Case Study: Reconstruction Company Limited vs. M/s Hotel Gaudavan Private Limited & Ors, Civil

CASE STUDY
INTRODUCTION:
The Supreme Court of India while deciding the civil appeal in Alchemist Asset
Reconstruction Company Limited Vs. M/s Hotel Gaudavan Private Limited & Ors, Civil
Appeal number 16929 of 2017 passed on October 23, 2017 has held that the effect of the
Moratorium that comes into effect vide Section 14 (1) (a) of the Insolvency and Bankruptcy
Code, 2016 (“I&B Code”) is that the arbitration that may be instituted after the aforesaid
Moratorium is non est in law.
It is an interesting observation in the realm of insolvency that the subject of moratorium

under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“Code”) has seen many
instances of interpretation. The specific issue most of the times relates to the exclusion or
inclusion of a particular proceeding under the ambit of moratorium.
The aim and function of a Moratorium is defined under Bankruptcy Law Reform Committee
Report as:
“One of the goals of having an insolvency law is to ensure the suspension of debt collection
actions by the creditors, and provide time for the debtors and creditors to re-negotiate their
contract. This requires a moratorium period in which there is no collection or other action by
creditors against debtors.”
FACTS:
1) The present appeal reflect that several proceedings had been resorted to by the parties
and ultimately a petition filed under the I&B Code was admitted by the National
Company Law Tribunal (“NCLT”), Principal Bench, New Delhi on March 31, 2017.
It was basis the admission of the petition that the Moratorium was imposed in view of
Section 14 of the I&B Code on the day the Interim Resolution Professional was
appointed. Section 14 (1) (a) of the I&B Code specifies that on the Insolvency
Commencement date, the Adjudicating Authority shall by order declare moratorium
for prohibiting the institution of suits or continuation of pending suits or proceedings
1
against the corporate debtor including execution of any judgment, decree or order in
any court of law, tribunal, arbitration panel or other authority;
2) In the meantime, despite the Moratorium the parties invoked the arbitration clause and
whereby a Sole Arbitrator was appointed. The NCLT in an order dated May 31, 2017
referred to Section 14 (1) (a) of the I&B Code and stated that given the Moratorium
imposed, no Arbitration proceedings can go on.
3) In view thereof, a first appeal was filed before the District Judge, Jaisalmer, Rajasthan
under Section 37 (Appealable Orders) of the Arbitration and Conciliation Act, 1996
(“Arbitration Act”) wherein the notice was issued.
4) It was against the admission of the application that the present Civil Appeal ensues.
The Court observed that the mandate of the new I&B Code is that the moment an
insolvency petition is admitted, the Moratorium that comes into effect under Section
14 (1) (a) of the I&B Code, expressly interdicts institution or continuation of pending
suits or proceedings against Corporate Debtors.
QUESTION OF LAW:
Whether arbitration proceedings can be instituted against an entity after a moratorium under
Section 14 (1) (a) of the Code has been imposed on that entity?
ARGUMENTS OF BOTH SIDES:
Learned counsel for the appellants urged that the moment an insolvency petition is admitted,
the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution
or continuation of pending suits or proceedings against Corporate Debtors.
Learned counsel for the respondents argued challenging that it is vires of the Insolvency
Code.
JUDGMENT:
The Supreme Court in this decision, unequivocally reiterated the mandate of the Insolvency
and Bankruptcy Code, 2016, that, upon imposition of a moratorium under Section 14 (1) (a)
2
of the Code, no new suit or arbitration proceedings can be initiated against the entity under
moratorium. Furthermore, continuation of any suit or legal proceeding is prohibited.
Accordingly, the Supreme Court declared the arbitration proceedings in question ‘non est’ in
law. The rationale for the court’s holding is that, a moratorium provides a period of calm,
where creditors cannot resort to individual enforcement action which may frustrate the object
of the corporate insolvency resolution process. Also, a prohibition on disposal of the
corporate debtor’s assets would ensure that the corporate debtor or its management is not able
to transfer its assets, thereby stripping the corporate debtor of value during the corporate
insolvency resolution process.
CONCLUSION:
Any arbitration proceeding initiated after imposition of moratorium under Section 14 of the
Insolvency and Bankruptcy Code, 2016 is non est in law.
Similar legal rulings can be found in the law of other countries. The UK Insolvency Act,
1986 prohibits any legal proceedings (inclusive of arbitration proceedings) against the
company or property of the company except with the consent of the administrator or with the
permission of the Court. Maritime Electric Company v. United Jersey Bank has emphasized
that the purpose of the ‘automatic stay’ is to grant the debtor a breathing spell, to consider
ways of reviving business, by stopping all creditor action, foreclosure, enforcement, and
arbitration proceedings.
The contention of imposing a moratorium period on the assets of the corporate debtor is to
preserve the value of the estate against diminution by the actions of various parties during the
insolvency proceedings. The literal interpretation of section 14 of the IBC is to declare the
proceedings involving corporate debtor sine die; however, the purposive interpretation
adopted by the courts in India concludes that arbitral proceedings in favour of the corporate
debtor can continue although it would depend upon the determination of facts from case to
case. At this juncture, the authors hasten to add that, as held in Jharkhand Bijli, liability, if
any, will not be enforced upon the parties but the claims can be adjudicated. Therefore, in a
similar manner, arbitral proceedings against corporate debtor can continue, but if any liability
arises the same can be executed after the completion of the CIRP.
3
Hence, as the law stands today, there is an ambiguity that the claims against the corporate
debtor in an arbitration proceeding can neither be continued nor executed during moratorium
period. However, a claim filed by the corporate debtor can be continued during the
moratorium period for the purpose of adjudication. The interpretation adopted by various
courts, including the Supreme Court of India, firmly establishes that the objective of the
moratorium period is to limit any further liability of corporate debtor and to consolidate all
the available claim before the resolution professional. Therefore, the intent behind the
reasoning adopted by the courts is to promote corporate resolution to the maximum extent
possible, by serving the objectives, principles and vision of the IBC. Allowing the
moratorium to be lifted in certain cases shall only be in the interest of the corporate debtor
and other parties in the insolvency proceedings and maximizing the value of the assets,
thereby providing a square deal to the aim of IBC.

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CASE STUDY

It is an interesting observation in the realm of insolvency that the subject of moratorium

ARGUMENTS OF BOTH SIDES:

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