2024 (8) TMI 1281 - HC - Insolvency and Bankruptcy

Corporate debtor can file counter-claims during moratorium under Section 14(1) IBC despite suit continuation ban

Delhi HC held that under Section 14(1) of the IBC, while moratorium prohibits continuation of suits against a corporate debtor, it does not bar ... Seeking modification of order - Grievance of appellant/ defendant no. 1 is that the application, whereby modification of the order dated 22.10.2019 was sought was not adjudicated and instead, simply notice was issued with a direction to the learned Joint Registrar to record evidence in the matter - HELD THAT:- Mere perusal of the provisions of Section 14 (1) of the IBC would show that once moratorium is declared by the adjudicating authority i.e., NCLT, it prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor, which includes execution of any judgment, decree or order in any Court of law, tribunal, arbitration panel and other authorities. The corporate debtor in this case being the appellant/defendant no. 1, as alluded to above, the appellant/defendant no. 1 has preferred a counter claim. Clearly, the plain language of Section 14 (1) (a) of the IBC does not prohibit continuation of a counter-claim. The counter-claim, as defined under Order VIII Rule 6 (a) of the Code of Civil Procedure, 1908, typically as against a set off, can relate to a cause of action accruing to a defendant vis-a-vis the plaintiff, either before or after filing of the suit action. Counterclaim needs to be filed, as per the said provision, before the defendant has delivered his defence or before the time limit for delivering his defence has expired. Counter-claim cannot exceed the pecuniary limits of the jurisdiction of the Court concerned, where the suit action is instituted. Because counter claim can proceed to trial, evidence ought to be permitted to be recorded in the suit claim, is a submission which is misconceived in law. Such submission flies in the face of the plain language of Section 14 of the IBC and what constitutes a counter claim. Therefore, SSMP does not lay down the correction position in law. The recordal of evidence by the learned Joint Registrar (Judicial) will continue vis-a-vis the counter-claim preferred by the appellant/ defendant no. 1. However, moratorium will operate vis-a-vis the claim made by the respondent no. 1/ plaintiff - Appeal disposed off. Issues:Appeal against judgment and order regarding modification of order dated 22.10.2019 and continuation of recordal of evidence in a suit action during Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code, 2016 (IBC).Analysis:The appellant, defendant no. 1, challenged the direction in the impugned judgment to continue recording evidence in the suit action despite being under CIRP. The appellant filed a counter-claim in the suit action and sought modification of the order suspending the adjudication of the plaintiff's suit while allowing continuation of evidence in the counter-claim. The appellant contended that the direction to record evidence was contrary to Section 14 of the IBC. The High Court found merit in the appellant's submission and stayed the direction pending appeal.The order dated 22.10.2019, based on the SSMP Industries Ltd. case, was challenged by the appellant, arguing that the decision in SSMP contradicted various judgments by the Supreme Court and other High Courts. The respondent, however, supported the SSMP decision as good law, asserting that continuing the suit action, including the counter-claim, would help determine the payable amounts. The High Court analyzed the applicability of Section 14 of the IBC, emphasizing that the moratorium does not extend to counter-claims. The Court referred to relevant legal provisions and case laws to support its conclusion that the continuation of a counter-claim is not prohibited during CIRP.The High Court held that the direction to record evidence in the suit action, including the counter-claim, was flawed and varied the impugned judgment and order accordingly. It allowed the recordal of evidence to proceed for the counter-claim but maintained the moratorium for the plaintiff's claim. The Court disposed of the appeal with these terms. Additionally, the respondent was granted liberty to approach the NCLT Bench to present its claims against the appellant, subject to legal procedures.In conclusion, the High Court clarified the application of Section 14 of the IBC regarding the continuation of counter-claims during CIRP and set aside the direction to record evidence in the suit action. The judgment provided a balanced approach by allowing evidence recording for the counter-claim while upholding the moratorium for the plaintiff's claim, ensuring legal compliance and fair proceedings for both parties.