Insolvency Stays Shouldn't Mean Open Season On Assets, Experts Say
Once a firm is admitted into insolvency and a moratorium is imposed, it basically means that no judicial proceedings for recovery, or sale or transfer of assets, can be pursued against the said firm.
In a recent case pertaining to Siti Networks’ insolvency, the question of whether a moratorium will continue to operate—despite there being a stay on an order admitting a company into insolvency—propped up before the National Company Law Appellate Tribunal.
Siti Networks, a group company of the Essel Group, has been undergoing insolvency proceedings since early 2023, following a petition by IndusInd Bank Ltd. over an alleged default of Rs 148 crore. Although the NCLT initially admitted the case, an interim order from the NCLAT halted the proceedings in March 2023 after one of Siti’s directors, Shilpi Asthana, contested the admission.
One of the aggrieved creditors of Siti alleged that Axis Bank Ltd. and some other creditors adjusted certain amounts towards their debt from Siti’s bank account during this stay.
NDTV Profit spoke with insolvency experts to get insights into what could be the right way forward in a case like this.
The whole rationale of imposing a moratorium is keeping the assets of the corporate debtor intact in a manner in which they are not depleted or usurped by any one of the creditors. This is because the end goal of IBC is to seek maximum out of those assets, which can be distributed as per the mechanism provided under the Code, said advocate Amir Bavani, founder at AB Legal.
Hence, from the time the moratorium kicks in, till the time the insolvency admission order is reversed, there can be no ambiguity as to the continuation of the moratorium, regardless of a stay granted by any appellate authority, Bavani said.
When one party acts unilaterally during the pendency of a dispute, it flies in the face of the objectives of the Code and unnecessarily prejudices the other stakeholders, said Radhika Bishwajit Dubey, an advocate practising at the Delhi High Court.
Once a resolution plan is accepted, financial creditors usually get the maximum benefit out of it. Therefore, if value is taken out of the assets through a unilateral act under the shelter of an interim order, it will take the tooth away from IBC and reduce the value of the corporate debtor.Radhika Bishwajit Dubey, Advocate, Delhi High Court
Anuj Shah, counsel at DMD Advocates, remarked that allowing parallel proceedings during a stay on the insolvency process contradicts the moratorium's purpose of protecting the corporate debtor from financial pressures and promoting resolution.
If the NCLAT allows parallel proceedings during a stay, it could lead to confusion and weaken the protection provided by the moratorium, potentially reducing the value of the corporate debtor’s assets and negatively impacting all stakeholders involved, Shah said.
Significance Of Moratoriums
The Insolvency and Bankruptcy Code was enacted in 2016 with the primary goal of reviving debt-ridden firms, with a key focus on value maximisation, while simultaneously safeguarding the rights of creditors and other stakeholders.
One of the most important measures in the Code to accomplish this is the imposition of a moratorium once a company is admitted into insolvency by the National Company Law Tribunal, or the NCLT.
The term 'moratorium' is not defined in the Code, but once in existence, it basically means that no judicial proceedings for recovery, enforcement of security interests, sale or transfer of assets, or termination of key contracts can be pursued against the debt-laden firm.
The objective of imposing a moratorium is simple: It prevents the institution of any parallel proceedings during the insolvency resolution process, which helps in keeping the value of the assets intact.
In the normal course of things, a moratorium is imposed as soon as a firm is admitted into insolvency.
