INTRODUCTION:
The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides a structured, time-bound mechanism for resolving corporate insolvency, with Section 14 imposing a moratorium that halts legal proceedings and enforcement actions against the corporate debtor during the Corporate Insolvency Resolution Process (“CIRP”). This moratorium aims to preserve the debtor’s assets and maintain stability, enabling an effective resolution.
At the same time, banks are obligated under the Reserve Bank of India’s Master Directions on Frauds, 2016 to promptly detect and classify fraudulent accounts, triggering regulatory reporting and potential criminal proceedings. This creates a legal dilemma—whether the moratorium also bars banks from declaring an account as “fraudulent” during CIRP.
The National Company Law Tribunal (“NCLT”) has recently clarified that fraud classification is an administrative and regulatory function, not a recovery action, and therefore falls outside the scope of the moratorium. [1]This interpretation seeks to balance the debtor’s protection with the need to uphold financial system integrity.
While this stance strengthens accountability and deters misuse, it raises concerns about reputational harm and its potential to deter resolution applicants. This article examines the statutory framework, judicial reasoning, and policy implications of the NCLT’s approach, exploring how insolvency law can reconcile moratorium protections with fraud detection mandates.
IBC MORATORIUM: SCOPE , INTENT AND EVOLUTION:
The Insolvency and Bankruptcy Code, 2016 (IBC) consolidated India’s fragmented insolvency framework into a single, time-bound process. At the heart of this architecture lies the moratorium under Section 14, which automatically comes into force upon admission of a Corporate Insolvency Resolution Process (CIRP). This moratorium operates as a statutory “pause button” on creditor actions, ensuring that the corporate debtor’s assets and business remain stable while stakeholders attempt a collective resolution.
Scope
Section 14(1) bars:
1. Institution or continuation of suits or proceedings before any court, tribunal, or authority;
2. Actions to foreclose, recover, or enforce any security interest;
3. Recovery of property from the possession of the corporate debtor; and
4. Disconnection of essential supplies.
The Supreme Court in Innoventive Industries Ltd. v. ICICI Bank (2017) [2]clarified that the moratorium is wide in scope and binding on all, including governmental authorities. In P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021)[3], it was held that even criminal complaints under Section 138 of the Negotiable Instruments Act are covered, as they are in the nature of debt recovery proceedings.
Intent
The moratorium serves three intertwined objectives:
- Asset Preservation – Preventing depletion or dissipation of the debtor’s estate (Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC, 2022).[4]
- Resolution Environment – Providing breathing space for the resolution professional to run the debtor as a going concern.
- Creditor Equality – Avoiding a “first-past-the-post” scramble, ensuring proportional treatment of claims.
However, courts have consistently held that the moratorium is not meant to confer absolute immunity from all legal or regulatory actions. In Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. (2017)[5], the Delhi High Court observed that administrative or regulatory measures in public interest may continue, provided they do not amount to debt enforcement.
Evolution & Fraud Classification Principle
Over time, jurisprudence has refined the boundaries of Section 14. In Directorate of Enforcement v. Manoj Kumar Agarwal (2022)[6], the Supreme Court held that criminal investigations under the Prevention of Money Laundering Act could proceed, reinforcing that the moratorium does not stifle statutory enforcement unrelated to debt recovery.
Similarly, tribunals have distinguished between coercive recovery actions (barred) and administrative classifications or statutory reporting obligations (permissible). For instance, where banks undertake fraud classification under the RBI’s Master Directions on Frauds, such action is regulatory in nature—it neither enforces security interest nor recovers debt. This principle aligns with the Supreme Court’s observation in K. Kishan v. Vijay Nirman Company Pvt. Ltd. (2018)[7] that the IBC must be harmonised with other statutory frameworks to avoid conflict.
Allowing fraud classification during CIRP protects the financial system’s integrity, deters willful misconduct, and ensures early initiation of investigative processes. Importantly, it preserves the moratorium’s purpose while recognising that insolvency protection cannot become a safe harbour for fraudulent activity.
