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The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its order dated November 29, 2022 (“Order”), in the matter of Ashok Mahindru and Another v. Vivek Parti [Company Appeal (AT) (Insolvency) No. 1324 of 2022], held that Section 96(1)(b) (Interim-moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not stay any future liability or obligation.

Facts

On September 5, 2019, Advance Home and Personal Care Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the National Company Law Tribunal, New Delhi (“NCLT”) under Section 9 (Application for initiation of CIRP by Operational Creditor) of the IBC.

Thereafter, on December 4, 2019, the resolution professional filed an application under Section 19(2) (Failure of personnel to extend co-operation to Interim Resolution Professional) of the IBC against Mr. Ashok Mahindru and one another (“Appellants”) who were the suspended directors of the Corporate Debtor. On July 23, 2020, the resolution professional filed an application under Section 66 (Fraudulent trading or wrongful trading) and Section 67 (Proceedings under Section 66) of the IBC.

The Appellants were also personal guarantors for another company, namely, Advance Surfactants India Limited (“ASIL”). By order dated December 6, 2021 and December 7, 2021, proceedings under Section 95 (Application by creditor to initiate insolvency resolution process) of the IBC were initiated against the Appellants as a personal guarantor for ASIL. Consequently, the interim moratorium under Section 96 of the IBC commenced in the said proceedings.

The Appellants filed an application in the CIRP proceedings under Section 9 against the Corporate Debtor seeking stay of proceedings under Section 19(2) of the IBC as well as under Section 66 and Section 67 of the IBC. However, the aforesaid application was dismissed by the NCLT by way of an order dated September 9, 2022 (“Impugned Order”).

Aggrieved by the Impugned Order, the Appellants filed an appeal before the NCLAT (“Appeal”).

Issue

Whether Section 96(1)(b) of the IBC contemplates a stay on any future liability or obligation.

Arguments

Contentions raised by the Appellants:
The Appellant argued that all proceedings were bound to be stayed considering the fact that interim moratorium had commenced in the proceedings under Section 95 of the IBC qua ASIL, vide order dated December 6, 2021 and December 7, 2021.

The Appellants further submitted that in proceedings under Section 19(2) of the IBC as well as proceedings under Sections 66 and 67 of the IBC, there is a possibility that an order can be passed against the Appellants in terms of monetary considerations to be paid by the Appellants and therefore, in lieu of interim moratorium, these proceedings must be stayed.

The Appellants placed reliance on the case of State Bank of India v V. Ramakrishnan and Another [(2018) 17 SCC 394] wherein the Hon’ble Supreme Court had examined the provisions under Sections 96 and Section 101 which deals with moratorium in respect of personal guarantors contrasted with Section 14 which deals with moratorium in respect of a company undergoing CIRP under the provisions of IBC and held that Section 14 could not possibly apply to a personal guarantor.

It was also argued that the NCLT had dismissed the application of the Appellants without giving any reason, except observing that it had been filed to halt all proceedings against the Corporate Debtor.

Contentions raised by the Respondent:

The respondent refuted the submissions of the Appellants and contended that Section 96 of the IBC contemplates stay of proceedings relating to the debt that is due. The said Section does not intend to stay the proceedings under Section 19(2), Section 66 and Section 67 of the IBC.

In this regard reliance was placed on the case Rakesh Kumar Jain, RP HBN Homes Colonizers Private Limited v. Jagdish Singh Nain, RP of HBN Foods Limited and Others [Company Appeal (AT) (Ins.) No. 425 of 2022] (“Rakesh Kumar Jain Case”) wherein a question arose with regard to application of Section 14(1)(a) of the IBC to Section 66 and Section 67 of the IBC. NCLAT held that there is absolutely no inconsistency or repugnancy between Section 14 (1)(a) and Section 66 of IBC and the adjudicating authority passed the order only by exercising power that conferred on it by Section 66 of IBC. Hence, it was held that appeal may be filed during moratorium.

Observations of the NCLAT

The relevant extract of Section 96 of the IBC is reproduced herein below, which has been dealt with and interpreted by the NCLAT in the Order:

“96. Interim – moratorium. –

(1) When an application is filed under section 94 or section 95 –

(a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and
(b) during the interim-moratorium period –

  • any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and
  • the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.”

In this regard, the NCLAT observed that the expression used in Section 96(1)(b)(i) of the IBC is “any pending legal action or proceeding pending in respect of any debt shall be deemed to have been stayed”. The term ‘debt’ has been defined under Section 3(11) of the IBC as “debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”.

The NCLAT observed that a conjoint reading of Section 96(1)(b) of the IBC with the definition of ‘debt’ in Section 3(11) of the IBC, make it evidently clear that Section 96(1)(b) contemplates to stay the proceeding relating to debt, which means a liability or obligation in respect of a claim which is due from any person. Interim moratorium applies to proceedings which relate to a liability or obligation due, that is, due on the date when such interim moratorium has been declared.

Further, in NCLAT’s view, the case relied on by the Appellants did not support their submissions in the instant case.

Decision of the NCLAT

The NCLAT opined that the respondent had rightly placed reliance on the decision in the Rakesh Kumar Jain Case and held that Section 96(1)(b) of the IBC cannot be read to mean that any future liability or obligation is contemplated to be stayed. Stay of proceedings under Section 19(2), Section 66 and Section 67 of the IBC are not contemplated under Section 96(1)(b) of the IBC.

The NCLAT held that the Impugned Order deserves no interference and accordingly, dismissed the Appeal.

VA View:

The NCLAT has correctly observed that by virtue of imposition of interim moratorium under Section 96 of the IBC, other proceedings against the personal guarantors such as applications filed under Sections 19(2), 66 and 67 of the IBC cannot be stayed.

It is clear from the language used in Section 96(1)(b) of the IBC, that the effect of the interim moratorium is only in respect of the debt that is due and cannot be stretched to mean that interim moratorium contemplates to stay any future liability or obligation. Therefore, Section 96(1)(b) of the IBC in no way contemplates a stay on any future liability or obligation.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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