Moratorium under IBC

The moratorium is one of the most critical protective mechanisms under the Insolvency and Bankruptcy Code, 2016. Declared by the NCLT under Section 14 upon the admission of a CIRP application, the moratorium creates a statutory shield around the corporate debtor, preserving its assets and ensuring that the resolution process can proceed without disruption from individual creditor actions.

What Is Prohibited under Section 14?

During the moratorium period, the following actions are prohibited: (a) the institution or continuation of suits or proceedings against the corporate debtor, including execution of any judgment, decree, or order in any court, tribunal, arbitral panel, or other authority; (b) transferring, encumbering, alienating, or disposing of any assets of the corporate debtor; (c) any action to foreclose, recover, or enforce any security interest created by the corporate debtor; and (d) the recovery of any property by an owner or lessor where such property is occupied or in possession of the corporate debtor. This comprehensive prohibition ensures a standstill that benefits all stakeholders collectively.

Exceptions to the Moratorium

The moratorium does not apply to certain categories of transactions and proceedings. Notably, it does not bar proceedings under Section 14(3) against surety in a contract of guarantee to a corporate debtor. Additionally, the Supreme Court has clarified that criminal proceedings, regulatory actions by government authorities, and proceedings under special statutes (such as PMLA) are not stayed by the moratorium. Supply of essential goods and services (electricity, water, IT) to the corporate debtor also cannot be terminated or suspended during the moratorium period under Section 14(2A).

Effect on Ongoing Proceedings

Once the moratorium is declared, all pending suits, arbitrations, and recovery proceedings against the corporate debtor are automatically stayed. Courts and tribunals across the country are bound to give effect to the moratorium. The Resolution Professional may, however, permit specific actions that are necessary for the corporate debtor to continue as a going concern. Creditors who have initiated recovery proceedings before CIRP must approach the NCLT if they wish to contest the moratorium's applicability.

Duration of the Moratorium

The moratorium commences on the insolvency commencement date (the date of admission of the CIRP application) and continues until the NCLT passes an order approving a resolution plan under Section 31, or orders liquidation under Section 33, or rejects the CIRP application, or the CIRP is withdrawn under Section 12A. In the case of liquidation, a separate moratorium (or its equivalent protection) applies under the liquidation proceedings.

Supreme Court Interpretations

The Supreme Court has delivered several significant pronouncements on the scope of the moratorium. In Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd., the Court emphasised that the moratorium is absolute and applies even to secured creditors. In P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021), the Court held that criminal proceedings under Section 138 of the Negotiable Instruments Act (dishonour of cheque) are covered by the moratorium and must be stayed during CIRP, though this remains a nuanced area of jurisprudence.