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Do’s & Don’ts for IPs During Moratorium under IBC

IBC .

Moratorium under Insolvency and Bankruptcy Code (IBC), 2016

The moratorium is a key feature of IBC, ensuring the Corporate Debtor’s assets remain protected during CIRP, thereby maximizing resolution opportunities. It balances creditors’ rights with the debtor’s need for restructuring, preventing disruptive enforcement actions. The moratorium is a temporary suspension of legal proceedings and enforcement actions against the Corporate Debtor during the Corporate Insolvency Resolution Process (CIRP).

Legal Basis for Moratorium

  • Section 14 of IBC, 2016 – Moratorium on judicial proceedings, enforcement actions, and asset transfers. Section 14 of the IBC, 2016 mandates that upon admission of a CIRP application by the National Company Law Tribunal (NCLT), a moratorium is automatically imposed.
  • Duties of an Insolvency Professional under IBC ensuring control of assets and operations, enforcing the moratorium, and managing the corporate debtor as a going concern.
  • Duration of Moratorium
    • Commencement: From the date of admission of CIRP by the NCLT.
    • Termination: On the approval of a resolution plan or liquidation order by NCLT.
  • Purpose of Moratorium
  • Protection of Corporate Debtor’s Assets: Prevents creditors from initiating enforcement actions that could disrupt resolution efforts.
  • Facilitation of Resolution: Allows the Resolution Professional (RP) to formulate a resolution plan without external pressures.
  • Avoidance of Multiple Proceedings: Ensures a single forum (NCLT) handles all matters related to the corporate debtor.

Scope of Moratorium

Prohibited Actions (During Moratorium)

  • No institution or continuation of suits or legal proceedings against the Corporate Debtor.
  • No enforcement of security interests under the SARFAESI Act or otherwise.
  • No recovery or alienation of assets by any creditor.
  • No termination of essential contracts that are necessary for business continuity.

Permitted Actions (During Moratorium)

  • Continuation of pending proceedings before the Supreme Court and High Courts under Article 226 & 227 of the Constitution.
  • Criminal proceedings (e.g., fraud or misappropriation cases) are not affected.
  • Proceedings under tax laws such as GST, Income Tax, and regulatory compliance matters can continue.

Exceptions to Moratorium (Judicial Precedents & Amendments)

  • Personal Guarantors – The Supreme Court ruled that proceedings against personal guarantors of the Corporate Debtor are not covered under moratorium.
  • Criminal Proceedings – Cases involving fraud, misrepresentation, or violations of law do not get suspended.
  • Writ Petitions – The moratorium does not apply to writ petitions under Article 226 & 227 before the High Court.
  • Public Utility Services – Essential services (water, electricity, telecommunications) cannot be terminated but may require continued payments.

Do’s and Don’ts for Insolvency Professionals (IPs) During Moratorium

As per Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016, once the Corporate Insolvency Resolution Process (CIRP) is admitted by the National Company Law Tribunal (NCLT), the moratorium period is enforced. Insolvency Professionals (IPs) play a critical role in ensuring compliance with the moratorium provisions.

Do’s (Obligations of Insolvency Professionals)

✔️ Take Immediate Custody and Control : Ensure prompt control over assets and financial records of the Corporate Debtor (CD). Delays in taking control can lead to unauthorized payments toward pre-CIRP costs, violating the moratorium provisions.

✔️ Enforce Moratorium from Date of Admission : The moratorium applies from the date of the admission order by NCLT, not from the date the IP receives the order. IP must act swiftly to inform stakeholders and creditors about the moratorium to prevent unauthorized transactions.

✔️ Engage with Suspended Board & KMPs : IPs must ensure full cooperation from the suspended Board of Directors and Key Managerial Personnel (KMPs) to continue operations and manage finances. Ensure proper handover of books, records, and management control.

✔️ Ensure the Going Concern Status of the Corporate Debtor : Continue essential operations without disruption. Prevent actions that may result in deterioration of the Corporate Debtor’s value.

✔️ Monitor Transactions to Avoid Prejudicial Payments : Ensure no payments are made towards pre-CIRP liabilities unless explicitly permitted. Prevent any diversion of funds or unauthorized transactions.

❌ Don’ts (Actions to Avoid)

  • Do Not Delay in Assuming Control : Any delay in taking control increases the risk of unauthorized transactions, payments, or asset depletion by the suspended Board of Directors.
  • IP Do Not Allow Any Legal or Recovery Proceedings Against the Corporate Debtor : Once the moratorium is in effect, no judicial proceedings, enforcement actions, or asset transfers can be undertaken against the Corporate Debtor.
  • Do Not Ignore Non-Cooperation by the Suspended Board or KMPs : If the suspended management refuses to cooperate, immediately report the matter to NCLT and seek appropriate directions.
  • IP Do Not Approve Payments in Violation of the Moratorium: Payments to creditors for pre-CIRP debts or settlements made during the moratorium are strictly prohibited unless permitted by law.
  • Do Not Terminate Essential Services : Services critical for business continuity, such as electricity, water, and telecom, cannot be discontinued.

Conclusion

The moratorium period serves as a protective shield for the corporate debtor during CIRP. Insolvency professionals must strictly comply with the IBC framework, swiftly assume control, and prevent any transactions that could undermine the resolution process.

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