Moratorium under the Insolvency and Bankruptcy Code - A Critical Insight

The idea of a moratorium is that it facilitates the continued operation of the business of the corporate debtor to allow its breathing space to organise its affairs so that a new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefiting all stakeholders, which would include workmen of the corporate debtor.
Report of the Insolvency Law Committee of February, 2020 Paragraphs 8.2 & 8.11.

India’s insolvency and bankruptcy regime reached a significant turning point in 2016 by adopting the Insolvency and Bankruptcy Code (IBC ). With the IBC, the existing laws will be consolidated and amended, and a comprehensive framework for handling insolvency and bankruptcy cases will be created. The previous disjointed and drawn-out legal processes for resolving insolvency presented difficulties that called for introducing the IBC. The moratorium period, which halts legal actions against the debtor during the insolvency resolution process, is one of the critical provisions of the IBC.

The Raghuram Rajan Committee, the Bankruptcy Law Reforms Committee, and the Standing Committee on Finance were just a few of the expert committees that made recommendations that eventually led to the creation of the Insolvency and Bankruptcy Code. These committees understood the necessity of an updated insolvency framework to support a creditor-friendly environment, safeguard stakeholders’ interests, and speed up the effective resolution of distressed assets.

The following main goals of the IBC were stated in its introduction:

The IBC seeks to promptly resolve insolvency cases to maximise asset value and encourage business revival.
Protection of creditors’ rights and interests: By defending creditors’ rights and interests, the code aims to create a friendly climate for creditors.
Ease of doing business: By offering a predictable and transparent insolvency resolution process, the IBC seeks to increase the ease of business in India.
The code tries to balance the interests of different stakeholders, including creditors, debtors, and employees.
Encouraging entrepreneurship and credit accessibility: The IBC promotes entrepreneurship by facilitating a quick exit mechanism for unprofitable ventures.

The Moratorium Clause: Safeguarding Corporate Debtors and Facilitating Resolution

The IBC’s Section 14 introduces the idea of a moratorium, a crucial clause designed to safeguard corporate debtors and speed up the insolvency resolution procedure. A temporary suspension of all legal actions and proceedings against the corporate debtor during the insolvency resolution process is referred to as a moratorium under the Insolvency and Bankruptcy Code (IBC). It is a crucial clause designed to safeguard the corporate debtor’s assets, speed up the resolution procedure, and preserve the status quo. The moratorium covers the following legal actions:

Institution or continuation of lawsuits, proceedings, or arbitration.
Security interest enforcement, including asset or property recovery.
The sale, alienation, or transfer of the corporate debtor’s assets.
Getting back any property that was lost to the corporate debtor.
Any legal action to enforce, recover, or foreclose on a security interest.

The moratorium period lasts from the day the insolvency process starts until the resolution process is finished or liquidation proceedings are commenced. This preserves the corporate debtor’s assets throughout the resolution process. The timelines within which the resolution process is to occur again safeguard the corporate debtor’s assets from further dilution, as well as all of its creditors and employees, by ensuring that the resolution process moves as quickly as possible so that another management can, through its entrepreneurial skills, resurrect the corporate debtor to accomplish all of these goals. The moratorium clause aims to maintain the status quo, stop the loss of the corporate debtor’s assets, and create a favourable setting for the resolution process. However, the moratorium’s reach and applicability have come under judicial review and interpretation.

Balancing Act: Understanding the Scope and Exclusions of the Moratorium Clause

The effectiveness of the resolution process depends on how long the moratorium lasts. As per Section 14 of the IBC, the moratorium period begins from the insolvency commencement date and lasts until the completion of the insolvency resolution process or the initiation of liquidation proceedings. According to Section 14 of the IBC, the scope of the moratorium is extensive and includes all legal actions and proceedings against the corporate debtor. It offers broad protection to the corporate debtor’s assets and business operations. While the moratorium provides a general suspension of legal activities, there are significant exemptions and caveats to its applicability. These exclusions include:

Actions by the corporate debtor: The moratorium does not restrict the corporate debtor from voluntarily initiating legal actions or proceedings during the resolution process.
Regulatory or disciplinary actions: The moratorium typically has no bearing on the actions taken by regulatory or disciplinary authorities. This makes it possible to take the necessary steps to defend the public interest or enforce regulatory compliance.
Criminal proceedings: Criminal proceedings against the corporate debtor or its officers and directors are not stayed during the moratorium period.
Essential supply agreements: The moratorium has no bearing on agreements for delivering goods or services important to the corporate debtor’s ability to continue operating its business.

These exclusions and exceptions are designed to balance protecting the corporate debtor’s interests and the legitimate concerns of other stakeholders, regulators, and the public.

