Open Access Research Article
UNDERSTANDING THE GREY AREAS IN THE MORATORIUM IMPOSED UNDER THE INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016
Published Paper
Article Details
UNDERSTANDING
THE GREY AREAS IN THE MORATORIUM IMPOSED UNDER THE INSOLVENCY AND BANKRUPTCY
CODE (IBC), 2016
AUTHORED BY
- NIMISHA FOGLA
Kes’s Shri
J. H. P Law College
Abstract
Since the enactment of the
legislation, insolvency proceedings have become challenging and a growing need
of the hour. Due to coded provisions, the entire process has been regulated yet
there remains certain unexplored areas which the justice providers are required
to interpret according to the demands of the case. Moratorium meaning the
prohibition of certain activities on a temporary basis is a crucial aspect of
IBC where the enforcement of insolvency proceedings is given a priority over
other pending suits with respect to the parties. There exists various questions
as to what is to be included or excluded from the ambit of moratorium which the
law makers have left to be determined by the interpretation of the Judges. The
IBC Code thus cannot be read barely on its own and have to be read along with
the precedents set by the Tribunals and the Courts. Due consideration is to be
provided to the demands and facts of the case pertaining to which the
precedents are upheld or a dissenting view is given.
1.
Introduction
In order to avoid interruptions in
the proceeding of insolvency, the Adjudicating Authority i.e., the National
Company Law Tribunal or the Debt Recovery Tribunal imposes a temporary
prohibition on certain acts by creditors or of corporate debtor, thus ensuring
smooth proceedings. The moratorium imposed under section 14 of IBC which
commences on the admission of the Corporate Insolvency Resolution Proceeding
(CIRP) application differs from an interim moratorium under section 96 of the
Code which commences on the receipt of an application of insolvency proceeding
of an individual. Section 96 of the Code encompasses only specific debt for
which an application under section 95 of the Code is filed thus narrowing the
scope and leaving grey areas to be decided according to the needs of the case
whereas section 14 has a wider scope where it enforces the stay of any pending
proceeding or suits and also debars the corporate debtor from transferring,
selling, or encumbering any of the assets. There arises various question
as to the inclusion of scope of moratorium which would be answered in this
paper.
2.
Scope of moratorium extends to proceedings
before High Court and Supreme Court?
The prohibition applies to all suits
and proceedings with respect to the Corporate Debtor yet there are certain
exclusions and exceptions to the same. A bare reading of Section 14(1)(a) does
not exclude any court from its purview including the Hon’ble High Court or The Supreme
court of India yet a contrasting perspective was observed by the National
Company Law Appellate Tribunal (NCLAT) in the case of Canara Bank vs Deccan
Chronicle Holdings Limited[1].
High Courts and Supreme Court are vested with certain powers to deal with the
suit for recovery of money as conferred upon them by the Constitution of India
which enables them to deal with original filings of cases enlarging their
original jurisdiction. NCLAT while ruling on the case observed that such recovery
suits which are filed before High Court or Supreme Court are included in the
effect of moratorium and is thus stayed after the commencement of the same
ensuring the enforcement of the clause of over-riding effect of IBC Code under
section 238 of the Code. However, the Tribunal has a dissenting view when it
came to filing of writ petition under Article 32 or 226 of the Constitution of
India before Hon’ble Supreme Court and High Court respectively. Any writ
petition pending under article 226 before the High Court or under article 32 of
the Supreme Court and a Special Leave petition filed under article 136 of the Constitution
before the Supreme Court cannot be stayed by any provision of law including but
not limited to IBC. Hence, such petitions are explicitly excluded from the
ambit of moratorium.
As we understand, to ensure the vital
nature of a writ petition, the same has been excluded from the scope of
moratorium yet there has been no clarification made in the amendments to the
Code which leaves it open for the justice givers to upheld or not according to
the needs of the case. Thus, the order does not yield in making the constitution
of India have an over-riding effect over IBC as the suit filed under article
131 before Supreme Court is included in the ambit of moratorium and is stayed
rendering IBC Code a self contained enactment having over riding effect over
other laws including but not limited to the powers enumerated to Courts by the
Constitution of India as well.
3.
Criminal proceedings included in
the expression “proceedings”?
