Moratorium Under Companies Act, 2013, Parties Cannot Be Referred To Arbitration: Delhi High Court

The bench of Justice V. Kameswar Rao was dealing with an application filed under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking reference of the dispute to arbitration. The High Court dismissed the contentions raised by the applicant that since the resolution of IL&FS was initiated under Sections 241 and 242 of the Companies Act, 2013 and not under IBC, the rigours of Section 14 of the IBC were not attracted.

Further, while holding that the order passed by the NCLAT has certain consequence, the bench rejected the averments made by the applicant that since NCLAT is subordinate to the High Court, the High Court is not bound by the moratorium granted by the NCLAT.

The petitioner DLF Ltd. and the respondent- IL&FS Engineering and Construction Company, executed a Construction Contract. After certain disputes arose between the parties, the petitioner invoked the arbitration clause and issued a notice under Section 21 of the A&C Act.

The respondent, in its reply to the notice invoking arbitration, contended that in view of the order passed by the NCLAT, staying the institution of suits and proceedings against IL&FS, i.e., the parent company of the respondent, and its 348 Group Companies, the parties cannot be referred to arbitration.

Thereafter, the petitioner filed an application under Section 11 of the A&C Act seeking appointment of an Arbitrator before the Delhi High Court.

The respondent- IL&FS Engineering and Construction Company, submitted before the High Court that it is a part of the IL&FS Group, which is subject to a moratorium by virtue of an order passed by the NCLAT under Sections 241 and 242 of the Companies Act, 2013. Thus, it argued that the respondent cannot be referred to arbitration.

The respondent added that in furtherance of the resolution process, a public advertisement was issued in the Economic Times. In the said advertisement, the creditors of the IL&FS Group Companies, including the petitioner, were directed to submit their claims regarding undischarged liabilities, that were due up to October 15, 2018.

The respondent averred that the claims submitted by the petitioner, which were due up to October 15, 2018, were dismissed by the Claims Management Advisor, adding that the said fact was suppressed by the petitioner.

To this, the petitioner DLF argued that the claims which accrued post October 15, 2018 were outside the resolution framework of IL&FS and thus, they must be referred to arbitration, failing which the petitioner would be rendered remediless.

The respondent- IL&FS Engineering and Construction Company, submitted that since it is subject to a resolution process, the claims raised by the petitioner that accrue after October 15, 2018, cannot be referred to arbitration. It contended that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted.

The petitioner DLF contended before the High Court that the moratorium granted by the NCLAT was not a statutory moratorium under Section 14 of the IBC. It argued that since the resolution of IL&FS was initiated under Sections 241 and 242 of the Companies Act, 2013 and not under IBC, the rigours of Section 14 of the IBC were not attracted.

It added that NCLAT is a statutory Tribunal over which the High Court has supervisory jurisdiction, therefore, the order passed by the NCLAT cannot curtail the jurisdiction of the High Court under Section 11 of the A&C Act. Thus, the petitioner argued that the NCLAT could not have passed the orders restraining institution and continuation of proceedings before the High Court.

While observing that the order passed by the NCLAT was challenged before the Supreme Court, the High Court noted that no stay order has been granted by the Apex Court.

The bench referred to the decision of the Coordinate Bench of the Delhi High Court in M/s. Apco-Titan (JV) versus National Highways & Infrastructure Development Corporation Ltd. (2019), where the High Court had concluded that in view of the NCLAT order, no suit was maintainable against the Group Companies of IL&FS.

Dismissing the contention of the petitioner that the moratorium granted by the NCLAT was not a statutory moratorium, the High Court ruled that the order passed by the NCLAT is akin to an order of moratorium passed under Section 14 of the IBC. While holding that the purpose and rationale behind granting a moratorium is to ensure that the assets of the corporate debtor are protected, the bench ruled that moratorium is granted with an intention to keep the company a going concern and for using the said period to strengthen its financial position.

Thus, it concluded that the intent of the order passed by the NCLAT is to protect the assets of IL&FS and its group companies, in order to make the resolution process effective and purposeful.

"Further, the order does not make any distinction between the claims before October 15, 2018 and after October 15, 2018. It restrains not just continuance of suits or proceedings already instituted, but also filing of fresh suits or proceedings. In other words, the order of stay/moratorium prohibits the initiation of any proceedings, regardless of the period to which the claims in the proceedings pertain", the Court observed.

Therefore, the bench held that it cannot be the intent of the NCLAT order to allow proceedings with respect to claims arising after the cut-off date, i.e., October 15, 2018.

"Mr. Nayar has submitted that NCLAT being subordinate to this Court, this Court is not bound by the order dated October 15, 2018. The plea is unmerited for the reason that the order passed by the NCLAT has certain consequences. The said order is not under challenge in this petition. It is pending consideration before the Supreme Court. The relief as sought for by Mr. Nayar, if granted, shall make the order of the NCLAT otiose, defeating the very purpose for which such an order was passed", the Court said.

The Court thus dismissed the petition.

Case Title: DLF Ltd. versus IL&FS Engineering and Construction Company

Citation: 2022 LiveLaw (Del) 1209

Counsel for the Petitioner: Mr. Rajiv Nayar, Sr. Adv. with Mr. Dhruv Divan, Ms. Meghna Mishra, Mr. Ankit Rajgarhia & Mr. Tarun Mehta, Advs.

Counsel for the Respondent: Mr. Jayant Mehta, Sr. Adv. with Mr. Kaushik Laik, Mr. Akshay Kaushik, Ms. Rudrakshi Deo & Mr. Abhishek Tiwari, Advs.

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