2019 (1) TMI 1937 - HC - Insolvency and Bankruptcy

Legal ruling: Suit proceedings halted during moratorium period under Insolvency Code Section 14

The court held that the continuation of the suit and interlocutory proceedings against the corporate debtor was barred during the moratorium period under ... Continuance of the suit and interlocutory proceeding during the moratorium period - whether a suit for passing off would embrace a suit under Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016? - HELD THAT:- Section 14 has clearly defined the classes of persons who are restrained from proceeding against the company. The classes of creditors include both secured and unsecured creditors. The statute insulates the corporate debtor against any debt recovery actions which are likely to endanger, diminish, dissipate or seriously affect the assets of the corporate debtor and such protection is to continue during the calm period. The emphasis is on to keep the corporate debtors' assets together during the insolvency resolution process and facilitate orderly completion of the process envisaged during the insolvency resolution process. In the instant case, although the relationship between the plaintiffs and the defendant is not a creditor-debtor relationship and the principle claim is not for realization of any debt, however, the continuation of the said proceeding might lead to affectation of the intellectual property rights of the defendant at least in relation to the four marks, namely Numbers 1988894, 2353792, 3373391 and 3518558, in respect whereof the defendant is the registered holder of the trademarks - Since any decision in favour of the plaintiffs in this proceeding may likely to affect the assets of the corporate debtor and in maximizing its asset value during the pendency of the said proceeding, the suit and the interlocutory proceedings cannot proceed against the corporate debtor during the insolvency resolution process. The proceedings in the suit and the interlocutory proceedings therein are stayed till 30th June, 2019, with liberty to mention in the event the insolvency resolution process comes to an end prior to the adjourned date. The application is adjourned till 1st July, 2019. Issues Involved:1. Preliminary objection regarding the continuation of the suit during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).2. Allegations of trademark infringement and passing off concerning the use of the trademark 'Kwality'.3. The applicability of moratorium provisions under IBC to suits for passing off and infringement.Detailed Analysis:1. Preliminary Objection Regarding Continuation of the Suit During Moratorium Period:The primary issue addressed is whether the suit and interlocutory proceedings can continue during the moratorium period declared under Section 14 of the IBC. The defendant raised a preliminary objection, arguing that the moratorium prohibits such proceedings. The plaintiffs contended that the moratorium under Section 14(1)(a) pertains only to suits or proceedings for the recovery of debt and does not apply to suits for passing off or trademark infringement. They referenced the definitions of 'claim' and 'debt' under Sections 3(6) and 3(11) of the IBC to support their argument that the moratorium is intended to protect the debtor's estate from monetary claims and not other types of legal actions.2. Allegations of Trademark Infringement and Passing Off:The plaintiffs filed a suit alleging that the defendant was using the trademark 'Kwality' or similar marks in a manner that constituted passing off. They claimed that the use of the trademark by the defendant was unauthorized and likely to cause confusion among consumers, leading them to believe that the defendant's products were associated with the plaintiffs. The plaintiffs argued that they had acquired a significant reputation and goodwill in the trademark 'KWALITY-WALL'S' and that the defendant's recent switch to using 'Kwality' was intended to create confusion. The defendant countered by asserting that they had been using the trademark 'Kwality' since the 1980s and had registered various related trademarks, entitling them to use the mark in their business.3. Applicability of Moratorium Provisions Under IBC:The court examined whether the moratorium under Section 14 of the IBC applied to suits for passing off and trademark infringement. The plaintiffs argued that Section 14(1)(a) of the IBC only barred suits related to the recovery of debt and not other types of legal actions. They referenced the UNCITRAL Legislative Guide on Insolvency Law and a Supreme Court decision in Innoventive Industries Ltd. Vs. ICICI Bank & Anr. to support their position that the moratorium was intended to protect the debtor's estate from monetary claims. Conversely, the defendant argued that Section 14(1)(a) applied to all types of suits against the corporate debtor, including those for trademark infringement, and that the interim resolution professional was required to take control and custody of all assets, including intellectual property, during the moratorium period.Conclusion:The court concluded that the continuation of the suit and interlocutory proceedings against the corporate debtor was barred during the moratorium period under Section 14 of the IBC. It held that the moratorium was intended to preserve the corporate debtor's assets, including intellectual property, and facilitate an orderly insolvency resolution process. The court noted that any decision in favor of the plaintiffs could potentially affect the defendant's intellectual property rights and assets, which were protected under the moratorium. Consequently, the court accepted the preliminary objection and stayed the proceedings in the suit and interlocutory applications until the end of the moratorium period, with liberty to mention the matter if the insolvency resolution process concluded earlier.