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MORATORIUM UNDER INSOLVENCY BANKRUPTCY CODE APPLIES ONLY TO CORPORATE DEBTORS, NOT PROMOTERS

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MORATORIUM UNDER INSOLVENCY BANKRUPTCY CODE APPLIES ONLY TO CORPORATE DEBTORS, NOT PROMOTERS
By: Mr.M. GOVINDARAJAN
September 25, 2021
All Articles by: Mr.M. GOVINDARAJAN       View Profile
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Moratorium

In case of initiation of corporate insolvency resolution process, the Adjudicating Authority shall,  on admission of the application under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short), by an order declare moratorium for the purposes of Section 14 of the Code

Section 14 of the Code provides that the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following-

  • the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
  • transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • 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 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
  • the recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor.

Whether moratorium applicable to promoters?

The issue to be discussed in this article is whether the moratorium declared by the Adjudicating Authority is applicable to the assets of the promoters with reference to decided case law.

Case law

In ANJALI RATHI AND OTHERS AND VARUN GUPTA AND OTHERS VERSUS TODAY HOMES & INFRASTRUCTURE PVT. LTD. AND OTHERS [2021 (9) TMI 948 - SUPREME COURT] – Supreme Court, originally the case was conducted before Consumer Forum.   The petitioners are home buyers in a group housing project, at Gurgaon, being developed by the first respondent. Home buyer agreements were entered into between the eleven petitioners and the first respondent. Clause 21 of the agreements envisaged that possession of the apartments would be delivered within a period of thirty-six months, which in almost all cases was to be in 2014.  The project was abandoned by the developer.  The petitioners filed a complaint before National Commission for getting their money back from the developer with interest.  The National Commissioner allowed their complaint and directed the promoter to refund the amount with interest @ 12% within 4 weeks of the receipt of the order.  If the said amount has not been paid by the promoter then the promoter is liable to pay enhanced rate of interest @ 14%. 

The petitioners initiated execution proceedings before National Commission.  The National Commission passed certain orders on 23.10.2018 which was challenged by the promoter before the High Court, Delhi.  The High Court stayed the order of National Commission.  In the meantime certain settlement terms were offered by the promoters which were not accepted by the petitioners.  The National Commission, during the execution proceedings directed the Managing Director of the promoter company to appear in person before the National Commission.  The same was challenged before the High Court which stayed the order of National Commission with the direction that no coercive action to be taken against the Managing Director.  Against this order the petitioners approached the Supreme Court.

The National Commission, on 01.04.2019 passed an order directed the promoters to pay the amount with interest within six weeks of the order otherwise Shri Ajay Sood, the Director shall be taken into custody and all the properties of the Judgment Debtor and the personal properties of the Judgment Debtor shall be attached and the decretal amount shall be recovered from it.  This order is, however, with the indication that this order of taking into custody and attachment of property shall be given effect into only after the Hon'ble Delhi High Court decides the matter.

In the meantime on 31.10.2019 corporate insolvency resolution process was initiated against the company by an operational creditor for nonpayment of dues by the corporate debtor.  The Adjudicating Authority admitted the application and through an order declared moratorium.  Being aggrieved by this order certain home buyers filed special leave petition before the Supreme Court.    The grievance raised in this petition is that the application filed for the initiation of corporate insolvency against the first respondent was merely to stall the refund of the amount due to the homebuyers, in terms of the order of the National Commission dated 12.07.2018.

However the petitioner lodged their claims to the Resolution Professional.  The Resolution Professional prepared information memorandum and called for Expression of Interest from the  eligible resolution applicants.  Two resolution plans were received by the Resolution Professional.  The Supreme Court directed the Resolution Professional to conduct the meeting of Committee of Creditors to approve the eligible resolution plan.  The Committee of Creditors approved with a majority vote of 96.93% of the resolution plan submitted by Consortium representing the Home Buyers.  The Resolution Professional filed an application before the Adjudicating Authority for approval of the resolution plan by the Adjudicating Authority.  Some objections have been received in this regard by the Adjudicating Authority.  The same is pending with the Adjudicating Authority for its approval.  The Supreme Court directed the petitioners to file objections, if any before the Adjudicating Authority and the Adjudicating Authority shall dispose the application within six weeks from the date of receipt of the certified copy of the order.

The petitioners urged the Supreme Court to attach the properties of the promoters.  The Supreme Court observed that since the Adjudicating Authority is to approve the resolution plan such request could not be taken into account by the Supreme Court. 

The Supreme Court clarified that the petitioners to move against the promoters of the corporate debtor even though there is a moratorium under Section 14.  The Supreme Court relied on its judgment in P. MOHANRAJ & ORS. Versus M/s. SHAH BROTHERS ISPAT PVT. LTD. - 2021 (3) TMI 94 - Supreme Court.  In this case the Supreme Court clarified that the moratorium was only in relation to the Corporate Debtor and not in respect of the directors/management of the Corporate Debtor, against whom proceedings could continue under Negotiable Instruments Act.

The Supreme Court held that the petitioners would not be prevented by the moratorium under Section 14 of the IBC from initiating proceedings against the promoters of the first respondent Corporate Debtor in relation to honoring the settlements reached before this Court.

Conclusion

The Supreme Court clarified in the above said case law that the moratorium will not be applicable to the promoters of the corporate debtor.  If any case is pending against the promoters during the period of moratorium the same may be continued.

 

By: Mr.M. GOVINDARAJAN - September 25, 2021

 

 

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