Section 96: Interim Moratorium under the Insolvency and Bankruptcy Code, 2016

Section 96 provides an automatic interim moratorium when an insolvency resolution application is filed under Section 94 or Section 95. It operates in relation to debts during the period specified by the provision.

Current framework: The notified Part III insolvency resolution framework is operational for personal guarantors to corporate debtors. Section 96 is therefore particularly relevant to applications under Sections 94 and 95 involving such personal guarantors.

Section 96 - Statutory Provision

(1) When an application is filed under section 94 or section 95-

(a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and

(b) during the interim-moratorium period-

(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and

(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

When Does the Interim Moratorium Begin?

The interim moratorium begins on the date an application is filed under Section 94 by the debtor or under Section 95 by a creditor. Unlike a moratorium that depends on a later admission order, Section 96 expressly attaches the interim protection to the filing of the application.

Effect on Pending and New Legal Proceedings

During the interim moratorium, legal action or proceedings already pending in respect of a debt are deemed to be stayed, and creditors are prohibited from initiating legal action or proceedings in respect of a debt. The statutory language focuses on proceedings "in respect of any debt", so the application of Section 96 to a particular proceeding depends on the nature and connection of that proceeding with the debt.

Interim Moratorium and Personal Guarantors

In the personal guarantor framework, courts and tribunals have applied Section 96 from the filing date of the insolvency application in relation to debts of the personal guarantor. The scope of the protection must be determined from Section 96 and the nature of the particular proceeding; it should not be treated as identical to the corporate moratorium under Section 14.

Applications Relating to a Firm

Under Section 96(2), where the application concerns a firm, the interim moratorium operates against all partners of the firm as on the application date.

Transactions Excluded by Notification

Section 96(3) authorises the Central Government, in consultation with a financial sector regulator, to notify transactions to which the protection under Section 96(1) will not apply. Any current notification relevant to a particular transaction should therefore be checked before relying on the interim moratorium.

How Long Does the Interim Moratorium Continue?

Section 96(1)(a) states that the interim moratorium ceases to have effect on the date of admission of the application. The Code then governs the consequences of admission, including the moratorium provisions applicable to the insolvency resolution process.

Meaning of Important Terms

Debt: Section 3 defines debt as a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt.

Creditor: Section 3 defines creditor as a person to whom a debt is owed and includes financial creditors, operational creditors, secured creditors, unsecured creditors and decree-holders.

Interim moratorium: For Section 96, it is the statutory protection commencing upon filing of a Section 94 or Section 95 application and operating in relation to debts in the manner specified in Section 96.

Personal guarantor: Section 5 defines a personal guarantor as an individual who is the surety in a contract of guarantee to a corporate debtor.

Related Provisions

For a particular proceeding, check the official Code, commencement notifications, applicable rules, IBBI regulations and current judicial decisions concerning the scope of Section 96.