Moratorium Period under the Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code, 2016 (IBC), incorporates the pivotal concept of a moratorium period during insolvency proceedings, effectively halting all actions against the corporate debtor. This pause not only provides a protective shield for the debtor but also creates an environment conducive to restructuring and resolution efforts.

1. Purpose of the Moratorium Period

1.1 The moratorium under the IBC is a critical mechanism designed to facilitate the insolvency resolution process. Its primary objectives are:

1. 1. Asset Protection: Prevents the dissipation or alienation of the corporate debtor’s assets during the resolution process.
   2. Breathing Space: Provides a “calm period” for the corporate debtor to focus on restructuring or resolution without the pressure of ongoing or new legal proceedings.
   3. Collective Resolution: Ensures that creditors act collectively through the insolvency process rather than pursuing individual claims.
   4. Value Maximisation: Preserves the corporate debtor’s value as a going concern, benefiting all stakeholders, including creditors, employees, and shareholders.

2. Legal Provisions Governing the Moratorium

2.1 The moratorium is primarily governed by Section 14of the IBC for corporate debtors and Section 96 for individuals and personal guarantors.

Section 14: Corporate Debtors

2.2 Trigger: The moratorium is imposed upon the admission of a Corporate Insolvency Resolution Process (CIRP) application by the National Company Law Tribunal (NCLT).

2.3 Prohibitions:

1. Institution or continuation of suits or proceedings against the corporate debtor.
2. Transfer, alienation, or disposal of the corporate debtor’s assets.
3. Foreclosure, recovery, or enforcement of security interests.
4. Recovery of property in possession of the corporate debtor by an owner or lessor.

2.4 Exceptions:

1. 1. Transactions notified by the Central Government (Section 14(3)(a)).
   2. Actions against guarantors of the corporate debtor (Section 14(3)(b)).

2.5 Duration: The moratorium remains in effect until the CIRP is completed, a resolution plan is approved, or a liquidation order is passed(Section 14(4)).

Section 96: Individuals and Personal Guarantors

1. 1. Interim Moratorium: Triggered upon the filing of an insolvency application and continues until the application is admitted or rejected.
   2. Prohibitions: Creditors are barred from initiating or continuing legal proceedings in respect of any debt owed by the individual or personal guarantor.

3. Implications for Creditors and Debtors

3.1 For Creditors

1. 1. Stay on Recovery Actions: Creditors cannot initiate or continue recovery actions, including enforcement of security interests, during the moratorium.
   2. Collective Process: Creditors must submit their claims to the resolution professional and participate in the collective insolvency resolution process.
   3. Impact on Secured Creditors: Secured creditors are temporarily barred from enforcing their security interests, which may delay their recovery.

3.2 For Debtors

1. 1. Asset Protection: The moratorium safeguards the corporate debtor’s assets from individual creditor actions.
   2. Operational Continuity: Essential contracts and services cannot be terminated, allowing the debtor to continue operations as a going concern.
   3. Potential Misuse: In the case of personal guarantors, the interim moratorium does not restrict the debtor from transferring or alienating assets, which could lead to misuse.

4. Judicial Interpretations and Recent Developments

Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021):

The Hon’ble Supreme Court has clarified that Section 14 of the Insolvency and Bankruptcy Code (IBC) extends to proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881, but only in relation to the corporate debtor. Consequently, cheque bounce proceedings against the corporate debtor are stayed during the moratorium period. However, such proceedings can still be initiated or continued against the directors of the corporate debtor.

China Development Bank vs Doha Bank OPSC and others:

The Supreme Court has ruled that a moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016, does not extinguish a claim. The Court clarified that Section 14 prohibits the initiation or continuation of legal proceedings against the corporate debtor, the transfer of assets, the enforcement of security interests, and similar actions.

Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd:

Courts have clarified that the moratorium does not apply to proceedings initiated by the corporate debtor if such proceedings are beneficial to the debtor’s financial position.

Indian Overseas Bank v. RCM Infrastructure Ltd. (2021):

The NCLAT clarified that the moratorium prohibits the institution or continuation of suits or proceedings against the corporate debtor, SARFAESI proceedings cannot be continued against Corporate Debtor once CIRP starts and Moratorium is ordered including execution of judgments or decrees.

5. Challenges and Criticisms 

1. 1. Uncertainty in Scope: Contradictory judicial interpretations have created uncertainty regarding the scope of the moratorium, particularly for arbitration proceedings and proceedings initiated by the corporate debtor.
   2. Delay in Resolution: The moratorium can lead to delays in the resolution process, especially if courts are required to determine whether specific proceedings fall within its ambit.
   3. Impact on Creditors: The blanket stay on recovery actions can disadvantage creditors, particularly secured creditors, who may face delays in realising their claims.

6. Conclusion

The moratorium under the IBC is a cornerstone of the insolvency resolution framework, balancing the interests of creditors and debtors. It ensures the preservation of the corporate debtor’s assets and provides a collective resolution mechanism. The practice also reveals that a moratorium does not always accelerate restructuring; in some cases, it leads to delays. However, judicial interpretations and recent developments have highlighted the need for greater clarity and potential legislative amendments to address ambiguities and prevent misuse.