Can a Company Operate During the Moratorium?

Under the Insolvency and Bankruptcy Code (IBC), when a company enters the Corporate Insolvency Resolution Process (CIRP), a moratorium is automatically imposed. This moratorium provides a temporary relief period, stopping creditors from taking legal actions to recover dues. However, the imposition of the moratorium does not completely halt the operations of the company. While the moratorium restricts certain creditor actions, the company can still continue its business under specific conditions, with the oversight of a Resolution Professional (RP).

Can a Company Operate During the Moratorium?

Yes, a company can continue operating during the moratorium, but there are specific conditions, and the Resolution Professional (RP) is responsible for overseeing the company’s day-to-day operations. The moratorium does not mean a complete shutdown of business activities; rather, it is a safeguard to allow the company the time and space needed for the Corporate Insolvency Resolution Process (CIRP), which includes formulating a resolution plan.

Key points to understand:

Management Control and Operations

Upon the initiation of the CIRP, the management of the company is temporarily suspended, and a Resolution Professional (RP) takes control of the company’s affairs.

The RP manages the company’s operations and is responsible for ensuring that business activities continue without disruption. This includes making critical decisions to preserve the value of the company’s assets and operations.

The RP can make business decisions, including hiring employees, negotiating contracts, or terminating unprofitable agreements, but must prioritize the goal of finding a resolution to the company’s financial distress.

Moratorium Restrictions

While the company can continue operations, there are certain legal restrictions imposed during the moratorium:

• Legal Proceedings: The moratorium prevents the initiation or continuation of any legal actions or recovery proceedings by creditors against the company. However, the company may still face certain criminal cases or personal injury claims, as these are exceptions to the moratorium.
• Asset Seizure: Secured creditors cannot seize or attach the company’s assets during the moratorium. This is to ensure that the company can continue operating without the threat of asset liquidation, unless approved by the NCLT or RP.
• Debt Recovery: Creditors are not allowed to take individual actions to recover their debts from the company during the moratorium. All creditor claims are handled through the Committee of Creditors (CoC).

Business Continuity and Operations

The company’s business can continue to operate normally in most aspects, provided:

• The Resolution Professional ensures that the operations are conducted in a manner that maximizes the company’s value and preserves its assets.
• The RP must also ensure that employee salaries, operational expenses, and other essential costs are met to avoid the breakdown of business functions.

Expenditure Approval

The RP is authorized to approve operational expenditure that is necessary for the day-to-day running of the business. This includes paying salaries, utilities, rent, and other operational costs. However, the RP may need approval from the Committee of Creditors (CoC) for significant decisions or financial commitments.

Transaction Limitations

During the moratorium, certain transactions and asset sales may require the approval of the NCLT or the Committee of Creditors. The goal is to prevent the debtor company from disposing of assets in a way that would adversely affect the creditors or the resolution process.

Key Provisions Affecting Company Operations

Role of the Resolution Professional (RP)

The RP plays a critical role in ensuring that the company can continue operating. The RP takes over the control of the company's management and monitors the ongoing business activities. They have the authority to:

• Approve payments for necessary operational expenses.
• Take decisions regarding contracts, employees, and suppliers to ensure that business continuity is not jeopardized.
• Oversee the company’s assets and operations to maximize the value of the company.

Management and Control

The company’s board of directors and management lose control over the day-to-day running of the business once the CIRP is initiated, and the Resolution Professional steps in to manage the company. However, the RP can allow the previous management to continue assisting in the operations of the business under their supervision.

Committee of Creditors (CoC)

The CoC, comprising the financial creditors, plays an important role in making decisions regarding the future of the company, the resolution plan, and the ongoing business operations. The CoC votes on the resolution plan and approves any significant business decisions proposed by the Resolution Professional.

Example

Suppose a company, ABC Ltd., is facing financial distress and defaults on its debts. As a result, a Corporate Insolvency Resolution Process (CIRP) is initiated by one of its creditors, and a moratorium is imposed. The following happens:

• Resolution Professional Takes Control: The Resolution Professional (RP) is appointed to manage the operations of ABC Ltd. The RP assesses the company’s financials, its ongoing operations, and any necessary changes to the business model.
• Business Operations Continue: ABC Ltd. continues its operations under the RP’s supervision. The company keeps paying salaries, fulfilling contracts with customers, and handling regular expenses like utilities, while the RP ensures that these payments are justified and aligned with the goal of resolving the company’s debts.
• Secured Creditors’ Actions Halted: The company’s secured creditors cannot seize any assets during the moratorium. However, the RP may negotiate with creditors to discuss the possibility of restructuring the company’s liabilities.
• Committee of Creditors (CoC) Involvement: The CoC discusses and votes on the resolution plan. The RP presents various options for the company’s recovery, which may include debt restructuring, asset sales, or other measures. The CoC must approve the final plan, and it is executed under the RP’s supervision.
• Outcome: If a resolution plan is successfully implemented, ABC Ltd. can continue to operate, but its debts are restructured, and the creditors are repaid under the new terms. If no resolution plan is successful, the company may face liquidation, and the business may cease operations.

Legal Protections and Consumer Actions

Protection for Employees and Suppliers

The moratorium helps protect employees and suppliers by ensuring that the company’s operations continue and that their dues are addressed under the CIRP. However, payments and contract terms must be approved by the RP and CoC.

Filing Claims During CIRP

Creditors, including employees, suppliers, and service providers, can file their claims with the RP during the CIRP. These claims will be verified and considered in the resolution process.