Part III of the Insolvency and Bankruptcy Code, 2016(Code) introduces the concept of the interim moratorium, offering protection to individuals and partnership firms during the insolvency resolution and bankruptcy process. This article aims to delve into the provisions of Section 96 of the Code and analyze the extent of protection granted to individuals during the interim moratorium period.
What actually is an interim moratorium under section 96?
The moratorium provided to corporate debtors under Part II of the Code serves to attract potential acquirers who can revive the struggling company. In contrast, the moratorium granted to individuals under Part III aims to facilitate the repayment or resolution of debt.
(a) Willful defaulter proceedings According to the “Master Circular on Willful Defaulters” published by the Reserve Bank of India in 2015, a borrower is considered a ‘willful defaulter’ if certain listed conditions are met. This includes instances where a borrower fails to meet payment obligations despite having the means to repay the loan or diverts funds for unauthorized purposes. In the case of Adarsh Jhunjhunwala v. State Bank of India & Anr., the Calcutta High Court noted that allowing the interim moratorium under the Code to stall willful defaulter proceedings would undermine the purpose of the law. The court emphasized that it is essential to prevent further fraudulent activities and protect public funds by ensuring that information regarding willful defaulters is widely disseminated.
(b) Quasi-criminal proceedings under the Negotiable Instruments Act of the Supreme Court, in the case of P. Mohanraj and Ors. v. Shah Brothers Ispat Private Limited, clarified that Section 96 of the Code encompasses a broader interpretation of legal action “in respect of any debt.” This includes proceedings under Section 138 of the Negotiable Instruments Act, which deals with dishonored cheques. Consequently, creditors are prohibited from initiating any legal action that directly or indirectly pertains to the recovery of debt during the interim moratorium. Therefore, a creditor cannot initiate recovery proceedings under any circumstances.
Whether interim moratorium affects future liabilities?
In the Ashok Mahindru and Ors case. v. Vivek Parti, the National Company Law Appellate Tribunal (NCLAT) explained that the interim moratorium under Section 96 of the Code applies only to proceedings relating to liabilities or obligations existing at the start of the moratorium. Therefore, any proceedings concerning liabilities or obligations arising after the moratorium’s commencement cannot be stayed under Section 96. The NCLAT held that the Code does not contemplate granting a stay on proceedings under Section 19(2), Section 66, and Section 67 in the case at hand hereby avoiding misuse of the power of the Code.
In my view, the protection provided under Section 96 and Section 101 of the Code is more extensive than that offered under Section 14. Consequently, a stay under Section 96 applies to all legal proceedings concerning the debt, rather than just the debtor.
In the insolvency resolution of a personal guarantor to a corporate debtor, the interim moratorium prevents creditors from taking legal action against the personal guarantor’s assets. This safeguards the available assets from individual creditors.
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