The Section 14 Moratorium: What Stops, What Continues and Who Remains Exposed

The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 is the first and most immediate effect of the admission of an insolvency application. It stops the creditors' separate efforts and holds the company's assets together while a resolution is attempted. For a creditor, the moratorium decides which proceedings stop, which continue and who remains exposed. This note describes its scope. It is general information, not advice on a particular matter.

When it begins and ends

The moratorium is declared by the Adjudicating Authority on the date it admits the application, and it continues until the completion of the corporate insolvency resolution process. If the committee of creditors approves a resolution plan, the moratorium ends on the date the tribunal approves it. If the tribunal orders the liquidation of the company, the moratorium ends on the date of that order, and Section 33(5) then restricts suits against the company in liquidation, except with the liquidator's leave in cases the Code allows.

What it prohibits

Section 14(1) prohibits, in respect of the corporate debtor:

• the institution of suits or the continuation of pending suits or proceedings, including the execution of any judgment, decree or order of any court, tribunal or arbitration panel;
• the transferring, encumbering, alienating or disposing of any of its assets or legal rights or beneficial interest in them;
• any action to foreclose, recover or enforce any security interest, including under the Securitisation Act; and
• the recovery of any property occupied by or in the possession of the corporate debtor by an owner or lessor.

What it preserves

• Essential supplies. Section 14(2) provides that the supply of essential goods or services to the corporate debtor, as may be specified, shall not be terminated or suspended during the moratorium. Section 14(2A) protects critical goods and services where the resolution professional considers that this is necessary to keep the company a going concern, subject to the debtor paying for the supplies during the period.
• Specified transactions. Section 14(3)(a) excludes transactions notified by the Central Government in consultation with a financial sector regulator.
• Guarantees. Section 14(3)(b) provides that the moratorium does not apply to a surety in a contract of guarantee to the corporate debtor. A creditor may therefore pursue a guarantor of the company while the company is in the process. The Supreme Court upheld this reading in State Bank of India v. V. Ramakrishnan (2018).

Criminal proceedings and cheque cases

The moratorium concerns proceedings in the nature of recovery. It does not stop all criminal proceedings. A complaint under Section 138 of the Negotiable Instruments Act, 1881 is a different matter: in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) the Supreme Court held that proceedings against the corporate debtor are covered by the moratorium, but that the directors and other persons who are liable under Section 141 may still be prosecuted. A holder of a dishonoured cheque should therefore consider whether the complaint can continue against the individuals.

Claims against the company

A creditor stopped by the moratorium is not left without remedy. The proper course is to submit a claim in the prescribed form to the interim resolution professional, with proof, within the time stated in the public announcement. A claim that is not made on time can still be accepted until the resolution plan is approved, though a late claim may fare badly under the plan. Secured creditors who hold security may submit their claims as secured, and they keep the right to realise the security if liquidation follows, subject to Section 52.

Practical steps on admission

1. Stop any pending recovery steps against the company, including execution, and note their status.
2. Collect the proof of the claim and file it with the professional promptly.
3. Consider whether there is a guarantor or other third party who can still be pursued.
4. If the creditor is a financial creditor, assess whether it will sit on the committee and who will represent it.

The moratorium is broad but defined. Knowing what it does not cover is as valuable to a creditor as knowing what it does.