BANKS’ FRAUD CLASSIFICATION: THE REGULATORY LANDSCAPE:
The classification of fraud by banks in India is governed by the Reserve Bank of India’s (RBI) Master Directions on Frauds – Classification and Reporting by Commercial Banks and Select FIs, issued under the Banking Regulation Act, 1949. These guidelines impose a mandatory obligation on banks to identify, classify, and report fraudulent accounts promptly. The process typically begins with a forensic audit, followed by formal fraud tagging, and reporting to the RBI as well as Statutory authorities like the Central Bureau of Investigation (CBI) or the Enforcement Directorate (ED) are responsible for investigations, based on the type and seriousness of the offence. [8]This responsibility operates separately and is not affected by insolvency proceedings conducted under the Insolvency and Bankruptcy Code, 2016 (IBC). While Section 14 of the IBC imposes a moratorium on suits, enforcement, and recovery actions against the corporate debtor during the Corporate Insolvency Resolution Process (CIRP), courts have clarified that regulatory actions—such as fraud classification—do not fall within its prohibitive ambit.
In State Bank of India v. Metenere Ltd. (NCLT New Delhi, 2020)[9], the tribunal held that compliance with RBI directions is an administrative function and cannot be stalled by the moratorium. Similarly, in RBI v. Dewan Housing Finance Corporation Ltd.[10], the judiciary recognized that statutory oversight and regulatory mandates operate alongside CIRP so long as they do not result in asset seizure or recovery.
Further, Section 66(2) of the IBC empowers resolution professionals to investigate and act against fraudulent trading during CIRP, reflecting a shared legislative intent to prevent misconduct. Thus, the regulatory framework strikes a balance—ensuring the IBC protects legitimate insolvency resolution while enabling banks to fulfill their duty of vigilance, maintain financial discipline, and safeguard public funds.
THE ROLTA INDIA RULING : A DETAILED EXAMINATION
The Rolta India [11]decision by the NCLT Mumbai Bench in July 2025 represents an important development in the evolution of insolvency law in India, particularly in balancing the moratorium provisions of the Insolvency and Bankruptcy Code (IBC) with the banks’ regulatory duties as per Reserve Bank of India (RBI) guidelines. This case originated from when Rolta India, facing admitted debts exceeding ₹14,000 crore, entered the Corporate Insolvency Resolution Process (CIRP). During this period, Bank of India, acting under the RBI’s Master Directions on Frauds – Classification and Reporting by Commercial Banks and Select FIs, 2016, classified its ₹616 crore exposure to Rolta as “fraudulent” after internal risk assessment and forensic audit. The Resolution Professional (RP) challenged this action, contending that categorizing it in such a way violated the comprehensive moratorium under Section 14 of the IBC, which prohibits starting or continuing any proceedings against the corporate debtor during the CIRP.
The NCLT dismissed this contention, drawing a clear line between judicial or coercive proceedings and administrative or regulatory actions. It held that fraud classification is not an attempt to recover debts, seize assets, or otherwise disturb the debtor’s estate; rather, it is an obligation arising from statutory and regulatory compliance. The Tribunal observed that the RBI’s directions function in a separate regulatory space from the IBC, and the moratorium cannot be stretched to shield a corporate debtor from being identified as having engaged in fraudulent conduct. This approach prevents the misuse of CIRP as a protective cover for wrongdoing and preserves the integrity of the financial system.[12]
In its reasoning, the NCLT underscored that both the IBC and RBI guidelines serve complementary public purposes. While Section 14 safeguards the debtor’s assets to enable an orderly and time-bound resolution, the RBI framework aims to detect and deter banking fraud to protect public funds and institutional stability. This harmony is further reflected in Section 66(2) of the IBC, which empowers RPs to take action against fraudulent trading during CIRP. By allowing banks to proceed with fraud classification, the Tribunal reaffirmed that insolvency law is not designed to insulate bad actors from regulatory or criminal scrutiny.