Preserving Assets and Facilitating Resolutions: The Significance of the Moratorium Clause in Insolvency

Asset Protection: One of the main goals of the moratorium clause under the Insolvency and Bankruptcy Code (IBC) is to safeguard the corporate debtor’s assets throughout the resolution procedure. The moratorium prevents individual creditors from taking unilateral actions that might deplete or reduce the value of the debtor’s assets by halting all legal actions and proceedings. This enables the insolvency practitioner and the committee of creditors to keep control of the assets and make defensible choices about their use and preservation. The moratorium protects the corporate debtor’s assets from haphazard liquidation and encourages the creation of the most significant possible value for all parties involved.
Facilitation of Resolution Process: By establishing a deadline for the insolvency professional and the committee of creditors to evaluate the debtor’s financial situation, develop a resolution plan, and engage in negotiations with interested parties, the moratorium provision facilitates the efficient operation of the insolvency resolution process. It offers a window of time to investigate various revival tactics, such as debt restructuring, asset sales, or fresh cash injection. An unbroken and focused effort can be made to develop a workable resolution plan that maximises value for creditors and encourages the resurrection of the corporate debtor, thanks to the suspension of legal proceedings during the moratorium.
Debtor Rehabilitation vs Creditor Rights: While the moratorium provision is aimed at aiding the resolution and revival of the corporate debtor, it can potentially cause a conflict between the debtor’s rehabilitation and the creditors’ rights. Some creditors may contend that the moratorium hinders their ability to collect and delays their recovery. Certain creditors, especially those with urgent funding needs or significant exposure to the debtor, may experience financial hardship due to the suspension of legal proceedings.

Navigating the Moratorium: Impacts on Creditors, Debtors, and Financial Institutions

Impact on Creditors: Due to the inability of creditors to file lawsuits or enforce security during the moratorium period, creditors may experience financial difficulties and liquidity issues. This may impact their cash flow, profitability, and general financial stability. Creditors could also delay getting payments or remedies, worsening their financial situation.
Impact on Debtors: During the moratorium period, debtors could have trouble getting financing or accessing necessities like goods and services. Cancelling legal proceedings could offer debtors short-term respite. Still, if the settlement process drags on for a long time, it might make it difficult for them to resume business operations. Additionally, debtors may need to show their dedication to the resolution process and offer frequent updates on their financial situation, both of which can be taxing and time-consuming.
Influence on Financial Institutions: Suspension of legal actions and recovery procedures may delay timely loan repayment and degrade the quality of their assets. Due to the delay in resolution, financial institutions may need help managing their non-performing assets and provisioning needs. The moratorium may also make it more difficult for financial institutions to respond quickly to cases of default, which could cause delays in their overall operations and credit disbursement procedures.
Prolonged and Delay-Prone Resolution Process: The moratorium intends to pause legal proceedings temporarily, but it may unintentionally result in a drawn-out and drawn-out resolution process. Stakeholder discussions, negotiations, issue complexity, and inherent difficulties in reaching an agreement might extend the moratorium period. This prolonged period can hinder the swift resolution of insolvency proceedings, resulting in increased financial burdens for debtors and creditors.

Challenges in Indian Insolvency Law

Swiss Ribbons Pvt. Ltd. v. Union of India: The Indian Supreme Court maintained the IBC’s validity and acknowledged the moratorium as a crucial step in the dispute resolution process. It emphasised the moratorium’s significance in protecting the corporate debtor’s assets and creating an ideal setting for the resolution specialist and the creditors’ committee to develop a workable resolution plan.
ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta: The Supreme Court clarified that the moratorium does not automatically suspend criminal proceedings against the corporate debtor or its directors. It affirmed that criminal proceedings could continue independently of the moratorium, ensuring that the insolvency resolution process does not impede cases involving fraudulent activities or criminal misconduct.

Despite landmark court cases, There have been inconsistent judgements and legal uncertainties surrounding the interpretation and extent of the moratorium provision. Uncertainty and inconsistency result from several courts’ differing stances on particular issues. Some of the points of debate are as follows:

There is some uncertainty on whether the moratorium provided for under the IBC applies to personal guarantors of corporate creditors. Legal issues have arisen as a result of various courts’ conflicting interpretations.
The exclusion of financial contracts from the moratorium scope has been debatable. Although the IBC exempts financial contracts from the moratorium, uncertainty about which precise contracts fall within this exclusion has led to varying court interpretations.
Impact on arbitration processes: Due to the connection between the moratorium and arbitration proceedings, there are doubts about whether arbitration awards will be enforceable while the moratorium is in effect. Inconsistent court interpretations have complicated the problem.

Learning from Global Perspectives

Increase the effectiveness of the moratorium clause by learning from the experiences of other jurisdictions. Some notable instances include-

The United Kingdom: The United Kingdom’s insolvency regime includes a moratorium that enables financially troubled enterprises to avoid creditor action while considering workable rescue solutions temporarily. To aid the company’s recovery, the UK’s strategy emphasises the value of early action and promotes stakeholder participation.
The United States: When a debtor files for bankruptcy, the automatic stay clause of Chapter 11 of the United States Bankruptcy Code prevents any further collection efforts and legal actions against the debtor. The clause gives the debtor some breathing room to reorganise and create a workable plan for financial recovery.
Singapore: Singapore’s bankruptcy framework permits a moratorium period throughout the restructuring process, providing temporary protection against legal actions and facilitating negotiations between the debtor and creditors. The framework encourages a cooperative approach to restructuring and strongly emphasises the value of protecting creditors and distributing assets fairly.
Australia: Australia’s insolvency laws include a voluntary administration procedure that results in a moratorium, giving the insolvent business time to create a restructuring plan. The regime emphasises the value of transparency and accountability in the dispute resolution process and promotes stakeholder engagement.

