Introduction –

The Delhi High Court in the case of Power Grid Corporation of India Ltd. vs Jyoti Structures Ltd.[1], vide its order dated December 11, 2017, ruled that Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as the ‘IBC’) would not apply to proceedings which are beneficial to the corporate debtor.

Legal provision –

For the purposes of the above order, let us look into the relevant provision, viz. Section 14 (1) (a) of the Code, which provides that –

“The Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

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

Brief facts of the case –

The Petition was filed by the Power Grid Corporation of India Ltd.(hereinafter referred to as the ‘Petitioner’) under Section 34 of the Arbitration and Conciliation Act, 1996, (hereinafter referred as “the Act”) for setting aside the arbitral award dated May 20, 2016, passed by the arbitral tribunal in favour of the Jyoti Structures Ltd. (hereafter referred to as the Respondents). The award is in nature of a pure money decree in favour of the Respondent.

During the pendency of the proceeding under section 34 of the Act, an application under Section 7 of the Code was filed by a financial creditor against the Respondent company before the National Company Law Tribunal, Mumbai, (hereinafter referred as “the NCLT”) seeking initiation of the corporate insolvency resolution against the Respondent and by an order dated July 4,2017, the NCLT has admitted such application and has declared a moratorium in terms of Section 14 of the Code.

The question arose whether the proceedings under Section 34 of the Act need to be stayed, as per Section 14(1) (a) of the Code.

The Respondents submitted that if the proceedings are stayed, they would be unable to execute the award given in their favour for an extended period till the moratorium exists and will be unable to recover the dues, thereby further impeding their financial condition.

Observations of the Court –

The Single Judge Bench of Justice Yogesh Khanna observed that –

“In the light of above purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, like the one before this Court in as much these proceedings are not a “debt recovery action” and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring the company may continue as a going concern.”

Further, the Court highlighted the report of the Bankruptcy Law Reforms Committee relied upon by the Supreme Court in the case of M/s Innovative Industries Limited vs. ICICI Bank & another[2], –

“The report of the Bankruptcy Law Reforms Committee on the rationale and design of the Code also demonstrates the moratorium is to apply to recovery actions and filing of new claims against the corporate debtor and the purpose behind moratorium is there should be no additional stress on the assets of the corporate debtor.”

Court order –

After careful observation of the case, the Court held as follows –

  • ‘Proceedings’ under Section 14 (1) (a) do not mean ‘all proceedings’.
  • Moratorium under Section 14(1) (a) of the code is intended to prohibit debt recovery actions against the assets of corporate debtor.
  • Continuation of proceedings under Section 34 of the Arbitration Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of the corporate debtor are not prohibited under Section 14(1)(a) of the code.
  • The continuation of these proceedings shall cause no harm to the rights of either party to seek determination of issues under Section 34 of the Act and object of the code shall be preserved rather than defeated