The Insolvency and Bankruptcy Code, 2016 (IBC) is a transformative legislation in India which is aimed at streamlining the resolution of insolvency and bankruptcy for corporate entities, partnership firms and individuals. Enacted to address inefficiencies in the previous insolvency framework, the IBC seeks to maximize asset value, promote entrepreneurship, and balance stakeholder interests. An essential feature of the IBC is the moratorium, which protects debtors during the resolution process. Section 96 of IBC introduces an interim-moratorium for individuals and partnership firms and provides a temporary shield against creditor actions. This article explores Section 96 in detail, covering its provisions, purpose, judicial interpretations, and impact on stakeholders, optimized for clarity and search engine visibility.
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What is Section 96 of the IBC 2016?
The meaning of Interim-moratorium is temporary stopping an activity. Section 96 of the IBC 2016 establishes an interim-moratorium that takes effect when an insolvency application is filed under Section 94 (by a debtor) or Section 95 (by a creditor) for individuals and partnership firms. The key provisions are:
Commencement and Duration: The interim-moratorium begins automatically on the date the application is filed and ceases when the application is admitted or rejected by the adjudicating authority, typically the National Company Law Tribunal (NCLT).
Scope: During this period:
All pending legal actions or proceedings related to any debt are stayed.
Creditors are prohibited from initiating new legal actions or proceedings concerning any debt.
Application to Partnership Firms: If the application pertains to a partnership firm, the interim-moratorium extends to all partners as of the filing date.
Exceptions: The Central Government, in consultation with financial sector regulators, may notify transactions exempt from this moratorium.
This provision ensures that debtors are protected from creditor actions during the initial stages of the insolvency process and facilitates an orderly resolution.
Purpose of the Interim-Moratorium Under Section 96 of IBC
The interim-moratorium under Section 96 of IBC serves several essential purposes and is important to prevent precipitous creditor actions that could undermine the insolvency resolution process:
Asset Protection: It prevents creditors from attaching or dissipating the debtor’s assets, which are vital for the resolution process.
Negotiation Facilitation: It provides a window for debtors and creditors to negotiate a resolution plan without the pressure of ongoing or new legal actions.
Status Quo Maintenance: It ensures that the debtor’s financial position remains stable and so, allowing for a fair assessment of their situation.
Scope and Limitations of Section 96 of IBC
The interim-moratorium is broad but has defined boundaries:
Covered Actions:
All debts, whether secured or unsecured.
Pending legal proceedings related to these debts.
New legal actions by creditors concerning debts.
Exclusions:
Transactions notified by the Central Government in consultation with financial sector regulators.
Wilful defaulter proceedings and quasi-criminal actions, as clarified in cases like Adarsh Jhunjhunwala v. State Bank of India.
This balance ensures that critical financial or regulatory actions can proceed while protecting the debtor’s assets for resolution.
Application to Partnership Firms and Partners
Section 96 of IBC extends the interim-moratorium to all partners as of the application date in case of partnership firm. This means that the creditors cannot pursue legal actions against individual partners for firm-related debts during this period which ensures comprehensive protection.
Impact on Stakeholders
Section 96 of the Act affects various stakeholders, where its balances ensures fairness in the insolvency process:
Debtors: They gain protection from creditor actions and time to prepare for resolution.
Creditors: Face temporary restrictions on legal remedies but they benefit from preserved debtor assets in order to get potential recovery.
Partners in Firms: These are shielded from personal liability pursuits during the interim period.
Learn more about Corporate Insolvency Resolution
Judicial Interpretations On Section 96 of IBC
These rulings provide a robust framework for understanding the practical application of Section 96 of IBC, 2016:
P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd.
This case clarified that legal actions related to bounced cheques (under Section 138 of the Negotiable Instruments Act, 1881) are paused during the interim-moratorium. Since these cases involve recovering money owed (debts), they fall under Section 96’s protection, preventing creditors from pursuing them until the insolvency application is decided.