Policymakers and other stakeholders can learn about the advantages and disadvantages of their moratorium laws by examining other jurisdictions’ experiences and best practices.

Enhancing the Provision for Creditor-Debtor Equity and Efficiency

Balance the rights and interests of creditors and debtors to increase the effectiveness of the moratorium clause. Impose specific rules to ensure that the moratorium does not unfairly favor one party over the other. Encourage openness, responsibility, and fair treatment of all parties involved in the insolvency resolution process to achieve this.
Professionals in insolvency play a crucial part in the resolution procedure. Enhancing the credentials, instruction, and supervision of insolvency professionals is crucial for enhancing the operation of the moratorium clause. Establish strict standards, encourage ongoing professional development, and create systems to monitor output and adherence to moral principles to accomplish this.
The success of the insolvency resolution procedure depends on timeliness. Establishing and enforcing specific deadlines for the moratorium, hiring resolution specialists, submitting resolution plans, and other critical milestones are key to preventing unneeded delays. Following these deadlines will assist in keeping the moratorium provision effective and efficient while avoiding unnecessary delays in the resolution procedure.
Conduct a thorough evaluation of the moratorium provision’s scope to address legal issues and assure clarity. Clearly state the scope to ensure the corporate debtor receives all necessary safeguards while avoiding unjustifiably impeding essential operations and legal actions. Clearly state the exclusions and exceptions to avoid misunderstandings regarding the moratorium and protect the interests of all parties involved.
Improving debtor responsibility is crucial to preventing misuse and abuse of the moratorium option. Implement stricter measures to ensure that debtors supply correct and timely information, show their dedication to the resolution process, and actively participate in revival efforts. Apply suitable penalties to non-compliance or willful misbehavior to discourage fraud and hasten the settlement process.

Building a Robust Future

Future views must be considered to improve the moratorium provision of the IBC. Reforms should concentrate on finding a balance between debtor and creditor rights, guaranteeing rigorous respect to deadlines, boosting debtor accountability, strengthening the position of insolvency specialists, and revising the scope of the moratorium. These actions will help make the insolvency resolution process more effective and efficient. In addition, regular assessments, evaluations, and ongoing monitoring are essential for finding any flaws and making the required corrections. Policymakers should stay informed as the bankruptcy and insolvency landscape changes, alter the moratorium provision to address new issues and encourage an equitable and open resolution process. Policy changes should focus on guaranteeing prompt resolutions, improving the effectiveness of the moratorium provision, and minimising potential abuses or misuses.

Enhancing the role of insolvency experts and revising the extent of the moratorium provision will further increase the efficacy of the overall insolvency framework. Additionally, to hone and enhance the moratorium provision under the IBC, policymakers should consider global best practices and take advice from the experiences of other countries. Collaboration and knowledge exchange with international partners can offer insightful information and help India establish a strong and effective insolvency ecosystem.

Conclusion

To sum up, the Insolvency and Bankruptcy Code’s moratorium clause effectively accelerates the resolution procedure. However, striving to balance debtor rehabilitation and creditor rights requires careful analysis, regular examination, and required modifications. The moratorium clause can play a crucial role in creating a fair, efficient, and successful insolvency resolution process in India by addressing the issues and implementing the suggested improvements. The moratorium clause in the Insolvency and Bankruptcy Code (IBC) is crucial to India’s insolvency and bankruptcy framework. It has many functions, including protecting the corporate debtor’s assets, stopping legal action, speeding up the resolution procedure, and balancing the interests of different parties.

The moratorium offers the required protection but has drawbacks and concerns, including its effects on lenders, borrowers, and financial institutions and the possibility of drawn-out settlement procedures. Legal ambiguities have resulted from the moratorium’s varied judicial interpretation. We can greatly improve the effectiveness and clarity of the moratorium provision by learning from the experiences of other jurisdictions and implementing revisions and suggestions. Reforms and suggestions should emphasise fostering openness, accountability, and equitable treatment of all parties involved while boosting debtor accountability and prompt compliance. To guarantee that the moratorium provision continues to help the resolution and rebirth of troubled firms under the Insolvency and Bankruptcy Code, it should consider these factors in the future.

References

Report of the Insolvency Law Committee of February, 2020 para 8.2 & 8.11
Insolvency and Bankruptcy Code, 2016, Section 14.
Laws, IBC. “All About Moratorium Under IBC Including Judicial Pronouncements.” IBC Laws, 5 Nov. 2017, ibclaw.in/all-about-the-moratorium-under-ibc-including-judicial-pronouncements.
(2019) SCC Online SC 73
Civil Appeal No.9582 Of 2018
“Chapter 11 – Bankruptcy Basics.” United States Courts, www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basic s. (Accessed 25 May, 2023).

Submitted by Sreejeeta Das, a 2nd Year B.A.LL.B. Law Student of Symbiosis Law School, Hyderabad.