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 counter-claims filed by the corporate debtor. The court distinguished between the main suit claim (subject to moratorium) and counter-claim (permitted to proceed), allowing evidence recording to continue for the counter-claim while maintaining moratorium protection for the plaintiff's claim against the corporate debtor. Appeal disposed of with directions for evidence recording on counter-claim only.

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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.

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