Adarsh Jhunjhunwala v. State Bank of India
The ruling stated that legal actions against wilful defaulters or serious (quasi-criminal) cases, like fraud, are not stopped by the interim-moratorium. Pausing such cases would undermine the IBC’s goals, as they involve regulatory or punitive actions rather than just debt recovery, so creditors can continue these proceedings.
State Bank of India v. V. Ramakrishnan and Anr.
This case compared Section 96 (which applies to individuals and partnership firms) with Section 14 (for companies). It highlighted that Section 96’s interim-moratorium starts when an insolvency application is filed and has a narrower scope, while Section 14’s moratorium begins after admission and covers broader actions like asset transfers.
Dilip B Jiwrajka Vs Union of India and Ors.
The decision confirmed that Section 96, along with related sections (95–100), is legally valid and does not violate fairness or justice principles. Critics argued these sections were unfair to debtors, but the ruling upheld that they align with the IBC’s aim to balance debtor protection and creditor rights.
Ms. Sangita Arora v IFCI Limited & Anr.
This case clarified that the interim-moratorium starts the moment an insolvency application is filed, not when it’s officially registered or numbered by the authorities. This ensures debtors get immediate protection from creditor actions as soon as they apply for insolvency.
Find out What Insolvency is.
Comparison with Other Sections
Comparing Section 96 (Interim-Moratorium) and Section 14 (Moratorium) of the Insolvency and Bankruptcy Code (IBC), 2016 highlights key differences:
Section 96 (Interim-Moratorium): Starts when an insolvency application is filed under Section 94 (by debtor) or Section 95 (by creditor).
Section 14 (Moratorium): Begins after the application is admitted under Section 7 (creditor), Section 9 (operational creditor), or Section 10 (debtor).
Duration
Section 96 (Interim-Moratorium): Lasts from the filing date until the application is either accepted or rejected by the National Company Law Tribunal (NCLT).
Section 14 (Moratorium): Continues until the corporate insolvency resolution process is completed or liquidation is ordered.
Scope
Section 96 (Interim-Moratorium): Pauses only debt-related legal actions, like lawsuits or proceedings to recover money owed, for individuals and partnership firms.
Section 14 (Moratorium): Covers broader actions, including stopping debt-related lawsuits, preventing asset transfers and restricting other legal or financial moves for companies.
Summary
Section 96 of IBC, 2016 provides an interim-moratorium for individuals and partnership firms, protecting them from creditor actions during the initial insolvency resolution phase. By staying legal proceedings and maintaining the status quo, it facilitates a fair and orderly process. Judicial interpretations have clarified its scope and ensured that it aligns with the objectives of Insolvency and Bankruptcy Code, while excluding certain regulatory actions. As the IBC evolves, Section 96 remains vital in balancing debtor and creditor interests, hence, contributing to an effective insolvency framework.
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Section 96 of IBC, 2016: FAQs
Q1. What is Section 96 of the IBC, 2016?
Section 96 of the IBC, 2016, provides an interim moratorium for individuals and partnership firms. It starts when an insolvency application is filed under Section 94 (by debtor) or Section 95 (by creditor), pausing debt-related legal actions until the NCLT admits or rejects the application.
Q2. How do Section 14 and Section 96 of the IBC differ?
Section 14: Applies to corporate entities, begins upon insolvency application admission (Sections 7, 9, or 10), and restricts asset transfers and broader legal actions until resolution or liquidation. Section 96: Applies to individuals/partnerships, starts on application filing (Sections 94 or 95), and halts only debt-related proceedings until NCLT’s decision.
Q3. Does Section 96’s moratorium cover Section 138 cases?
Yes, the interim moratorium under Section 96 applies to Section 138 of the Negotiable Instruments Act, 1881 (cheque bouncing cases), as they are debt-related, per P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.
Q4. Which section governs the interim moratorium?
Section 96 of the IBC, 2016, governs the interim moratorium for individuals and partnership firms.
