Moratorium

Introduction

Moratorium is a pause or suspension of specified legal or contractual processes for a limited period. In India the term attained particular legal salience with the enactment and operation of the Insolvency and Bankruptcy Code, 2016 (IBC) and, more recently, through regulatory relief measures such as the Reserve Bank of India’s (RBI) COVID-era loan moratoria. For practitioners, “moratorium” is not a mere hiatus: it is a high-impact instrument that alters priority, enforcement rights, asset access, and strategic options for creditors, debtors, guarantors and stakeholders. This article explains the statutory anatomy of moratoriums in India, their everyday operation in courts and tribunals, key judicial pronouncements, and practical strategies for lawyers handling disputes where a moratorium operates or is sought.

Core Legal Framework

Primary statutory source
– Insolvency and Bankruptcy Code, 2016 — Section 14 (Moratorium)
– Key text (Section 14(1)): “Subject to the provisions of this Act, on the insolvency commencement date, the Adjudicating Authority shall by order declare a moratorium for prohibiting — (a) the institution of suits or continuation of pending suits, or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of any of the assets…; (c) any action to foreclose, recover or enforce any security interest…; and (d) recovery of any property by owner or lessor…”
– Exception (Section 14(2)): suppliers of essential goods/services shall not be terminated/suspended during the moratorium on account of non-payment of dues arising on or after the insolvency commencement date (subject to conditions specified).
– Effectively, the moratorium is automatic upon the insolvency commencement date and lasts until the earlier of: approval of a resolution plan, order of liquidation or withdrawal of the application.

Other statutes and regulatory sources of moratoria
– Reserve Bank of India (RBI) circulars (regulatory moratoria)
– Example: RBI’s March–May 2020 and later extensions of EMIs/term-loan repayment moratoriums during the COVID-19 pandemic; regulatory forbearance on classification/watching of assets. (These are regulatory reliefs, not statutory moratoria on enforcement in the manner Section 14 IBC creates.)
– SARFAESI Act, 2002 and moratorium under IBC
– Section 14 operates to suspend enforcement under SARFAESI during the moratorium; lenders must approach the Adjudicating Authority (NCLT) for permissions or relief to enforce.
– Civil and criminal process
– The moratorium under Section 14 is directed at civil recovery/enforcement and proceedings in respect of the corporate debtor’s assets; it does not by its terms extinguish offences or criminal proceedings unrelated to recovery (see Practical Application below for nuances).

Practical Application and Nuances

How the moratorium works in day-to-day litigation and insolvency practice
1. Automatic bar on enforcement and suits
– Once the insolvency commencement date is triggered (typically upon admission of a Section 7/9/10 petition), an NCLT order declares the moratorium. From that moment creditors’ actions to accelerate, attach, auction, or enforce security against the corporate debtor’s assets are stayed. Example: a secured creditor cannot proceed with a SARFAESI sale of collateral unless the NCLT lifts the moratorium or grants express permission.
2. Preservation of assets and status quo
– The moratorium preserves the pool of assets for collective resolution. The Resolution Professional (RP) takes control of the corporate debtor’s property; third parties must not interfere with the RP’s custody/management.
3. Exceptions and “essential supplies”
– Operational suppliers providing indispensible goods/services (power, water, IT hosting, maintenance, critical raw materials) may not be able to cut supplies on account of pre-insolvency non-payment that falls within the moratorium period, subject to conditions. Practical tip: suppliers must document that supplies are “essential” and secure orders from the RP/NCLT when necessary.
4. Secured creditors’ routes forward
– Secured creditors should not presume impotence. They can:
– File an application under Section 60(5) read with Section 14 seeking relief from the moratorium on specific grounds (e.g., to protect their security from imminent dissipation).
– Seek interim directions from the NCLT for appointment of valuers, take possession if permitted, or an order allowing SARFAESI action in narrowly-defined circumstances.
– Practical example: a bank with perishable stock as security can seek immediate relief to sell/realise value, arguing irreparable diminution.
5. Effect on guarantors and personal proceedings
– The Section 14 moratorium applies to the corporate debtor, not its personal guarantors. Creditors routinely proceed against personal guarantors, and criminal complaints for fraud (if made) can proceed. Practically, creditors often intensify recovery actions against guarantors during CIRP.
6. Criminal proceedings and prosecution
– Moratorium does not automatically stay prosecutions or non-recovery criminal proceedings (e.g., complaint for fraud, criminal conspiracy) unless such proceedings amount to recovery actions or evasion of the moratorium’s purpose. Practitioners should evaluate whether a criminal case is a camouflaged recovery attempt; courts have allowed FIRs and prosecutions to proceed when they are independent of mere debt recovery.
7. Interest, dues and extinction
– Debts continue to exist during moratorium; interest accrues as per contract/statute unless the resolution plan provides otherwise. The moratorium does not write-off or alter underlying liabilities without a resolution plan’s treatment.
8. Interaction with RBI/regulatory moratoria
– RBI moratoria (COVID-era) were regulatory forbearances that changed lenders’ prudential classification obligations; they did not create a cross-sector judicial moratorium like Section 14. Lawyers must distinguish remedies available under regulatory forbearance (e.g., no asset downgrade) from the statutory protections of IBC moratorium.

