In the Insolvency and Bankruptcy Code, 2016 ( IBC) the concept of an interim moratorium serves as a crucial tool designed to provide distressed individuals with a temporary relief period to reorganize their financial affairs and to shield them from immediate creditor actions.

While, a company moratorium under the IBC involves a more extensive, long-term halt to legal actions and proceedings against a corporate debtor. It is initiated when an insolvency application is accepted and remains in place until the Corporate Insolvency Resolution Process is completed. In contrast, an interim moratorium under Section 96 of the IBC is a temporary, pre-admission pause that begins when an insolvency application is filed against an individual or personal guarantor of the corporate debtor and ends when the application is either admitted or rejected.

In recent years, personal guarantees have become a common feature in business lending, where an individual, often a director or shareholder of a company, personally guarantees the repayment of a company’s debts. In the event of a company’s default, creditors can pursue the personal assets of the guarantor to recover unpaid loans. However, personal guarantors also find themselves subject to bankruptcy or insolvency proceedings when they are unable to fulfill their obligations.

However, the abuse of interim moratorium by personal guarantors has become a growing concern as it has been widely used as a tactical move to delay recovery or security enforcement actions initiated by secured creditors under the provisions of the SARFAESI Act, 2002 and RDDBFI Act, 1993.  Individuals have exploited this legal mechanism to delay or obstruct legitimate creditor actions, often with the aim of avoiding personal liability or transfer their assets or buying time for a more favorable resolution. This abuse of the interim moratorium poses challenges to both creditors and the insolvency system as a whole, particularly when the personal guarantor is using it as a shield to avoid paying their debts.

The crucial test in such matter is the relevant date from which Moratorium kicks in. The Hon’ble Kerala High Court in the matter of Jeny Thankachan v. UOI[1] while dealing with the issue of filing of Petitions under section 94/95 IBC has explicitly stated that Moratorium under section 96 does not kick in merely on the filing of Application under section 94/95 of IBC and same has to be first scrutinized, cleared, placed before the Ld. Tribunal and need to have a proper case no. and not merely a filing no. High Court also held that personal guarantors of corporate debtor cannot use provisions of IBC as a shield to escape from the claims of creditors.

The Ld. National Company Law Appellate Tribunal has taken contrary view of the said judgment of Hon’ble Kerala High Court in the matter of Sangita Arora v. IFCI Ltd.[2] and stated that moratorium commence from the date of filing of the application and also stated that the similar issue has already been dealt in the matter of Krishan Kumar Basia v. SBI[3] wherein it was reiterated that even if there is any defect in the Application, which is subsequently cured, the date of presentation of the Application shall remain the same and shall not be dependent on the date when defects are cured

Recently, the issue has once again arisen before the Hon’ble Bombay High Court in the recent judgment of Bank of Baroda v. UOI[4] has recognized the systemic abuse of interim moratoriums and directed NCLT to enforce strict procedural timelines under Rule 28 of the timeline on interim moratorium and has laid down strict timeline for removing the objections as under:-

• The NCLT must notify applicants of any defects in their applications within 7 days of submission.
• That the applicants are required to address and rectify any defects within 7 days of receiving the notification.
• That the NCLT will issue a monthly report listing applications with unresolved defects, where compliance has not been completed within the designated 7-day period.
• That within 15 days of the monthly list being issued, a notice under Rules 28(3) and 28(4) will be sent. It will state that applications failing to comply will be processed according to Rule 28(4) within the following 30 days.
• That if objections are not resolved within 30 days, the application will be rejected within 7 days and marked online as “dismissed as declined by register.”
• Re-filing a rejected application does not automatically restart the interim moratorium, unless an appeal is made under Rule 63 of the NCLT Rules.

The abuse of the interim moratorium by personal guarantors has serious consequences for creditors. Some of the key impacts including but not limited to are the Financial Losses, Prolonged Litigation, additional legal costs and distrust in the system etc.

While the interim moratorium serves as an essential tool for personal guarantors facing genuine financial difficulties, its abuse has become a serious concern in the realm of insolvency law. To maintain fairness and prevent abuse, it is critical for courts and lawmakers to ensure that appropriate safeguards are in place.

This article has been authored by Jagrita Ahuja, Associate Partner and Geetansh Kathuria, Associate. 

[1] Jeny Thankachan v. Union of India, (2023) 1 HCC (Ker) 164

[2] Sangita Arora v. IFCI Ltd., 2024 SCC OnLine NCLAT 767

[3] Krishan Kumar Basia v. SBI, 2022 SCC OnLine NCLAT 1619

[4] Bank of Baroda v. Union of India, 2024 SCC OnLine Bom 3964