Between The Lines | NCLT: Section 14 of the Insolvency and Bankruptcy Code does not differentiate between assessment, quasi-judicial or judicial proceedings. September 23, 2022
Published in: Between The Lines
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The National Company Law Tribunal, Mumbai (“NCLT/ Adjudicating Authority”) has in its judgement dated July 29, 2022 (“Judgement”), in the matter of M/S Ravi Infrastructure and Projects v. KSS Petron Private Limited [CP (IB) 1202/MB/C-II/2017] held that Section 14 (Moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC“) does not differentiate between assessment, quasi-judicial or judicial proceedings and moratorium is imposed on all proceedings irrespective of its nature.
M/s Ravi Infrastructure and Projects (“Operational Creditor”) had filed a petition under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against KSS Petron Private Limited (“Corporate Debtor“). Admitting the petition of the Operational Creditor, the Adjudicating Authority initiated CIRP against the Corporate Debtor in its order dated August 1, 2017, and a moratorium was imposed under Section 14 (Moratorium) of the IBC.
Thereafter, pursuant to issuance of the resolution professional’s public announcement, the Assistant Provident Fund Commissioner and Recovery Officer and the Regional Provident Fund Commissioner (“Respondent”) submitted its claim on June 22, 2018 for an amount INR 47,25,682/- for the period from March 2012 to October 2015 and June 2015 to March 2017. The resolution professional admitted the claim of the Respondent under the list of creditors of the Corporate Debtor.
Subsequently, the Respondent initiated inquiry under Section 7A (Determination of moneys due from employers) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) based on a report prepared by an enforcement officer. The said inquiry was initiated through notice dated January 30, 2019 for the period from April 2015 to December 2018.
Despite being informed of the pendency of the CIRP against the Corporate Debtor and imposition of moratorium by the resolution professional, the Respondent continued its proceeding and issued summons on June 04, 2019 and July 02, 2019 under Section 7A (Determination of moneys due from employers) and 14B (Power to recover damages) of the EPF Act. In the meanwhile, the Adjudicating Authority had passed an order for liquidation of the Corporate Debtor on June 28, 2019.
Thereafter, the Respondent had passed orders dated July 05, 2019 (“Orders”) under:
The Respondent also issued notices dated June 28, 2020 and July 7, 2020 seeking recovery of the amounts mentioned in the Orders (“Recovery Notices”).
On account of the foregoing, Mr. Vineet K. Chaudhary, the liquidator of the Corporate Debtor (“Applicant”) preferred an application challenging the Recovery Notices and the Orders passed by the Respondents.
Whether Section 14 (Moratorium) of the IBC differentiates between assessment, quasi-judicial or judicial proceedings.
Contentions raised by the Applicant:
The Applicant submitted that the Orders and Recovery Notices have been passed in violation of the moratorium imposed under Section 14 (Moratorium) of the IBC.
In order to support its submissions, the Applicant relied on the following judgements:
The Applicant further contended that the Respondent had failed to provide details such as names and provident fund numbers of the employees and workmen in respect of whom the alleged provident fund dues were being claimed. The Applicant had also averred that in absence of details of identified employees and workmen, no dues could exist.
Lastly, the Applicant urged that no claims had been submitted by the Employee Provident Fund (“EPF”) authorities towards claiming any dues under the EPF Act and that in the event of any claims being submitted by such authority, the Applicant would deal with it in accordance with the provisions of the IBC and the law enunciated by the Courts.
Contentions raised by the Respondent:
The Respondent countered the application made by the Applicant that challenged the Recovery Notices and the Orders, by submitting that determination of the amounts of provident fund dues are assessment proceedings and are not barred under Section 14 (Moratorium) of the IBC. It is only on completion of the said assessment proceedings that a claim can be filed under the provisions of the IBC.
It was further submitted that the dues of the Respondent were required to be paid in priority over all dues provided under Section 11 (Priority of payment of contributions over other debts) of the EPF Act, as the said dues are excluded from the liquidation estate under Section 36 (Exclusions to liquidation estate assets) of IBC.
Moreover, the dues claimed by the Respondent were social welfare dues and actions have been taken for the benefit of the employees and workmen.
Observations of the NCLT
The NCLT observed that the purpose of imposition of a moratorium had been expounded in the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited [Civil Appeal No.10355 Of 2018] (“Mohanraj Case”), wherein the SC had held that moratorium is imposed to shield the corporate debtor from pecuniary attacks to enable it to get a breathing space so that it can continue as a going concern to ultimately rehabilitate itself.
Section 14 (Moratorium) of IBC imposes complete prohibition on the institution of suits or continuation of proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
The NCLT further observed that Section 14 (Moratorium) of the IBC does not differentiate between any proceedings, whether they are assessment, quasi-judicial or judicial in nature. In fact, a moratorium is imposed on all proceedings irrespective of the nature.
In the instant case, the proceedings initiated by the Respondent are not mere assessment proceedings but legal proceedings. The initiation of proceedings by the Respondent would entail imposition of a pecuniary liability on the corporate debtor and that is exactly what is prohibited by the IBC.
Moreover, claims during CIRP are required to be filed within fourteen (14) days from the date of appointment of the interim resolution professional in terms of Regulation 6 (Public Announcement) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Thus, a claim which is not alive on the insolvency commencement date, cannot indirectly be permitted to be ascertained, as it would lead to numerous proceedings against the corporate debtor which would in turn frustrate the object of the IBC and the completion of the CIRP in time.
The NCLT further observed that the Applicant had rightly pointed out that the Respondent had passed Orders in haste without identifying the name of any employee or workman in respect of whom the alleged provident fund dues were being claimed.
Decision of the Supreme Court
In view of entirety of the foregoing, the NCLT set aside the Orders passed by the Respondent as the said Orders were in violation of the moratorium imposed under Section 14 (Moratorium) of the IBC. Consequently, the Recovery Notices that sought recovery of the amounts mentioned in the said Orders were also set aside.
The NCLT further held that setting aside of the Orders passed by the Respondent would not curb employees or workmen from filing their respective claims, if any, with the Applicant under the provisions of the IBC, in respect of dues towards provident fund, pension fund and gratuity fund and that the Applicant would be duty bound to prioritize the payments of the social welfare dues.
Through this Judgement, the NCLT examined the legality of the Orders and Recovery Notices issued by the Respondent and if the said Orders and Recovery Notices were issued in breach of moratorium period under Section 14 of the IBC.
The Judgment upheld the view laid down in the Mohanraj Case, wherein the SC held that “…While section 14(1)(a) refers to monetary liabilities of the corporate debtor, Section 14(1)(b) refers to the corporate debtor’s assets, and together, these two clauses form a scheme which shields the corporate debtor form pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself. Any crack in this shield is bound to have adverse consequences, given the object of Section 14, and cannot, by any process of interpretation, be allowed to occur.”
Therefore, the principle emerging from this Judgement is that Section 14 of the IBC does not differentiate between assessment, quasi-judicial or judicial proceedings and moratorium is imposed on all proceedings irrespective of its nature.
For any query, please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER