Alchemist Asset Reconstruction Company Limited vs. M/s.

Hotel Gaudavan
Private Limited & others

Introduction

Prior to Insolvency and Bankruptcy Code, we had multiple corresponding laws and various
tribunals to govern Insolvency and Bankruptcy issues such as Securitization and Reconstruction
of Financial Assets and Enforcement of Securities Interest Act, 2002; The Recovery of Debts
Due to Banks and Financial Institution Act, 1993; and Companies act, 1956 and its amendment
in 2013. But this multiple acts and regulation have not been able to get the wanted documents,
neither been able to aid the recovery for lenders and nor aided in the restructuring of company
and/or firms. However, there was no transparency and inevitability of jurisdiction and are dealt
with in different legal for ranging from the BIFR to debt recovery tribunals to civil courts and
high courts, each of these laws had their way of allocating with insolvency and many times in
conflict with each other. More importantly, India is witnessing a huge pilling up of non-
performing assets; the process of discharging an insolvent was very lengthy. 

The Bankruptcy Code is an effort to change the Corporate Insolvency Resolution Process, to
allow faster mechanisms within a minimum amount of time to deal with the Insolvency Process,
to reduce bankruptcy dishonor, improve easiness of doing business and making sure that the
financial risk to the foreign investor is decreased. The code unified all existing former law which
deals with the insolvency of corporate firms and individuals into single legislation and law has
simplified the winding-up process in respect of companies. The main purpose of this code is to
empower creditors through Corporate Insolvency Resolution Process for reviving of the
company as well as recovery of defaulted amount through CIRP as it is stated in the Preamble of
the code reorganization and insolvency resolution.
One of the most significant tools introduced to address the problem of stressed assets is the
Insolvency and Bankruptcy Code, 2016 (“IBC”). It has been a little over a year that the IBC was
enacted. Till date more than 650 cases have been admitted by the National Company Law
Tribunal (“NCLT”) under IBC. Out of these, so far, resolution plans for around 26 companies
have been approved and orders for liquidation for more than 100 companies have been passed.
While the ratio of successful resolution versus liquidation may not be encouraging, there has
been a flurry of activities in the distressed M&A space with many sensing an opportunity to
acquire some good assets. 

Moratorium

Once an application for commencing CIRP against a corporate debtor is admitted, a moratorium
order is passed prohibiting the institution of suits or continuation of pending suits or proceedings
against the corporate debtor or any action to foreclose, recover or enforce any security interest
created by the corporate debtor in respect of its property. Transfer of assets by the corporate
debtor is also prohibited. This order of moratorium remains in effect till the completion of the
CIRP or earlier if NCLT approves a resolution plan or passes an order for liquidation of the
corporate debtor.

A moratorium, however, will not affect any suit or case pending before the Supreme Court under
Article 32 of the Constitution of India or where an order is passed under Article 136 of
Constitution of India. A moratorium will also not affect the power of the High Court under
Article 226 of Constitution of India. However, a money suit or a suit for recovery, against the
corporate debtor, filed before any High Court under original jurisdiction, cannot proceed after
declaration of moratorium.

The effect of moratorium on actions by governmental authorities have arisen in various cases
before the NCLT. In one case NCLT has held that issuance of demand notice against the
corporate debtor by the mining authority and demanding stoppage of mining operations during
the period of moratorium is illegal and inoperative and it directed the mining authority to lift the
order demanding stoppage of mining operations. In another case, NCLT has held that withdrawal
of permission to procure, store and transport coking coal and iron ore for want of consent to
 operate while moratorium is not valid. However, in another case, NCLT upheld the action of the
Government, during the moratorium period, terminating a coal mines development and
production agreement and vesting order in favor of the corporate debtor.

The aim and function of a Moratorium is defined under Bankruptcy Law Reform Committee
Report as:

“One of the goals of having an insolvency law is to ensure the suspension of debt collection
actions by the creditors, and provide time for the debtors and creditors to re-negotiate their
contract. This requires a moratorium period in which there is no collection or other action by
creditors against debtors.”1

The case of Alchemist Asset Reconstruction Company Limited vs. M/s. Hotel Gaudavan Private
Limited & others2 is yet another pertinent judgement on the subject of moratorium. It has cleared
a conundrum regarding clash of arbitration with insolvency proceedings under the Code.

Facts

1. Hotel Gaudavan Private Limited (“Corporate Debtor”) was given a loan of Rs

24,00,00,000 (Rupees Twenty-Four Crore only) and limited credit of INR 1,00,00,000 (Rupees
One Crore only) by the State Bank of India (“SBI”) (“Financial Creditor”) on January 4, 2008.
2. The Corporate Debtor became irregular on repaying the loan and interest amount.
3. Subsequently, the bank looking at the irregularity gave notice to the Corporate Debtor
calling back the loan amount. A petition was filed before the Debt Recovery Tribunal, Jaipur,
(“DRT”) to recover the amount of loan.
4. State Bank of India (“SBI”) through an assignment agreement under Section 5 of the
Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

1
The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, November 2015.
2
Alchemist Asset Reconstruction Company Limited vs. M/s. Hotel Gaudavan Private Limited & others (IB)-
23(PB)/2017, decided on 13.12.2017
 2002 assigned the debt of the Corporate Debtor to a company named as Alchemist Asset
Reconstruction Company Limited.
5. In effect, the Financial Creditor had replaced SBI in the ongoing proceedings in DRT,
Jaipur.
6. The Financial Creditor then approached the Principal Bench of the National Company
Law Tribunal at New Delhi by making an application under Section 7 of Code. This application
was accepted and admitted by the bench and the tribunal declared Moratorium against Corporate
Debtor under Section 14 of Code.
7. Once the Moratorium was declared, the Corporate Debtor invoked the arbitration clause
between the Financial Creditor and the Corporate Debtor and appointed an arbitrator as per the
loan agreement.
8. The bench decided that the appointment of an arbitrator and the arbitration proceeding
were unlawful and not tenable. Moreover, the bench restrained from holding any arbitration
proceeding against the Corporate Debtor.
9. Even after the above ruling, the Corporate Debtor filed an appeal before the District
Court of Jaisalmer, Rajasthan under Section 37 of the Arbitration and Conciliation Act, 1996
(“Arbitration Act, 1996”) and the court passed an order for the appeal to be registered and a
notice seeking reply was issued.
10. It was against the admission of this application that an appeal was preferred before the
Supreme Court.

ARGUMENTS OF BOTH THE PARTIES

- FROM HIGH COURT

ARGUMENTS OF PETITIONER

Learned counsel for the writ petitioner, contends that after the assignment of debts by SBI to the
petitioner company, all the accounts and documents were transferred to Delhi. The Stressed
Assets Management Branch of SBI, the respondent No.2 in the writ petition is situated at New
Delhi. Alchemist being the assignee of the debts from SBI is also situated at Delhi. SBI issued
the first and second notice under Section 13(2) of the Act dated June 20, 2013 and October 14,
2013 respectively to HGPL from its branch situated at New Delhi. Alchemist also issued notice
dated July 21, 2014 under Section 13(2) of the Act to HGPL from its registered office at New
Delhi. The statements of accounts of HGPL are maintained by SBI at Delhi. The letter of consent
dated March 20, 2014 for substitution under Section 5(5) of the Act and the NPS certificate have
been issued by SBI from New Delhi and thus not only part of cause of action but entire cause of
action took place at Delhi and thus this Court has territorial jurisdiction to entertain the present
writ petition. Reliance is placed on the decisions reported as (2004) 6 SCC 254 Kusum
Ingots & Alloys Ltd. v. Union of India & Anr., AIR 2011 Delhi 174 M/s Sterling Agro
Industries Ltd. v. Union of India & Ors., 2015 (3) AD (Delhi) 721 Urmila Kumari v. Om Prakash
Jangra & Ors., 224 (2015) DLT 464 Edara Gopi Chand v. Union of India & Ors., 118 (2005)
DLT 274 Ansal Buildwell Ltd. v. North Eastern Indira Gandhi Institute of Health and Medical
Science & Ors., MIPR 2007 (2) 0396 (India TV) Independent News Service Pvt. Ltd. v. India
Broadcast Live LLC & Ors., 2009 (39) PTC 498 Glaxosmithkline Consumer Healthcare Ltd. v.
Heinz India (P) Ltd., 218 (2015) DLT 267 Lt. Col. A.S. Chaudhari v. Union of India and 219
(2015) DLT 321 Mukul Gupta v. Management Development Institute & Ors.

ARGUMENTS OF RESPONDENT

Learned counsel for HGPL at the outset objects to the maintainability of the present writ petition
before this Court on the ground of want of territorial jurisdiction. Learned counsel for HGPL
contends that the loan was sanctioned at Jodhpur by SBI Branch, Jodhpur, the registered office
of borrower i.e. HGPL is at Jaipur, the property in question was situated at Jaisalmer, the
proceedings took place at DRT, Jaipur culminating in the order dated May 06, 2015. It is
contended that merely because the DRAT was situated at Delhi and the impugned order was
passed at Delhi, the same would not vest territorial jurisdiction in this Court to entertain the
present writ petition as no cause of action or even a part of cause of action arose in Delhi.
Reference is made to the decision reported as (2007) 6 SCC 769 Ambica Industries v.
Commissioner of Central Excise.

- FROM SUPREME COURT

ARGUMENTS OF RESPONDENT
 Mr. Jayant Bhushan, learned Senior Counsel, also informs us that criminal proceeding being
F.I.R. No. 0605 dated 06.08.2017 has been taken in a desperate attempt to see that the IRP does
not continue with the proceedings under the Insolvency Code which are strictly time bound.

JUDGEMENT

The Court observed that the mandate of the Code is that the moment an insolvency petition is
admitted, the moratorium period stands initiated under Section 14 (1) (a) of the Code, and then it
bars any admission of fresh proceedings or continuation of any pending suit against a Corporate
Debtor.

Section 14(1)(a) of the Code reads as: -

“14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date,
the Adjudicating Authority shall by order declare moratorium for prohibiting all of the
following, namely-

1. The institution of suits or continuation of pending suits or proceedings against the

corporate debtor including execution of any judgment, decree or order in any court of
law, tribunal, arbitration panel or other authority”

The court observed that the effect of Section 14 (1) (a) is that the arbitration that has been
instituted after the Moratorium is “non est” in law. On such findings, the Court set aside the
order of the District Court of Jaisalmer.

The issue in such cases relates to the word “proceedings” used in Section 14(1)(a) of the Code,
that it be interpreted so as to include ‘all legal proceedings’ or should it be construed to mean a
particular or specific type of legal proceeding such as debt recovery proceedings which may have
a detrimental effect on the debtor’s assets during the ongoing insolvency proceedings.
The plain reading of Section 14 makes it clear that it includes legal proceedings of any nature.
The intention of the legislature with regards to moratorium is that there must be a standstill
period during which actions of debt recovery cannot be initiated against the debtor. If any legal
action against the debtor is allowed it will nullify the very object of the insolvency proceedings
under the Code.

CONCLUSION

Moratorium under Section 14 of the Code shall apply in arbitration proceedings ultimately
depends upon the nature of arbitration proceedings and peculiar facts and circumstances of each
case, if the proceedings are in detriment to the financial position of the Corporate Debtor the
moratorium shall have an effect and in case it does not have such an effect the moratorium shall
not apply.

In the least arbitration proceeding began after imposition of moratorium under Section 14 of the
Insolvency and Bankruptcy Code, 2016 is non est in law.
References

1. https://thelawblog.in/2019/07/13/scope-of-moratorium-under-insolvency-and-bankruptcy-
code-2016-arbitration-and-the-test-of-detrimental-effect/#_ftnref3
2. http://mappingadr.in/alchemist-asset-reconstruction-company-limited-v-hotel-gaudavan-
private-limited/
3. https://www.legitquest.com/case/alchemist-asset-reconstruction-company-ltd-v-hotel-
gaudavan-pvt-ltd-and-ors/1764BE
4. https://www.legitquest.com/case/alchemist-asset-reconstruction-company-pvt-ltd--another-v-
ms-hotel-gaudavan-pvt-ltd--another/A2192
5. http://www.argus-p.com/papers-publications/thought-paper/distressed-ma-under-ibc/
6. https://indiankanoon.org/doc/71520091/