Evidence and procedural approach when arguing moratorium issues
– To obtain or resist lifting of the moratorium, adduce:
– Clear proof of imminent asset dissipation or fraudulent transfer (bank statements, ledger, transfer documents, witness affidavits).
– Valuation reports demonstrating perishable or rapidly declining security value.
– Contractual documents and timelines showing bona fide disputes (see Mobilox principle below) if resisting admission or seeking to avoid CIRP.
– For suppliers, documentary proof that supplies are “essential” and that non-supply will cause disproportionate prejudice.
– Framing relief:
– Draft specific, narrowly-tailored prayers (e.g., permission to realise a specified asset, preserve perishable goods, or proceed against guarantor) rather than broad requests to lift the entire moratorium.
– Seek interim protective orders and offer adequate undertakings to the NCLT (for example, custody proposals, escrow arrangements).

Landmark Judgments

• Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17
• The Supreme Court upheld the constitutionality of the IBC and affirmed that the code is a time-bound, creditor-friendly architecture designed to maximise value. Relevant for moratorium: the judgment underscored that the statutory scheme (including moratorium) has a commercial rationale and is not arbitrary. Practitioners must therefore align arguments with the commercial purpose of the IBC.
• K. Sashidhar v. Indian Overseas Bank, (2019) 9 SCC 73
• The Court clarified that the IBC regime has primacy in cases of insolvency, and that regulatory measures (such as RBI resolution frameworks) cannot override the IBC once a default actionable under the Code is established. Practical consequence: a creditor should not be thwarted from initiating CIRP in favour of a regulatory forbearance if statutory conditions under IBC are met.
• Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353
• The Supreme Court held that a party cannot create a spurious dispute as a device to frustrate the insolvency process; a plea of existence of a dispute must be plausible and bona fide. This principle is critical at the admission stage (and therefore for when moratorium comes into effect): creditors must meet the admissibility tests and corporate debtors cannot manufacture disputes to avoid moratorium consequences.

(These decisions illustrate the IBC’s objective: to preserve the asset pool for collective resolution, prevent asset-stripping, and ensure commercial certainty. Use them when advancing or opposing moratorium-related relief.)

Strategic Considerations for Practitioners

For financial creditors
– Act fast to preserve rights: upon default, compile and file a well-documented Section 7 petition if insolvency is desired; a prompt admission triggers the moratorium that protects the asset pool.
– If an asset is at risk (perishables, ongoing diversion), immediately file an interlocutory application seeking limited relief from moratorium under Section 14/60(5) — attach detailed valuations and photographs.
– Against the common error of “waiting out” moratorium: do not assume moratorium eliminates your remedy — deploy parallel actions against guarantors and third parties.

For operational creditors and suppliers
– If supplies are essential, secure the supplier’s position by (a) preserving documentary proof of essentiality and (b) applying to the RP/NCLT for directions to continue supply on safe commercial terms (e.g., cash-on-delivery, security).
– Beware unsecured creditor disadvantage — negotiate early for workable interim supply arrangements.

For corporate debtors and directors
– Use moratorium to stabilise operations and prevent opportunistic enforcement; but maintain transparent records, cooperate with the RP and avoid preferential transfers after the commencement date (which may attract actions).
– Don’t misuse moratorium to hide asset-stripping — courts are alert to sham transactions and can lift moratorium or set aside transfers.

For resolution professionals
– Immediately assume control of operations and secure critical supply lines; be ready to resist termination of essential services, and apply for directions on continued supply and maintenance of employees.
– Maintain a clear claims register, correspondence trail, and prioritise creditor meetings — the moratorium is a finite window to formulate a viable plan.

Drafting and advocacy tips
– When seeking to lift or vary the moratorium, frame the application around narrow, fact-specific imminent prejudice — supply specific asset IDs, valuations, evaporation risk, and proposed safeguards to the RP/NCLT.
– When resisting attempts to lift the moratorium, stress the collective interest, the threat of fragmentation of value, and compliance with the statutory timeline; rely on Swiss Ribbons and Mobilox to underline the IBC’s object.
– Avoid broad, speculative affidavits; courts demand precise, documentary proof, not conjecture.

Common pitfalls to avoid
– Misconception that moratorium extinguishes liability — it does not; debts continue and interest may accrue.
– Assuming moratorium bars all legal action — criminal proceedings, actions against guarantors, or exceptionally permitted relief may still proceed.
– Failure to preserve time-sensitive rights (e.g., guarantor recovery, arbitration against guarantor) — moratorium is a tool, not an answer to every problem.

Conclusion

“Moratorium” in the Indian context is predominantly a statutory instrument created by the IBC to protect the collective estate and ensure time-bound resolution. It is a potent weapon for creditors seeking to freeze assets and for corporate debtors seeking protection from piecemeal enforcement — but it is bounded by exceptions, judicial scrutiny, and the commercial object of the Code. Practically, success with moratorium-related litigation turns on speed, focussed evidence of imminent prejudice or essential supply needs, carefully drafted reliefs, and strategic use of parallel remedies (particularly against guarantors). Familiarity with Section 14’s contours, the Mobilox “no spurious dispute” test, and the IBC’s purpose as articulated in Swiss Ribbons will equip practitioners to either activate or neutralise moratoriums with precision.