The decision carries important implications for stakeholders. Resolution applicants will need to incorporate potential fraud findings into their due diligence, factoring in the reputational, legal, and operational risks such classifications entail. Promoters and directors face heightened exposure, as CIRP will no longer serve as a procedural shield against regulatory determinations of fraud. For the banking sector, the ruling is a strong affirmation that statutory duties under RBI guidelines can be discharged without fear of breaching the IBC’s moratorium.
Ultimately, the Rolta India judgment reinforces the principle that the IBC’s protective mechanisms must coexist with, rather than override, the country’s financial regulatory framework. It strikes a necessary balance between facilitating resolution and maintaining accountability, ensuring that insolvency processes do not inadvertently erode public trust by allowing fraud to go unchecked. This nuanced interpretation strengthens both the insolvency ecosystem and the regulatory apparatus, aligning with the broader policy objective of fostering responsible corporate conduct while enabling timely resolution of distressed assets.
IMPLICATION FOR STAKEHOLDERS:
The NCLT’s decision in the Rolta India matter, allowing banks to classify a corporate debtor’s account as fraudulent during the Corporate Insolvency Resolution Process (CIRP), has reshaped the operational and strategic considerations for all parties involved in insolvency. This ruling affirms that such classification, undertaken in line with the The Reserve Bank of India’s (RBI) Master Directions on fraud reporting represent a regulatory and administrative function that is separate from debt recovery, and thus do not violate the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC). This clarification allows banks and financial institutions to fulfill their legal responsibilities without waiting for insolvency proceedings to conclude, thereby enhancing the financial system’s integrity. For corporate debtors and their promoters, the ruling removes any notion of protection under the moratorium when there is suspected misconduct. Labeling an account as fraudulent has serious reputational impacts, can discourage business relationships, and may lead to simultaneous criminal or regulatory investigations. This, in turn, adds complexity to revival efforts under CIRP, as it influences both public perception and the willingness of stakeholders to engage with the distressed entity.
Resolution Professionals (RPs) are also directly affected, as they must now incorporate potential fraud classifications into their management of the insolvency process. The presence of such a classification can alter asset valuations, influence bidder interest, and necessitate further investigations or applications under Section 66 of the IBC for fraudulent or wrongful trading. RPs must balance transparency in their Information Memorandums with strategies to preserve the viability of resolution.
Prospective resolution applicants face heightened due diligence requirements in this environment. The stigma of a fraud label, coupled with potential legal and compliance risks, can depress valuations and lead bidders to seek additional contractual safeguards before committing to a plan. This can narrow the pool of interested applicants and affect the competitiveness of bids, influencing the overall outcome of the resolution.
At a systemic level, the Rolta India ruling reinforces the principle that insolvency mechanisms cannot be exploited to shield misconduct. It harmonizes the objectives of the IBC—focused on revival and value maximization—with the RBI’s mandate to ensure probity in the banking sector. This convergence of regulatory oversight and insolvency proceedings not only preserves creditor confidence but also upholds public trust in the robustness of India’s financial and legal framework.
BALANCING ACCOUNTABILITY AND PUBLIC INTEREST:
The issue of classifying borrower accounts as fraudulent during the Corporate Insolvency Resolution Process (CIRP) highlights the need to strike a careful balance between accountability and public interest. The Insolvency and Bankruptcy Code (IBC) provides for a moratorium under Section 14, designed to protect the debtor’s assets and ensure an orderly resolution process free from disruptive recovery measures. This safeguard aims to maximize asset value, protect all stakeholders, and facilitate effective debt restructuring.
However, accountability—particularly in cases involving fraud or financial misconduct—cannot be compromised for the sake of expediency. Regulatory authorities such as the Reserve Bank of India (RBI) require banks to promptly detect and classify fraud to protect depositors, maintain financial stability, and uphold the credibility of the banking system. The Rolta India ruling by the National Company Law Tribunal (NCLT) affirmed that such classification is a regulatory and administrative duty, not an act of debt recovery, and therefore lies outside the moratorium’s scope.
