No Automatic Stay for Personal Guarantors Under After Section 96 Amendment

Background and Legislative Context

Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) provides for an interim moratorium upon the filing of an application for initiation of insolvency resolution or bankruptcy process against individuals and partnership firms under Sections 94 or 95. This moratorium operates automatically from the date of filing and stays all legal actions and proceedings in respect of any debt until the application is either admitted or rejected.

At present, the provisions relating to personal insolvency under the Code are operational primarily in respect of personal guarantors to corporate debtors. Under this framework, such personal guarantors could invoke the interim moratorium upon filing an application, thereby pausing recovery actions and legal proceedings, which often led to delays in enforcement.

 Potential for Abuse and Regulatory Concern

In September 2022, the Ministry of Corporate Affairs (MCA) issued a public consultation paper proposing reforms to the IBC framework. Paragraph 22.2 of the consultation paper specifically suggested that “Section 96 may be made inapplicable to personal guarantors.”

This proposal stemmed from a growing concern that personal guarantors were misusing the interim moratorium by filing insolvency applications strategically to obtain an automatic stay on recovery proceedings, without any genuine intent to pursue resolution.

 Judicial Recognition of Misuse

The issue was also examined by the Bank of Baroda v. Union of India, where the Bombay High Court observed a recurring pattern:

• Personal guarantors were filing applications under Section 94 to trigger the interim moratorium.
• Thereafter, they failed to diligently pursue the application, such as by not curing defects or not taking steps for admission.
• This resulted in prolonged or indefinite moratoriums, effectively stalling creditor actions.

 Position Prior to the 2026 Amendment

As of July 2025, no statutory amendment had been enacted, and the interim moratorium under Section 96 continued to apply automatically upon filing of applications by personal guarantors. This allowed scope for continued procedural delays despite judicial intervention.

 Amendment under the IBC (Amendment) Act, 2026

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 addresses this issue by introducing a critical clarification to Section 96. A new sub-section (4) has been inserted, which excludes personal guarantors to corporate debtors from the benefit of interim moratorium.

The amendment removes the applicability of the interim moratorium in cases involving personal guarantors to corporate debtors (CDs). In effect, where an application is filed to initiate insolvency resolution or bankruptcy proceedings against a personal guarantor, the interim moratorium under Section 96 shall not come into force.

This change is particularly important because, at present, the provisions relating to personal insolvency under the Code are operational primarily in respect of personal guarantors to corporate debtors. Under the earlier framework, such personal guarantors could invoke the interim moratorium upon filing an application, thereby pausing recovery actions and legal proceedings, which often led to delays in enforcement.

By excluding personal guarantors from the scope of Section 96, the amendment ensures that:

• creditor enforcement actions are not automatically stayed, and
• the insolvency process involving personal guarantors proceeds without unintended procedural delays.

 Key Features of the Amendment

• The interim moratorium shall not apply where an application is filed to initiate insolvency resolution or bankruptcy proceedings against a personal guarantor to a corporate debtor.
• This effectively means that no automatic stay on legal proceedings or recovery actions will be available merely upon filing such applications by personal guarantors.
• The amendment directly addresses the earlier misuse, ensuring that insolvency filings are not used as a tactical tool to delay enforcement.

 Continued Applicability for Other Individuals

Importantly, the amendment does not alter the position for other individuals and partnership firms:

• Where applications are filed under Sections 94 or 95 (other than for personal guarantors), the interim moratorium continues to apply automatically from the date of filing.
• During this period:
  • Creditors are barred from initiating fresh legal proceedings
  • Pending proceedings in respect of any debt remain stayed
    until the application is admitted or rejected by the Adjudicating Authority.

 Impact and Significance

This amendment brings much-needed clarity and balance to the insolvency framework by:

• Preventing abuse of the interim moratorium mechanism
• Ensuring uninterrupted creditor enforcement against personal guarantors
• Promoting timely and efficient resolution processes
• Aligning the law with judicial observations and practical realities

At the same time, it preserves the protective framework of interim moratorium for genuine individual and partnership insolvency cases.

 Practical Illustration – Misuse by Personal Guarantor and Position After Amendment

Facts of the Case

• ABC Ltd. (Corporate Debtor) defaults on a loan of ₹50 crore taken from a bank.
• Mr. X is the personal guarantor (PG) to the said loan.
• The bank initiates recovery proceedings against Mr. X under applicable laws (e.g., SARFAESI / DRT proceedings).

 Position Before Amendment (Misuse of Section 96)

1. To stall recovery, Mr. X files an application under Section 94 of the IBC for initiating his personal insolvency process.

2. Immediate Effect:

• As soon as the application is filed, Section 96 interim moratorium automatically comes into force.
• All proceedings against Mr. X are stayed, including:
  • Recovery actions by the bank
  • Enforcement of personal guarantee
  • Ongoing legal proceedings

3. Strategic Delay Tactics:

• Mr. X does not actively pursue the application.
• He delays:
  • Removal of defects
  • Submission of documents
  • Appearance before the Adjudicating Authority
• Result:
  • The interim moratorium continues for a prolonged period.
  • The bank is unable to proceed against the guarantor, despite clear default.
  • The insolvency process becomes a tool for delay rather than resolution.

 Position After Amendment (IBC Amendment Act, 2026)

1. Mr. X again files an application under Section 94.

2. Effect of Amendment to Section 96:

• Since Mr. X is a personal guarantor to a corporate debtor,
  No interim moratorium will apply.

3. Consequences:

The bank can continue recovery proceedings without interruption, including:

• Enforcement of guarantee
• DRT / SARFAESI actions
• Attachment and sale of assets

3. Legal Position:

• Filing of insolvency application does not provide automatic protection.
• Any relief, if at all, will depend on admission and further orders, not mere filing.

 Position After Amendment (IBC Amendment Act, 2026)

1. Mr. X again files an application under Section 94.

2. Effect of Amendment to Section 96:

• Since Mr. X is a personal guarantor to a corporate debtor,
  No interim moratorium will apply.

3. Consequences:

• The bank can continue recovery proceedings without interruption, including:
  • Enforcement of guarantee
  • DRT / SARFAESI actions
  • Attachment and sale of assets

4. Legal Position:

• Filing of insolvency application does not provide automatic protection.
• Any relief, if at all, will depend on admission and further orders, not mere filing.

Conclusion: The exclusion of personal guarantors from the scope of Section 96 marks a targeted and pragmatic reform under the IBC. By eliminating the automatic stay in such cases, the legislature has reinforced the principle that insolvency proceedings should not be used as a shield for delay, but as a mechanism for bona fide resolution and recovery.

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