A Corporate Debtor who is unable to pay its debts can approach NCLT for a moratorium order to prevent any criminal action under Negotiable Instrument Act or any recovery process under SARFAESI

A Corporate Debtor who is unable to pay its debts can approach NCLT for a moratorium order to prevent any criminal action under Negotiable Instrument Act or any recovery process under SARFAESI

Ultratech Engineering Limited - made a petition to NCLT, Mumbai bench under section 10 of the Insolvency and Bankruptcy Code 2016 and under Rule 7 of the Insolvency and Bankruptcy Rules 2016 for initiation of Corporate Insolvency Resolution Process.

Ultratech Engineering alleged in its petition that one Sicom Investment and Finance Ltd , who is a financial creditor has warned the company through a letter that they will be initiating an action under section 138 &141 of the Negotiable instrument Act ,1881 demanding the Ultratech Engineering to pay Rs 5 Crores  failing which, a criminal complaint will be filed against the Ultratech and its directors.  Likewise, Canara bank who is also creditor also demanded the Ultratech to pay its dues at the earliest. Likewise, the Sales Tax department also issued an attachment order to one of its current account with a bank.

The following documents were submitted by the Corporate Debtor Ultratech Engineering as required Insolvency and Bankruptcy (Application adjudicating authority) Rule 2016.

·       Forms evidencing creation of charge by Ultratech Engineering in favour of its financial creditors and lenders.

• ·  Copies of the audited financial statements and provisional financial statements
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• ·       The details of its financial creditors and amounts owed to them
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• ·       List of company shareholders

On the basis of the above, the Mumbai NCLT issued a moratorium under section 10 of the I&B Code 2016.

How a Moratorium Order Helps an Ailing Corporate Debtor?

The moratorium order issued by the NCLT Mumbai  bench prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor ( Ultratech Engineering) including execution of any judgment , decree , or order in any court of law , tribunal , arbitration panel or other authority; transferring , encumbering , alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.

Any action to foreclose , recover or its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002,  (SARFAESI).

The operation of order of Moratorium issued by NCLT will have effect from the date of its issue till the completion of the corporate insolvency resolution process or until the NCLT bench approves the resolution plan under sub-section 31 or passes an order for liquidation of corporate sector under section 33 as the case may be.

It is to be noted that section 35 of SARFAESI Act, 2002 states that the Act overrides every other enactment. However , Insolvency and Bankruptcy Code 2016 overides all other acts , such as Negotiable Instrument Act , SARFASEI, any state Act. 

Section 14 (1) of IBC states the following :

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

(a) the institution of suits or suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment decree or order in anhy court of law , tribunal , arbitral panel or other authority. 

This is an important direction by NCLT as per section 14(1) of IBC  in Ultratech Engineering case and in  ICICI Bank Ltd vs. Innoventive Industries Ltd.

Whether Insolvency and Bankruptcy Code, 2016 (Code) supersedes any State Law ? Held yes by Mumbai NCLT in ICICI Bank Ltd vs. Innoventive Industries Ltd.

Whether Insolvency and Bankruptcy Code, 2016 (Code) supersedes any State Law ?

Held yes by Mumbai NCLT in ICICI Bank Ltd vs. Innoventive Industries Ltd.

ICICI bank has advanced term loan, working capital facilities and external commercial borrowing (ECB) to Innoventive Industries Ltd to the tune of Rs1, 019,177,034 as on 30th November, 2016. As there was a failure to repay the loan by the Innoventive industries , ICICI bank has initiated an insolvency proceeding under the Insolvency and Bankruptcy Code, 2016 for the realisation of money advanced to Innoventive and requested for an order of Moratorium.

What is Moratorium Order?

One of the most significant features of the Code is the grant of moratorium during which creditor action will be stayed. This is not automatic and has to be granted by the Adjudicating Authority at the time of admission of the corporate insolvency application. Moratorium shall continue till completion of corporate insolvency resolution process.

The Adjudicating Authority (NCLT) shall declare moratorium for prohibiting the following:

• ·  Transferring, encumbering, alienating or disposing debtor’s assets;
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• ·   Any action to enforce or deal with security interest created by the debtor in respect of its property including under SARFAESI Act, 2002;
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• · The recovery by an owner or lessor of any property in the possession of the debtor.

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Relief under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958

Innoventive Industries argued that as they fell under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958, they are entitled for a relief from any pending proceedings before any court, tribunal, and authorities.

Innoventive Industries argued that the Maharashtra Relief Undertaking (Special Provisions) Act is armoured with non-obstante clause in section 4 with the overriding effect.

NCLT Mumbai bench viewed that since IBC 2016 (Code) has come into existence subsequent to Maharashtra Relief Undertaking (Special Provisions) Act, 1958, the non–obstante clause of the Code in section 238 thereof would prevail upon any other law for the time being in force, and it could not be said that the notification given under the Maharashtra Act would become a block to issue a direction under section 7. 

Furthermore, the goal and aim under the Maharashtra Act is to avert unemployment, and an order under section 7 of IBC code would not result in any obstacle to their employment until the next 180 days even if the Innoventive Industries goes into liquidation.

NCLT viewed that the liability of the Innoventive Industries has been dealt with by the Maharashtra Relief Undertaking (Special Provisions) Act (MRU) and also by IBC but with diverse objectives , as the chief aim of  MRU is to safeguard the interest of the employees whereas under IBC , it is to safeguard the interest of the creditors who have supplied fuel to the company to make it run.

Decision

NCLT Mumbai bench observed that as the petition filed by the financial creditor is being complete, the same is accepted declaring moratorium with necessary directions.