The question arises that whether the
expression “proceedings” mentioned under section 14(1)(a) of the Code extends
to prohibition of prosecution of the corporate debtor as well along with the
stay of civil suits. Criminal proceedings are considered as a matter of urgency
as it affects the interest of large public and hence the stay of such
proceedings could not only affect the society at large but also yield in
tampering of evidences and delay in rendering justice to a person. The words
used in Section 14 is “suits or proceedings” which leaves space for the
justice providers to decide as to whether the law makers deliberately and
intendedly omitted to mention prosecution or not. In the case of Mr. Ajay
Kumar Bishnoi vs M/s Tap Engineering and Other[2], the
Madras High Court while dealing with a cheque bounce case under section 138 of
Negotiable Instruments Act, 1881 (NI) and a concurrent CIRP proceeding filed
against the company, observed and renounced the fact that prosecution does not
fall under the ambit of moratorium and hence cannot be stayed with the effect
of moratorium. A suit filed for recovery of money under section 138 of the NI Act
is considered a criminal suit as the person found guilty is punished with
imprisonment and fine. When such an application was filed by the petitioner,
the justice providers were bound to make a decision whether or not to stay 138
proceedings and include or exclude the prosecution from the ambit of
moratorium. The judge was called out to use the rule of interpretation and step
into the shoes of the law makers, thus to decide the scope of moratorium. After
interpreting the intent of the law makers, the decision was ruled, excluding
prosecution from the ambit of moratorium and thus the proceedings pending
before the criminal court was not interrupted and continued simultaneously with
CIRP proceedings going against the debtor.
Bombay High Court in the case of Indorama
Synthetics (I) Limited Nagpur vs State of Maharashtra and Ors[3]
also observed that a prosecution initiated under Section 138 read with 141 of
Negotiable Instruments Act, 1881 does not fall under the ambit of moratorium
thus renounced the individuality and importance of a criminal proceeding. A similar
view was conferred by NCLAT in Shah Brothers Ispat Pvt Ltd vs P.Mohanraj
& Ors[4], wherein
the tribunal re-iterated that no criminal proceeding is covered by section 14
of the IBC. The order of imposing fines under section 138 of NI Act, 1881 is
not a money claim or recovery against corporate debtor rather it is a punitive
measure for non-compliance of the provisions of law or violating such provisions.
A difference needs to be created between debt recovery proceedings and punitive
action and thus not all criminal liabilities can be excluded from the purview
of IBC. Thus, a criminal proceeding including but not limited to prosecution
and imposition of fines under section 138 of NI Act, 1881 falls out of the
ambit of the moratorium imposed under IBC.
In the case of Ajay Kumar Radheyshyam Goenka v. Tourism
Finance Corporation of India Ltd[5].,
the National Consumer Dispute Redressal Commission (NCDRC) reaffirmed that
criminal proceedings against directors or signatories of a company do not abate
merely because the corporate debtor is undergoing insolvency resolution process
indicating that the moratorium does not even extend to the stay of criminal
proceedings of the company’s officers and thus all such criminal proceedings
will be in force even during the CIRP process.
NCLAT in the case of Varrsana
Ispat Limited Through the Resolution Professional Mr. Anil Goel vs. Deputy
Director, Directorate of Enforcement[6]
also re-iterated the same view that Section 14 is not applicable to the
criminal proceeding or any penal action taken pursuant to the criminal
proceeding or any act having essence of crime or crime proceeds. However, the
exclusion of criminal proceedings from the scope of moratorium is decided
according to the needs and wants of the case and is a case to case basis
decision where the general interpretation of the court is indeed considered as
a precedent while ruling over such critical situations.
4.
Is there an exclusion of regulatory
penalties from the scope of moratorium?
Section 96 of the IBC imposes interim
moratorium which commences as soon as the application under section 95 if filed
and gives way to moratorium under section 101 of the IBC when the application
of insolvency is admitted. The language of section 96 is restricted to the
debts for which an application is filed, thus leaving areas for interpretation
as to whether or not other debts of the corporate debtor would come under the
ambit of moratorium imposed. In a recent 2025 case of Saranga AnilKumar
Aggarwal vs Bhavesh Dhirajlal Sheth & Ors[7]. ,
the Supreme Court of India clarified one of the issues raised regarding the
scope of interim moratorium under section 96. The issue raised was whether the
fine imposed by National Consumer Disputes Redressal Commission (NCDRC) on the
applicant due to a default in the execution of the court’s order would amount
to debt and will be excluded from the scope from moratorium or not. The NCDRC
was of the view that the fines imposed as a result of non-compliance of the order
of the court is a safeguard measure to protect the consumers and to ensure the enforcement
of interest of the public at large. The court also emphasized that the stay
under Sections 96 and 101 extends only to proceedings concerning the debt and
does not necessarily shield the guarantor from all legal actions. The court
thus ruled that the interim moratorium under Section 96 of the IBC did not bar
the continuation of proceedings under Section 27 of the Consumer Protection
Act, against the applicant in her personal capacity as a guarantor and the same
was upheld by the Supreme Court of India in the appeal decided in March 2025.
