On the date of admitting the application for initiating the corporate insolvency resolution process, the National Company Law Tribunal will order the moratorium to fulfill the purposes of section 14 which contains the provisions regarding moratorium.
Moratorium in common words means a kind of stay or delay of an activity or a law. In legal parlance, it means to temporarily suspend a law to carry out a legal challenge. It is legally authorizing the debtors to delay the due payments.
The order declaring moratorium prohibits the following:
However, the supply of essential goods or services neither can be terminated nor can be interrupted during the moratorium period.
Moreover, existing licenses, permits, registrations, quotas granted by the government or local authority will not be suspended nor can be terminated on the grounds of insolvency. But there should not be any default in payment regarding their use or continuation.
Effect of order of moratorium:
A moratorium will continue to be in effect till:
(i)Corporate insolvency resolution process is completed; or
(ii)Resolution plan is approved by the adjudicating authority; or
(iii)Committee of creditors pass the resolution to liquidate the corporate debtor,
Whichever is earlier.
Purposes of the moratorium:
(i)To ensure that multiple proceedings do not take place simultaneously. Thereby, avoiding the possibility of conflicting decisions of the related proceedings.
(ii)To keep all the assets of the corporate debtor together during the corporate insolvency resolution process and thus facilitating orderly completion of the process.
(iii)To ensure that the company continues as a going concern while options for resolution of default are being assessed by the creditors.
(iv)To prohibit the disposal of the assets of the corporate debtor to ensure that the corporate debtor does not transfer his assets during the corporate insolvency resolution process. Thereby, stripping him of the value of the assets during the continuation of the process.
In Mr. Anand Rao Korada Resolution Professional v. M/S Varsha Fabrics Pvt. Ltd. & Ors. (2020), it was held that once the proceedings under the Code have commenced and the moratorium is declared by the NCLT, then High Court cannot proceed with the property of the corporate debtor as alienating his property during the continuation of the process will jeopardize his stakeholder’s interests.
Exclusion of certain acts:
The Act shall not be applied to:
(a)transactions that are notified by the central government after consulting with any financial regulator.
(b)surety to a corporate debtor in a contract of guarantee.
In Varrsana Ispat Ltd. V. Deputy Director Directorate of Enforcement, it was held by the NCLAT that the Prevention of Money Laundering Act, 2002 applies on proceeds of crime and for matters connected therewith, resulting in the confiscation of property which is derived from the proceeds of crime and therefore, section 14 which contains provisions relating to the moratorium is not applicable on such proceedings.
In Power Grid Corporation of India Ltd. V. Jyoti Structures Ltd., it was held by the High Court that while applying section 14 the nature of proceedings has to be seen and if the proceedings are for the benefit of the corporate debtor or in his favor then section 14 will not apply.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
