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Moratorium Under Insolvency and Bankruptcy Law

Moratorium Under Insolvency and Bankruptcy Law

The Insolvency and Bankruptcy law 2016, in essence, is focused towards ensuring that national and global investors and creditors have a way to retrieve the debts lent to the debtors that have now become insolvent entities. An insolvent entity is the debtor (person of your company) is the one who is not able to repay the debt that it owes to its creditors on prescribed time. When that happens, there are many options, and the penultimate among them is initiating the insolvency resolution process.

However, many might say that during the Insolvency resolution process, the corporate debtor is vulnerable of being almost bullied by the creditors for debt repayment. Therefore, the Insolvency and Bankruptcy Code of 2016 has a provision of Moratorium.

Through Moratorium, a legal authorization is provided to the debtor to delay the time to repay their debts until the insolvency resolution is resolved. How far does this moratorium concept go? Through the course of this article, we are going to take a look into this question and find out more about moratorium in insolvency and bankruptcy law.

Moratorium: The definition

According to the definition, a moratorium refers to a delay or suspension of an activity. In legal terms, this definition can extend to delay and suspension of law, or an activity pertaining to the law. It is an authorization given to debtors to defer or delay their due payments until insolvency resolution process is complete.

Why adjudicating authority declares moratorium

According to Section 14(1) of the code, the adjudicating authority shall declare a moratorium in order to:

  1. Prohibit any pending lawsuit or any proceedings against the corporate debtor. These include execution of any decree, judgment or order in any tribunal, arbitration penal, the court of law or any other authority.
  2. Prohibit the disposal, transfer, encumbering, or alienating of any of the corporate debtor’s assets by the corporate debtor.
  3. Prohibit any of the following actions:
    1. Foreclosing
    2. Recovering
    3. Enforcing any security interest

Created by the corporate debtor in respect to its property

  1. Prohibit the recovery of any property by the owner or less or where the property is currently either occupied by or either under the possession of the corporate debtor.

Note: Insolvency commencement date refers to the date at which the Section 9 petition to initiate insolvency resolution process was admitted by the adjudicating authority (In this case, the adjudicating authority is the NCLT).

No moratorium on the following

  1. Supply of essential goods to the corporate debtor
  2. Supply of essential services to the corporate debtor

What are the essential goods and services the Insolvency and bankruptcy code 2016 referring to here?

  1. Electricity
  2. Telecommunication services
  3. Water
  4. Information technology services.

Conclusion

The moratorium is a legal authorization given to the corporate debtors so that they are able to delay their payments. Through the moratorium process, until the period of insolvency resolution is complete, there are certain activities that the adjudicating authority prohibits from being done to the corporate debtor. These include selling the corporate debtor’s assets, re-acquiring of corporate debtors property. Until the insolvency resolution process is complete, the moratorium ensures that the debtor is given appropriate room to recover for a bit.

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