Section 79(15) of the Code lists out
certain debts which are to be excluded from the purview of Section 96 of the
Code which reads as “(a)liability to pay fine imposed by a court or
tribunal; (b)liability to pay damages for negligence, nuisance or breach of a
statutory, contractual or other legal obligation;” Thus, a bare perusal of
section 79(15) read with section 96 also excludes the stay of all regulatory
penalties from the ambit of moratorium thus ensuring that a person cannot escape
from the penalties imposed by the court by hiding behind the curtains of
insolvency proceedings.
As we understand, there is a clear
distinction between debt recovery proceedings and the regulatory penalties and
fines imposed by the courts. The former is about the recovery of money whereas
the latter is charged for non-compliance of the provisions of law which if
stayed because of the insolvency proceedings would result in defeating the
objective of the statutes which is to protect the public interest and ensure
regulation. If damages arising from legal violations, consumer protection
claims, or penalties imposed by courts and tribunals were to be shielded under
the moratorium, it would create an unfair advantage for errant entities and
individuals, allowing them to evade their legal obligations under the guise of
insolvency.
The Hon’ble Appellate Tribunal in the
case of Ms. Anju Agarwal, Resolution Professional for Shree Bhawani Paper
Mills Ltd vs Bombay Stock Exchange & Ors[8]. had
a different view when it comes to inclusion of regulatory penalties with
respect to moratorium imposed under section 14 of the Code. Section 238 of the
Code demarcates the over-riding effect of the IBC Code over other provisions of
law. NCLAT was of the view that non-compliance of the laws resulting in the
payment of regulatory penalties would be covered under moratorium imposed under
section 14 and will be stayed. The penalty imposed by the court due to
non-compliance of SEBI (Listing Obligations and Disclosure Requirement)
Regulation, 2015 would not be effected as the company was undergoing CIRP
process and Bombay Stock Exchange (BSE) was withheld from debarring the Debtor
from trading. Thus, the ambit of section 14 moratorium is wider in aspect than
that of section 96 moratorium. While the former includes the stay of all the
fines imposed by the court as a breach of any law, the latter excludes the same
from its ambit. However, none of the clarifications has yet been added to the
Code and is left as a open wound to be filled pertaining to the demands and
facts of the cases.
5.
Conclusion
There remains certain unexplored
areas in the context of moratorium which would only be answered as and when
there is a unique case which questions the scope of the effect of moratorium.
However, the judges have indeed filled some gaps in the ambit which still is
yet to be re-affirmed by the law makers and is still not a part of the IBC
Code, 2016. Thus, it is pertinent to note that the Code is still a new
undiscovered arena that requires the attention and concern of the justice
providers and law makers.
[3] Indorama Synthetics (I) Limited
Nagpur vs State of Maharashtra and Ors, 2016 (4) Mh.L.J. 249
[4] Shah Brothers Ispat Pvt Ltd vs
P.Mohanraj & Ors, (2021) 6 SCC 258
[5] Ajay Kumar Radheyshyam Goenka v.
Tourism Finance Corporation of India Ltd, (2023) 6 SCC 258
[6] Varrsana Ispat Limited Through
the Resolution Professional Mr. Anil Goel vs. Deputy Director, Directorate of
Enforcement, Company
Appeal (AT) (Insolvency) No. 493 of 2018
[8] Ms. Anju Agarwal, Resolution
Professional for Shree Bhawani Paper Mills Ltd vs Bombay Stock Exchange &
Ors, Company Appeal (AT) (Insolvency) No. 734 of 2018
Article Information
UNDERSTANDING THE GREY AREAS IN THE MORATORIUM IMPOSED UNDER THE INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016
Authors: NIMISHA FOGLA
- Journal IJLRA
- ISSN 2582-6433
- Published 2025/03/12
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.