division Hinganghat at exhibit 24 in R.C.S. No.23/2022 is hereby quashed and set aside - Civil Revision Application is allowed.

Summary

The core legal questions considered by the Court are:

1. Whether the suit filed by the respondent against the applicant company during the subsistence of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC") is maintainable or barred by law.

2. Whether the moratorium imposed by the National Company Law Tribunal ("NCLT") under Section 14 of the IBC prohibits institution or continuation of suits against the corporate debtor, including suits for recovery of possession and arrears of rent.

3. Whether the jurisdiction of civil courts is ousted in matters covered by the IBC, especially during the moratorium period and until approval of the resolution plan under Section 31 of the IBC.

4. The applicability of the moratorium period vis-`a-vis the timeline of the Corporate Insolvency Resolution Process ("CIRP") and the filing date of the suit.

5. The treatment of operational debts such as arrears of rent under the IBC and the appropriate forum for raising such claims.

6. The effect of approval of the resolution plan by the NCLT on pending or new claims against the corporate debtor.

7. The scope of jurisdiction of civil courts in cases where the subject matter involves recovery of property occupied by the corporate debtor during CIRP.

Issue-wise detailed analysis:

1. Maintainability of the suit during moratorium under Section 14 of the IBC

The relevant legal framework includes Section 14(1)(a) of the IBC which imposes a moratorium prohibiting institution or continuation of suits or proceedings against the corporate debtor once CIRP is initiated. Section 14(1)(d) specifically bars recovery of any property by an owner or lessor where such property is in possession of the corporate debtor. Section 63 of the IBC bars civil courts from entertaining suits or proceedings in matters within the jurisdiction of the NCLT.

Precedents such as Alchemist Asset Reconstruction Company Ltd. and Anand Rao Korada confirm that the moratorium has overriding effect over other laws and civil courts lack jurisdiction to entertain suits against the corporate debtor during the moratorium.

The Court examined the NCLT order dated 30.08.2021 initiating CIRP and imposing moratorium, which prohibited institution of suits and recovery of property occupied by the corporate debtor. The moratorium was effective from 30.08.2021 until the approval of the resolution plan on 19.05.2023.

The suit was filed on 21.01.2022, during the moratorium period. The trial court had erroneously held that since the CIRP period under Section 12 (270 days) had lapsed, the suit was maintainable. The Court found this to be incorrect, noting that the moratorium continues until approval of the resolution plan under Section 31(1), which occurred only on 19.05.2023.

The Court applied the law to the facts and held that the suit was barred under Section 14(1)(a) and (d) of the IBC, and hence not maintainable. The institution of the suit during the moratorium rendered it non est.

2. Jurisdiction of civil courts vis-`a-vis NCLT under the IBC

Section 63 of the IBC bars civil courts from entertaining any suit or proceeding in respect of matters on which the NCLT or NCLAT has jurisdiction under the Code. Section 238 provides that the IBC overrides any inconsistent provisions of other laws.

Precedents such as Anand Rao Korada emphasize that once CIRP is initiated and moratorium declared, civil courts cannot proceed with matters involving the corporate debtor's assets or recovery thereof, as the NCLT has exclusive jurisdiction.

The Court noted that the suit involved recovery of possession of property occupied by the corporate debtor, which falls within the moratorium's scope and NCLT's jurisdiction. Therefore, the civil court lacked jurisdiction to entertain the suit during moratorium.

3. Operational debts and claims during CIRP

Operational debts, including arrears of rent, are claims that must be submitted to the resolution professional during CIRP as per Section 5(21) and related provisions of the IBC. The Court relied on Jaipur Trade Expocentre and Electrosteel Steel Limited judgments, which held that operational creditors must file claims before the resolution professional and cannot initiate separate suits during moratorium.

Any grievance regarding claim rejection lies with the NCLT under the IBC framework, not civil courts. The Court emphasized that allowing suits during moratorium would defeat the purpose of a collective insolvency resolution process.

4. Effect of approval of resolution plan on claims and moratorium

Once the resolution plan is approved by the NCLT under Section 31, the moratorium ceases to have effect as per Section 14(4) of the IBC. Claims not included in the resolution plan stand extinguished and cannot be pursued.

The Court referred to the Electrosteel Steel Limited judgment which held that claims outside the approved resolution plan are barred and no proceedings can be initiated or continued in respect of such claims.

In the present case, the moratorium ended only on 19.05.2023, after which the suit could be maintainable. Since the suit was filed during moratorium, it was barred.

5. Treatment of competing arguments

The respondent argued that the suit was for declaration and arrears of rent, which are not barred and that the property was not owned by the company. The Court rejected this, holding that the moratorium prohibits recovery of property occupied by the corporate debtor regardless of ownership, and that the civil court's jurisdiction is ousted during moratorium.

The respondent's reliance on cases involving public law or partition suits was distinguished as not applicable to the facts involving insolvency moratorium.

6. Application of Order 7 Rule 11 and Section 151 CPC

The Court held that the plaint was liable to be rejected under Order 7 Rule 11 read with Section 151 CPC as the suit was barred by law due to the moratorium imposed under the IBC. It was not necessary to confine the examination to the plaint alone, given the overriding effect of the IBC and the special jurisdiction of the NCLT.

Conclusions:

The suit filed during the moratorium period was barred and not maintainable. The civil court lacked jurisdiction to entertain the suit as the matter fell within the exclusive domain of the NCLT under the IBC. The moratorium under Section 14 prohibits institution or continuation of suits against the corporate debtor, including suits for recovery of property occupied by the debtor. Operational debts must be raised before the resolution professional and NCLT, not civil courts. The moratorium remains effective until approval of the resolution plan, which extinguishes claims not included therein.

Significant holdings:

"The moratorium under Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016 expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtor."

"The moratorium shall have effect from the date of pronouncement of the order till the completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33."

"Section 63 of the IBC bars the jurisdiction of civil courts in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code."

"All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor."

"Once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the central government, any state government or any local authority, guarantors and other stakeholders. All claims which are not a part of the resolution plan shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim which is not part of the resolution plan."

"The plaint is liable to be rejected under Order 7 Rule 11 read with Section 151 of the Code of Civil Procedure as the suit is barred by the moratorium imposed under the Insolvency and Bankruptcy Code."