By allowing fraud classification during CIRP, the ruling prevents corporate debtors from using insolvency protection as a shield against scrutiny or delaying regulatory action. It also aligns with provisions like Section 66(2) of the IBC, which empowers resolution professionals to address fraudulent trading or wrongful conduct.
From a public interest standpoint, timely fraud reporting helps safeguard institutional funds, deter misuse of the insolvency framework, and maintain trust in financial markets. This approach ensures that while companies under distress receive breathing space to reorganize, they remain accountable for past misconduct.
Ultimately, the decision harmonizes the twin goals of the IBC—preserving commercial viability and ensuring integrity—by reinforcing that insolvency protection is not immunity from regulatory oversight. This balanced approach strengthens transparency, discipline, and trust in India’s insolvency ecosystem.
TOWARDS A PRINCIPLED FUTURE: RECOMMENDATIONS :
The evolving jurisprudence under the Insolvency and Bankruptcy Code (IBC), exemplified by the Rolta India ruling, highlights the importance of a principled framework that safeguards both efficient insolvency resolution and robust regulatory oversight. While Section 14 of the IBC provides a moratorium to protect the debtor’s assets during the Corporate Insolvency Resolution Process (CIRP), recent rulings have clarified that this protection does not extend to shielding fraudulent activities from regulatory scrutiny.
To strengthen this balance, procedural safeguards must be put in place for fraud classification during CIRP. Regulators and insolvency authorities should establish protocols that include prior consultation with the Resolution Professional (RP) to ensure such classifications do not hinder resolution activities. Enhancing the statutory role of RPs under Sections 25 and 66 of the IBC can further integrate fraud detection into the resolution process, enabling coordinated action with banks and investigative agencies.
At the same time, the timing and manner of fraud classification should be carefully managed to protect resolution value. While transparency is vital, premature public disclosure of a fraud designation could deter potential bidders and reduce enterprise value, unless disclosure is necessary for public interest. Banks should also invest in specialized teams for insolvency-related fraud detection to fulfill their obligations under RBI’s Master Directions efficiently and fairly.
CONCLUSION:
The Rolta India ruling makes it clear that the moratorium is not an all-encompassing immunity but a targeted measure to halt debt recovery actions while permitting statutory and regulatory functions essential to safeguarding the financial system. This reinforces accountability, deters misuse of the insolvency framework, and preserves both economic value and market discipline.
Ultimately, fostering cooperation between insolvency professionals, creditors, regulators, and the judiciary will ensure that insolvency protection coexists with vigilant anti-fraud measures, building a transparent, trustworthy, and resilient insolvency ecosystem.
Notes:
[1] https://supremetoday.ai/doc/news/nclt-rules-ibc-moratorium-no-shield-against-bank-fraud-classification-20250716174622
[2]Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407
[3] P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258 (India).
[4] Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, 2022 SCC OnLine SC 1101 (India).
[5] Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd., 2017 SCC OnLine Del 12189 (India).
[6] Directorate of Enforcement v. Manoj Kumar Agarwal, 2022 SCC OnLine NCLAT 10 (India).
[7] K. Kishan v. Vijay Nirman Company Pvt. Ltd., 2018 SCC OnLine SC 1241 (India).
[8] https://economictimes.com/news/economy/policy/banks-can-flag-fraud-despite-ibc-shield-nclt/articleshow/122457209.cms
[9] State Bank of India v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, NCLAT New Delhi (May 22, 2020), 2020 SCC OnLine SC 837 (India).
[10] Reserve Bank of India v. Dewan Housing Finance Corporation Ltd., C.P. (IB)-4258/MB/2019, NCLT Mumbai Bench (Dec. 3, 2019).
[11] Rolta India Ltd., C.P. (IB) No. 530/MB/2020, NCLT Mumbai Bench (July 8, 2025).
[12] https://ibclaw.in/a-bank-can-classify-a-corporate-debtors-account-under-fraud-even-during-the-moratorium-period-under-section-14-of-the-ibc/
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