NCLT Has Inherent Power To Impose Moratorium Before Initiation Of Corporate Insolvency Resolution Process

In Company Appeal (AT) (Insolvency) No. 664 of 2019,  IN THE MATTER OF NUI Pulp and Paper Industries Pvt. Ltd. Vs. M/s. Roxcel Trading GMBH, an application under Section 9 of the Insolvency Code was filed by the respondent against which the Corporate Debtor had filed a caveat. The Corporate Debtor also claimed the existence of a dispute and the Adjudicating Authority allowed time to file affidavit by the Corporate Debtor and rejoinder by the respondent. However at that stage, the respondent having expressed apprehension of the Corporate Debtor intending to sell the assets of the ‘Corporate Debtor’ to defeat the purpose of the ‘I&B Code’ and cause wrongful losses to all the creditors including the ‘Operational Creditor’, passed an interim order under Rule 11 of the NCLT Rules, 2016, restraining the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the 1st Respondent Company till further orders. Against that order the Corporate Debtor  filed this appeal.

The Corporate Debtor argued that before admission of an application under Sections 7 or 9, the Adjudicating Authority has no jurisdiction to restrain the ‘Corporate Debtor’ and its Directors from alienating, encumbering or creating any third party interest on the assets of the ‘Corporate Debtor’. No such power can be exercised under Rule 11 of the National Company Law Tribunal Rules, 2016. According to the Corporate Debtor, inherent power can be exercised by the Adjudicating Authority (National Company Law Tribunal), if it comes to the notice on receipt of reply that the ‘Corporate Debtor’ somehow or other trying to get adjournment or to alienate the matter after filing of the application under Sections 7 or 9. No such ground having shown by the ‘Operational Creditor’ on the first day of issuance of notice or allowing the ‘Corporate Debtor’ to file reply. The Adjudicating Authority has no jurisdiction to pass interim order.

The Ld. NCLAT observed that against the apprehension of the Operational Creditor that the Corporate Debtor might if not restrained sale assets to defeat the purpose of the Insolvency application, the Corporate Debtor could give any such undertaking as according to them it will act taking into consideration the necessity of the ‘Corporate Debtor’ for its day-to-day functioning.

The Ld. NCLAT decided that Rule 11 of the National Company Law Tribunal Rules, 2016 which deals with ‘inherent powers’ of the National Company Law Tribunal, makes it clear that once an application under Sections 7 or 9 is filed by the Adjudicating Authority, it is not necessary for the Adjudicating Authority to await hearing of the parties for passing order of ‘Moratorium’ under Section 14 of the ‘I&B Code’. To ensure that one or other party may not abuse the process of the Tribunal or for meeting the ends of justice, it is always open to the Tribunal to pass appropriate interim order.