Impact of moratorium on troubled project vehicles

The inflow of cases filed in relation to large-value stressed project finance loans under the recently enacted and much required Insolvency and Bankruptcy Code, 2016, has been galloping ever since the code came into force. The code’s enactment resulted in a “paradigm shift” in Indian law as aptly put by Supreme Court Justice RF Nariman in the recent case of Innoventive Industries Ltd v ICICI Bank Ltd.

The code provides a lifeline to a corporate debtor such as a project special purpose vehicle (SPV) against which an insolvency petition is filed, to come up with a resolution plan through the corporate insolvency resolution process to pay its debts and stay afloat. One of the crucial requirements to make this happen is to halt simultaneous recovery proceedings in respect of the corporate debtor, which may adversely affect this process. This safe harbour has been provided in section 14 of the code and is branded as a “moratorium”.

Moratorium has been subject to a great deal of interpretation. One of the most debated issues is whether proceedings against guarantors are stayed with an order of moratorium. This has been answered in the negative by the National Company Law Tribunal (NCLT), Mumbai, and upheld by the National Company Law Appellate Tribunal (NCLAT), in the case of Alpha & Omega Diagnostics (India) Ltd v Asset Reconstruction Company of India Ltd & Ors.

Sushmita Gandhi is a partner and Bhargav Kosuru is an associate at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata.