Source: Supreme Court

Why in News?

Recently, the Supreme Court held that imposition of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) would not prevent any initiation of proceedings against the officers of the company.

• The aforesaid observation was made in the case of Ansal Crown Heights Flat Buyers Association (Regd.) v. M/S. Ansal Crown Infrabuild Pvt. Ltd. & Ors.

What is the Background of Ansal Crown Heights Flat Buyers Association (Regd.) v. M/S. Ansal Crown Infrabuild Pvt. Ltd. & Ors. Case?

• The Homebuyers' Association (Appellants) of a project developed by M/s Ansal Crown Infrabuild Pvt. Ltd. (Respondent) filed a complaint before the National Consumer Disputes Redressal Commission (NCDRC).
• An order was made by the NCDRC directing the Developer Company to complete the project in all respects and handover the possession of the allotted flats/apartments to the members of the Association of the homebuyers within the time specified.
• The developer company is the subject-matter of the proceedings under Section 9 of IBC.
• The National Company Law Tribunal (NCLT) has admitted the petition filed under Section 9 of the IBC against the developer company.
• The appellants sought to execute the directions of the NCDRC not only against the company but also against several individuals.
• The NCDRC held that the decree cannot be executed against the company due to the operation of the moratorium under Section 14 of IBC.
• Thereafter, an appeal was filed before the Supreme Court by the appellant which was later allowed by the Court.

What were the Court’s Observations?

• The Bench comprising of Justices Abhay S. Oka and Ujjal Bhuyan, has held that only because there is a moratorium under Section 14 of the IBC against the company, it cannot be said that no proceedings can be initiated against the company or its officers for execution, provided that they are otherwise liable to abide by and comply with the order, which is passed against the company.
• The Court also held that the protection of the moratorium will not be available to the directors/officers of the company.
• The Court placed reliance on the Supreme Court judgment in the case of P. Mohanraj v. Shah Bros. Ispat (P) Ltd. (2021).
• In this case, it was held that notwithstanding moratorium, the liability, if any, of the directors/officers will continue.

What are the Relevant Legal Provisions Involved in it?

Insolvency and Bankruptcy Code, 2016

• This code consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons.
• It aims at promoting entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.
• The IBC repealed two pieces of legislation, the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920.
• Section 9 of IBC deals with the application for initiation of corporate insolvency resolution process by operational creditor.

Section 14 of IBC

• Section 14 of IBC deals with the concept of Moratorium. It states that-

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, 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.

(b) Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.

(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

(d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

(3) The provisions of sub-section (1) shall not apply to--

(a) Such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.

(b) A surety in a contract of guarantee to a corporate debtor.

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process.