MORATORIUM UNDER IBC AND ADJUDICATION UNDER GST

[Dr. Sanjiv Agarwal]

Under the Insolvency and Bankruptcy, Code 2016 (IBC). ‘Moratorium’ is covered under section 14 of the Code which means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the corporate debtor.

Section 14 of the Code provides for as follows:

‘(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-

1. 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;
2. transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
3. 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;
4. the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at 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 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’

The object of moratorium provision under Section 14 of the IBC is to see that there is no depletion of corporate debtor's assets during the insolvency resolution process so that it can continue as a going concern while maximising its value.

In ASSOCIATE DECOR LTD., VERSUS ASSISTANT COMMISSIONER OF COMMERCIAL TAXES BENGALURU, STATE OF KARNATAKA BENGALURU [2021 (10) TMI 578 - KARNATAKA HIGH COURT] the petitioner was served show cause notice (SCN) under section 75 of the CGST Act, 2017 and the petitioner sought setting aside of said noticee on the ground that proceedings under the GST law cannot be allowed to be continued on account of moratorium under insolvency law (IBC). Revenue authorities issued notice because it could hit limitation bar under the GST law if proceedings were initiated after the lifting of moratorium.

It was contended by the petitioner that no proceedings against the petitioner can be continued in view of the moratorium declared by the National Company Law Tribunal (NCLT) Bengaluru against the petitioner on 26-10-2018 thereby initiating corporate insolvency resolution process against the petitioner, all suits, proceedings, etc. initiated against the petitioner cannot be continued till the moratorium is lifted in accordance with the Insolvency and Bankruptcy Code, 2016 (IBC). Further, the respondent is illegally and arbitrarily attempting to continue the proceedings against the petitioner which are without jurisdiction or authority of law and contrary to Section 14 of the IBC and as such, the petitioner is before this court by way of the instant petition.

On the other hand, Revenue Authorities contended that the embargo fixed under section 14 of the IBC is only as regards recovery proceedings against the petitioner and vide interim order dated 29-9-2021, this court has permitted the respondent to proceed with assessment/adjudication proceedings which are permissible in law and consequently, there is no merit in the petition and that the same is liable to be dismissed. Further, in the event the instant proceedings initiated by the respondent against the petitioner are quashed, the proceedings to be initiated by the respondent later after lifting of the moratorium would be barred by limitation resulting in irretrievable loss and hardship to the respondent and on this ground also, the petition is liable to be dismissed.

The court observed that a plain reading of section 14 of the IBC will clearly indicate that there is a complete/total embargo/bar to initiate and continue proceedings against the petitioner before any other authority including the respondent - authority also during the pendency of proceedings before the NCLT and appeal(s) to be filed against the same, if any, when the moratorium/CIRP is in force and has not been lifted; it is relevant state that neither the words 'proceedings' nor 'authority' have been defined under the IBC and consequently giving the said words their plain grammatical meaning, the only inference that arises from a reading of section 14 would be that the said provision is an all pervasive and omnibus provision which includes and encompasses proceedings initiated by the respondent - department against the petitioner also.

Once an order of moratorium is granted by the NCLT, the legal fiction under section 14 of the IBC will come to the rescue of the corporate debtor. Therefore, taking into consideration all the above said provisions of law and also the ratio laid down by the Apex Court in the above said case, as also the Delhi High Court holding that when once the Moratorium is granted by the NCLT, it will continue till the completion of Corporate Insolvency Resolution Process or until it approves the resolution plan under section 31(1) of the IBC or passes an order of liquidation of corporate debtor under section 33 of the IBC, as the case may be.

The court relied upon  the following cases:

• P. MOHANRAJ & ORS. VERSUS M/S. SHAH BROTHERS ISPAT PVT. LTD. [2021 (3) TMI 94 - SUPREME COURT]
• PRINCIPAL COMMISSIONER OF INCOME TAX VERSUS MONNET ISPAT & ENERGY LTD. [2017 (9) TMI 1907 - DELHI HIGH COURT]
• PR. COMMISSIONER OF INCOME TAX VERSUS MONNET ISPAT AND ENERGY LTD. [2018 (8) TMI 1775 - SC ORDER]

It was held that in view of the specific embargo/bar contained in section 14 of the IBC, the instant proceedings initiated by the respondent pursuant to the impugned notices deserve to be stayed/suspended/kept in abeyance till conclusion of the proceedings before the NCLT and appeal(s) to be filed, if any, and only after lifting of the moratorium and completion of the corporation insolvency resolution process. Further, in view of the non-obstante clause contained in section 60(6) of the IBC which excludes the entire period during which the moratorium is in force; so also section 75(1) of the GST Act also excludes the entire period from 29-9-2021 onwards when the court passed an order of stay up to the date of completion of the CIRP and lifting of the moratorium.

Thus, it was concluded that proceedings under GST cannot be continued when moratorium declared under Insolvency and Bankruptcy Code is in force; proceedings were to be kept in abeyance till lifting of moratorium. Liberty was given to the respondent to continue/initiate proceedings against the petitioner after disposal of the proceedings and lifting of the moratorium and completion of the CIRP.