Can counterclaims filed against the debtor company be stayed in accordance with the provisions of the IBC during the moratorium

0


Whether a counterclaim filed against a debtor company is likely to be stayed during the moratorium has been discussed repeatedly by the courts / NCLT / NCLAT. Since its creation, the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Coded”) Has been a hotbed of discussion and debate among jurists. Under the terms of the Code, the notion of moratorium is envisaged in Articles 13 and 14 and provides for a period during which the following are prohibited against the debtor Company:

  • Initiation or continuation of proceedings or pending proceedings, including enforcement proceedings;
  • the transfer or alienation of any assets of the debtor Company;
  • the execution of any security provided by the Debtor Company
  • Recovery of any property by any owner or lessor who is occupied by or is in the possession of the debtor Company

The question of whether a counterclaim can be brought against the debtor company during the moratorium period was examined before the National Company Law Appeal Tribunal (“hereinafter referred to as”NCLAT“) in terms of Jharkhand Bijli Vitran Nigam Ltd. Vs IVRCL Ltd.[1]. the Tribunal held that the claim and the counterclaim should be allowed to be heard by the arbitral tribunal. The reasoning of the Tribunal; however, since the debtor company’s claim could only be determined after the determination of the counterclaim, in such circumstances both proceedings should be allowed to continue.

The said issue was recently re-examined in the Delhi High Court in SSMP Industries Ltd. against Perkan Food[2]. A bench composed of Judge Pratibha M. Singh judged a recovery action filed by SSMP Industries Ltd. following an agreement to sell and buy Totapari mango pulp. In the said lawsuit, the defendant filed a counterclaim thus indicating that no amount is due and payable by him to the plaintiff. Subsequently, the plaintiff company went bankrupt.

When considering the matter whether the adjudication of the counterclaim is likely to be suspended during the moratorium in view of article 14 of the Insolvency and Bankruptcy Code, 2016, the Respondent’s assertion that the counterclaim relates to the Plaintiff’s claim has been considered in detail by the Court. After invoking the judgments rendered in Jharkhand Bijli Vitran Nigam Ltd. and Power Grid Corporation of India[3], the Court ruled that counterclaims cannot be blindly stayed by the courts and when they are an integral part of the recovery requested by the plaintiff and are part of the same transaction, in such cases the counterclaims should not be suspended. However, it has also been clarified by the Court that once the counterclaims are adjudicated and the amount to be paid / recovered is determined, at this stage or at the stage of the enforcement proceedings, the arrangements contemplated in the article 14 could be triggered by the Debtor Company.

FINAL REMARKS:

Although Article 14 of the Code serves as legal protection for debtor companies, the recent trend in the courts seems to be that the stay of the counterclaim during the moratorium is no longer a general protection afforded to debtor companies and until and unless the proceeding has the effect of endangering, diminishing, dissipating or adversely impacting the assets of the Debtor Business, the counterclaims may well continue. However, courts should consider, in the facts and circumstances of each case, the nature of the counterclaim and whether the purpose and intention behind the imposition of the moratorium is satisfied or rejected. [1] Company Recourse (AT) (Insolvency) No. 285 of 2018) [2] 2019 (177) DRJ473 [3] Power Grid Corporation of India v Jyoti Structures Ltd. (2018) 246 DLT 485+


Share.

About Author

Comments are closed.