Moratorium under IBC not applicable if proceedings do not endanger Corporate Debtor’s assets

In the matter of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd., the High Court of Delhi (“Court”), on December 11, 2017, held that proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”), for setting aside the arbitral award (in the nature of a money decree) passed in favour of the corporate debtor by the arbitral tribunal did not attract the provisions of Section 14 of the Insolvency and Bankruptcy Code, 2016 (“Code”).

FACTS

An arbitral award in the nature of a pure money decree was awarded in favour of Jyoti Structures Ltd. (“Corporate Debtor”), in a dispute between the Corporate Debtor and Power Grid Corporation of India Ltd. (“Petitioner”). Subsequently, the petitioner filed a petition challenging the award under Section 34 of the Act.

During the pendency of the proceedings under Section 34 of the Act, an application was filed by a financial creditor of the Corporate Debtor under Section 7 of the Code, before the National Company Law Tribunal, Mumbai (“NCLT”), seeking initiation of the corporate insolvency resolution against the Corporate Debtor and by an order dated July 04, 2017, the NCLT admitted such application and declared a moratorium in terms of Section 14 of the Code.

ISSUE

Whether the petition challenging the award is liable to be stayed on account of the moratorium declared under Section 14(1)(a) of the Code.

CONTENTION

The Corporate Debtor contended that if the proceedings were stayed, the Corporate Debtor would be unable to execute the award given in its favour for an extended period till the moratorium exists and would be unable to recover its dues.

HELD

The Court held that the proceedings before it under Section 34 of the Act would not be hit by the embargo of Section 14(1)(a) of the Code for the following reasons:

  • Proceedings 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 Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under Section 14(1)(a) of the Code;
  • The use of narrower term ‘against the corporate debtor’ in Section 14(1)(a) makes it evident that Section 14(1)(a) is intended to have restrictive meaning and applicability;
  • The Act draws a distinction between proceedings under Section 34 (objections to the award) and under Section 36 (enforceability and execution of the award). The proceedings under Section 34 are a step prior to the execution of an award. Only after determination of objections under Section 34, the party may move a step forward to execute such award and in case the objections are settled against the Corporate Debtor, its enforceability against the Corporate Debtor shall be covered by moratorium of Section 14(1)(a) of the Code.