The moratorium under the IBC is only in relation to the corporate debtor, i.e., the builder, and not in respect of its directors, a three-judge bench of the SC has ruled
In a decision that would make it difficult for promoters of defaulting companies to take the insolvency route to avoid penalties, the Supreme Court (SC) has ruled that the moratorium offered under the provisions of the Insolvency and Bankruptcy Code (IBC), applies only to corporate debtors and not its promoters.
The observation by the top court came, in a case against the promoters Today Homes and Infrastructure Pvt Ltd by its home buyers, even though a moratorium had been declared under Section 14 of the IBC.
What is a moratorium under IBC?
It is pertinent to mention here that Section 14 of the IBC restrains initiation of certain proceedings, once the National Company Law Tribunal (NCLT) admits a company’s petition for initiation of insolvency.
Once the plea of a company to go for insolvency is admitted, the NCLT declares a moratorium prohibiting:
- New suits or continuation of proceedings or pending suits against the corporate debtor.
- Transferring, alienating, disposing, or encumbering of, by the corporate debtor, of any of its assets or legal right or beneficial interest therein.
- Any action to recover, enforce or foreclose any security interest in respect of its property created by the corporate debtor.
- The recovery of any property occupied by or in the possession of the corporate debtor, by an owner or lessor.
SC stance on moratorium under IBC
While clarifying that the moratorium is only in relation to the corporate debtor, i.e., the builder, and not in respect of its directors, the three-judge bench of the SC said: “The petitioners would not be prevented by the moratorium under Section 14 of the IBC from initiating proceedings against the promoters in relation to honoring the settlements reached before this court.”
The top court also clarified that no new proceedings could be undertaken or pending ones continued against the developer company since the moratorium declared in respect of the corporate debtor continued to operate under Section 14 of the IBC. The SC also directed the NCLT to dispose of the Today Homes and Infrastructure Pvt Ltd case within six months.
Today Homes and Infrastructure case
A group of home buyers, who had bought units at Today Homes and Infrastructure’s project, Canary Greens in Sector 73 of Gurgaon, had earlier approached the National Consumer Dispute Redressal Commission (NCDRC), seeking a refund of their money with interest, when the builder failed to complete the project after 2014, the deadline committed in the builder-buyer agreement.
While ruling in favor of the buyers on July 12, 2018, the NCDRC directed the builder to refund the principal amount, along with 12% interest, within four weeks.
Even as it failed to comply with the NCDRC order, Today Homes was dragged to the Delhi High Court by another group of home buyers. To its relief, the Delhi HC stayed the NCDRC order, saying no coercive steps should be taken against the managing director of Today Homes.
While this matter reached the SC, the company moved the NCLT, which initiated the corporate insolvency resolution process under the IBC. Another set of buyers moved the apex court, challenging the move by the builder, saying Today Homes filed for insolvency only to stall the refund of the amount due to them.