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Concept Moratorium Section 14 Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code (also known as IBC) has enumerated various concepts and has also prescribed the terms which have been used under the code. The interpretational meanings of the various concepts have now become necessary. Here in this article, I shall try to explain the term moratorium which has been explained under section 14 of the IBC.

Section 14, the bare language of Act, talks about Moratorium:

Sub-section (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:

  • (a) 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;
  • (b) Transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • (c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
  • (d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.


(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(3) the provisions of sub-section (1) shall not apply to-

  • (a) such transaction as may be notified by the Central Government in consultation with any financial regulator;
  • (b) a surety in a contract of guarantee to a corporate debtor.


(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

Explanation:
After admitting the application for insolvency process u/s 7 or u/s 9 or u/s 10, The Adjudicating Authority (i.e. NCLT) shall order (i) to declare a moratorium, (ii) to cause a public announcement of the initiation of the insolvency process and (iii) to appoint an Interim Resolution Professional in the matter.

Sub Section (1) of Section 14: The moratorium is declared by the Adjudicating Authority (AA) for prohibiting all of the following actions/suits/matters, namely:

  1. Any kind of initiation of suits against the corporate debtor or continuation of suits, including the execution of any order/judgment/decree in any court of law/tribunal/arbitration panel or any authority. Which means, once the moratorium declared by the AA (NCLT), any fresh proceedings suits or continuation of suits shall be stopped. One cannot file any new suits against that debtor until the NCLT orders so to do.
  2. Disposing off or transferring or alienating or encumbering any of assets of corporate debtor. Which means once the moratorium has declared, the corporate debtor cannot sale/transfer/dispose off any of its assets. Further he also cannot give his legal rights to do so nor can he create any beneficial interest for the purpose of disposing off any assets during that moratorium.
  3. Any action with respect to security interest created by the corporate debtor in respect of his property including any action under SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
    Which means, if the corporate debtor has created any security interest on any property or if any action under the SARFAESI Act, such action has shall not have effect in this statute and the IBC shall override the former statute.
  4. Any property which is in possession of or occupied by corporate debtor and such property is to be transferred to or recovered by owner or lessor.

    Which means, any property which is being enjoyed by the corporate debtor or occupied or in possession of the corporate debtor and such property is to be recovered by the owner or lessor. Hence in such case, it is prohibited to transfer or give up the possession of such property to the owner or lessor.

Sub Section (2) of Section 14:

The supply of essential goods or services to the corporate debtor shall not be suspended or interrupted or terminated during moratorium period. This provision gives relief to the corporate debtor since he also has a constitutional right to do the business and life of liberty. Nonetheless he has also been kept in umbrella with some restriction during moratorium period.

Sub Section (3) of Section 14:

This provision is an exception to the sub-section (1) of section 14 above, which states, Section 14(1) shall not apply to (a) such transactions as may be notified by the Central Govt. in consultation with any financial regulator, and (b) a surety in a contract of guarantee to corporate debtor. Which means a surety in a contract (such contract which gives surety and it is not directly related to such contract) of guarantee. Thus, these are exception and the moratorium restriction shall not apply in this case.

Sub Section (4) of Section 14:

The order of moratorium shall have effect from the date of its order till the completion of insolvency process. This means, the order of moratorium shall be effective as and when the AA (NCLT) passes an order stating moratorium and shall be effective till the insolvency process gets complete.

Provided, it is to be noted that at any time during CIRP (insolvency process), if the AA (NCLT) approves the resolution plan under section 31(1) or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or order. That means, such order of moratorium under section 14(4) shall not have effect if the AA (NCLT) looks the matter under section 31(1) or section 33.

It is to be noted that section 31 talks about the Approval of resolution plan and section 33 talks about the initiation of liquidation.

It is further to be noted that while considering the Section 14 of the IBC pertaining to the Moratorium, we further need to read it with section 85, section 96 and section 101 of the code. I shall discuss more about these sections with considering moratorium in my next article.

End-Notes
The above are the personal explanations to Section 14 of the IBC. For any clarifications or feedback, feel free to share your knowledge with the Author. Your feedback is highly appreciated:
About the Author: Adv. Saheb Shaikh, (B. Com, GFMP (Int'l Finance), LL.B, DCL (Cyber Law), Advanced certified in Investment Law (NLU-Kolkata), Capital Market (JBIMS), and SEBI Certified Merchant Banking & Research Analyst.
Share your feedback at [email protected] | 9004736297 | Mumbai.

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