Delhi HC: Whenever Moratorium u/s 96 IBC Commences, all Legal Proceedings are Deemed to be Stayed

Delhi High Court Law Insider

Aastha Thakur

Published on: 07 November 2022 at 15:03 IST

The Delhi High Court recently ruled that the Insolvency and Bankruptcy Code‘s (IBC) interim moratorium under Section 96 is applied as soon as a creditor or debtor files an application for insolvency proceedings under Section 94 or 95, and as a result, all ongoing legal proceedings pertaining to any debt are also deemed to have been stayed.

The single judge Justice Amit Bansal observed that this is in contrast to the moratorium under Section 14 of the IBC, where it only takes effect when an order is passed by the NCLT establishing a moratorium.

The judge further ruled that under Section 96(1)(a) term “all debts” must be in respect of all debts of a particular debtor.

The Court said that, “This is clear from the language used in Section 96(1)(b)(ii) to the effect that ‘the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt’. Therefore, the effect of the interim moratorium is only in respect of the debts of a particular debtor.”

“By no stretch of imagination can it be said to include other independent guarantors in respect of the same debt of a corporate debtor. Merely because an interim moratorium under Section 96 is operable in respect of one of the co-guarantors, the same would not apply to the other co-guarantor(s),” 

Justice Bansal was handling the cases of Axis Trustee Services Limited and Norddeutsche Landesbank filed two lawsuits, each attempting to recover from former Bhushan Steel Limited promoters approximately EUR 64 million and EUR 44 million, respectively.

The matter was mentioned again on October 11 with the statement that insolvency proceedings have been initiated against both defendants, despite the fact that the arguments in the civil suits had completed on September 5, the judgement had been reserved, and even written submissions had been submitted.

The defendants, who are the Bhushan Steel promoters, argued that the proceedings cannot be maintained before the High Court because the interim moratorium has taken effect. They claimed that the National Company Law Tribunal (NCLT) is the appropriate forum for deciding the defendants’ personal insolvency.

Further the defendant counsel contended that even if the latter date, when the application was registered, is taken into account, the suits still cannot proceed because the judgement was still pending on May 28, 2022, the date the application under Section 94/95 of the IBC was filed.

As a result, the Court stated that it must first assess whether the claim can proceed because applications have been filed against the parties under Section 95 of the IBC in light of the insolvency procedures initiated.

It was declared that the date of filling an application under Section 94/95 is the date from when the interim moratorium comes into effect.

Therefore, the judge stayed the proceedings in the suit.

“In view of the discussion above and the clear statutory mandate under Section 96 of the IBC, the proceedings in the present suit are stayed against both the defendants,” 

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