Moratorium & Bankruptcy Application: Individual Insolvency

Moratorium and Bankruptcy Application under Individual Insolvency Proceedings in IBC, 2016

IBC provides a structured framework for resolving the insolvency of individuals and personal guarantors. One of the key protections available to a debtor during insolvency proceedings is the concept of a moratorium, which temporarily halts recovery actions by creditors. The Code also lays down the circumstances under which bankruptcy proceedings may be initiated if insolvency resolution efforts fail.

Moratorium under Section 101

Section 101 of the IBC deals with the moratorium that comes into effect upon admission of an insolvency application. As per Section 101(1), when an application is admitted by the Adjudicating Authority under Section 100, a moratorium commences in relation to all debts of the debtor. The moratorium remains in force until the earlier of:

• Completion of 180 days from the date of admission of the insolvency application; or
• The date on which the Adjudicating Authority passes an order on the repayment plan under Section 114.

During this period, creditors are generally restricted from initiating or continuing legal proceedings or recovery actions against the debtor in respect of the debts covered by the insolvency process.

Purpose of the Moratorium under Individual Insolvency

The moratorium serves several important objectives:

• Provides temporary relief to the debtor from recovery actions.
• Preserves the debtor’s assets during the insolvency process.
• Facilitates preparation and consideration of a repayment plan.
• Ensures equitable treatment of all creditors.

When Can Bankruptcy Proceedings Be Initiated?

The insolvency process is intended to provide an opportunity for repayment and resolution. However, where resolution fails, the Code permits initiation of bankruptcy proceedings.

Section 121 – Application for Bankruptcy

Under Section 121, a bankruptcy application may be filed within three months from the date of the relevant order passed by the Adjudicating Authority in the following situations:

• Rejection of Insolvency Application : Where the Adjudicating Authority rejects the insolvency application against the personal guarantor under Section 100(4).
• Repayment Plan Rejection : Where the repayment plan submitted during the insolvency process is rejected by the Adjudicating Authority under Section 115(2).
• Failure of Repayment Plan :Where the repayment plan has not been completely implemented, leading to failure of the insolvency resolution process as contemplated under Section 118(3).

In any of the above situations, the debtor or creditor may seek commencement of bankruptcy proceedings within the prescribed period of three months.

Interim Moratorium upon Filing of Bankruptcy Application – Section 124

Section 124 provides protection even at the stage when a bankruptcy application is filed.

Effect of Filing Bankruptcy Application

According to Section 124(1)(a), when an application is filed under Sections 122 or 123:

• An interim moratorium commences immediately from the date of filing of the bankruptcy application.
• Interim moratorium applies to all actions against the properties of the debtor in respect of his debts.
• The interim moratorium continues until the bankruptcy commencement date.

This provision ensures that creditors do not take individual enforcement actions against the debtor’s assets while the bankruptcy application is pending consideration.

Difference Between Moratorium and Interim Moratorium under Individual Insolvency

Particulars	Moratorium (Section 101)	Interim Moratorium (Section 124)
Stage	After admission of insolvency application	Upon filing of bankruptcy application
Commencement	Admission under Section 100	Filing under Sections 122 or 123
Coverage	All debts of the debtor	Actions against debtor’s properties
Duration	Up to 180 days or approval/rejection of repayment plan	Till bankruptcy commencement date

Practical case study: Individual Insolvency

Ms. Pooja Bahry (Bankruptcy Trustee of Shanta Gupta) vs. Shanta Gupta & Anr., NCLT Delhi PB – IA (IBC) Date 08.06.2026

03.04.2024       AA admitted the insolvency application filed u/s 95 against Ms Shanta Gupta – PG, Respondent No. 1

12.07.2024        Ms. Shanta Gupta – PG submitted a repayment plan dated

30.07.2024        Repayment Plan was rejected by the creditors

15.10.2024       AA rejected the repayment plan of the Respondent No.1, discharged the RP, and granted liberty to the debtor and Creditors to file an application for initiation of bankruptcy under Part III, Chapter IV of the Code.

21.10.2024 The PG—Ms. Shanta Gupta executed a registered transfer-cum-sale deed transferring the subject property in favor of respondent No. 2, Ms. Ratna Devi, for a consideration of Rs. 41,500,000/-.

13.01.2025: After the above execution of the sale deed, Bankruptcy Application bearing IA-781/2025 was filed seeking a declaration of Respondent No. 1 as bankrupt under Chapter IV of Part III of the IBC.

02.07.2025: AA commenced bankruptcy of the PG and appointed Ms. Pooja Bahry as bankruptcy trustee.

The Respondent(s) have sought to justify the transfer of the said property primarily on the grounds that (i) the moratorium under Section 101 had ceased, (ii) the property was unencumbered, and (iii) the transaction was effected through a duly registered sale deed. 

Sections 164 and 165 expressly confer jurisdiction upon the Adjudicating Authority to cancel undervalued and preferential transfers of properties that would have otherwise vested with the bankruptcy trustee. The adjudicating authority is empowered to declare such transactions as void and pass consequential orders restoring the position to what it would have been had the impugned transaction not occurred. Thus, the power to restore the estate is not merely incidental but forms an integral part of the statutory scheme.

A conjoint reading of the above sections along with Sections 150, 154, and 155 of the Code demonstrates the legislative intent to preserve the estate of the bankrupt for the benefit of creditors and to vest the same in the bankruptcy trustee. Section 158 further recognizes that certain dispositions of property undertaken during the statutorily prohibited period are liable to be declared void.

When these sections are read together with the overriding effect accorded to the Code under Section 238, it becomes abundantly clear that this adjudicating authority is fully empowered to scrutinize transactions affecting the bankruptcy estate and, where the facts so warrant, declare such transactions void and grant such relief as may be necessary.

Conclusion

The IBC framework for individuals and personal guarantors carefully balances the interests of debtors and creditors. Section 101 grants a moratorium after admission of insolvency proceedings, allowing the debtor breathing space to formulate and implement a repayment plan. If the insolvency process fails due to rejection of the application, rejection of the repayment plan, or non-implementation of the plan, bankruptcy proceedings may be initiated under Section 121 within three months.

Further, Section 124 ensures continuity of protection through an interim moratorium immediately upon filing of a bankruptcy application, safeguarding the debtor’s assets until the commencement of bankruptcy proceedings. Together, these provisions create a seamless transition from insolvency resolution to bankruptcy, ensuring an orderly and legally structured process under the IBC.