Imposition Of Pre CIRP Moratorium: Icing On The Cake

An application under Section 9 of the IBC for initiation of CIRP was filed by the M/s Roxcel Trading GMBH against NUI Pulp and Paper Industries Private Limited. The application for initiation of CIRP was yet to be admitted and parties were given time to file their reply. However, there was a reasonable apprehension that the Corporate Debtor might sell its assets before the admission of application. This gesture would have been detrimental to the interest of creditors and would have also frustrated the objective of the IBC. Therefore, an application was moved by the applicant under section 60(5) of the IBC, requesting the NCLT to pass an interim order as per Rule 11 of the NCLT Rules, 2016, restricting the Corporate Debtor from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor till the time insolvency petition was not adjudicated upon by NCLT. It is also material to take into account that the Corporate Debtor did not made any refusal or objection to the fact that they had no intention to sell their assets. The  Tribunal exercised its inherent power enshrined under Rule 11 of NCLT Rules, 2016 and vide its order dated 15.07.2019, Corporate Debtor and its directors were restrained from alienating, encumbering or creating any third party interest on the assets. This was later affirmed by the Hon'ble Appellate Tribunal.

This path-breaking judgment of NCLT has made it explicit that once an application under Sections 7 or 9 is filed before the Adjudicating Authority, it is not mandatory for the Adjudicating Authority to await hearing of the parties for passing order of 'Moratorium' under Section 14. It has been observed that despite prescribing a time limit of 14 days for admission or rejection of application, the process has taken years. In the matter of Asset Reconstruction Company Limited vs. GPT Steel Industries Limited, the application was at pre admission stage for almost a year due to repetitive adjournments. Therefore, in such cases it becomes necessary to put a bar on the Corporate Debtor from alienating their assets or creating encumbrance over it before the admission of application. The view of the Apex Court is still awaited on this movement to pre- IBC moratorium. However, going by the way the Apex Court has supported IBC yet, it appears that the vision of NCLAT will easily get a green signal.

The aforesaid judgment has also triggered the debate concerning inherent powers of the 'Adjudicating Authority'. IBC defines NCLT as 'Adjudicating Authority' and not as a 'Tribunal'. Therefore, application of NCLT rules, 2016 over 'Adjudicating Authority' has always remained hot potato. In the case of Uttara Foods & Feeds Pvt. Ltd. vs. Mona Pharmachem, the Apex court held that NCLT could not prima facie avail of the inherent powers recognised under the Rule 11 of the NCLT Rules. It was reasoned that Rule 11 grants powers to NCLT in its role of "tribunal" under the Companies Act, 2013, and not in its role of an "AA" under the Code. A similar view was taken by the Apex court in the case of Lokhandwala Kataria Construction (P) Ltd v. Nisus Finance & Investment Managers LLP. In the matter of Neha Himatsingka & Anr. Vs. Himatsingka Resorts Private Limited & Anr, the AA, by impugned order, rejected applications filed under section 7 of the Code by exercising its inherent powers to address some extraordinary situations. . While remitting the matter to AA, the NCLAT observed that the Adjudicating Authority has exceeded its jurisdiction and exercised its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016, which is actually not applicable in the cases under Sections 7 or 9 or 10 of the I&B Code.

However, in the landmark case of Swiss Ribbons Pvt, Ltd vs. Union of India, the Supreme Court took a contrary stand and stated that NCLT can invoke Rule 11. It was held that a party can approach Adjudicating Authority that can allow or disallow application as per inherent powers under Rule 11 of NCLT Rules, 2016. As of now, the position pertaining to the inherent powers of NCLT is not yet settled and it still remains a matter of contention and debate.

A Concluding look: This welcome move of the NCLAT will prohibit the promoters from taking advantage of the pending application. It has again established IBC as a dynamic law and in the coming time, we might come across a paradigm shift from post-IBC to pre-IBC moratorium. However, the conundrum pertaining to application of NCLT Rules, 2016 over 'Adjudicating Authority' will certainly serve as an obstacle. Thus, there is an imperative need to resolve it with a view to avoiding contradictions in the future.

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