INSOLVENCY AND BANKRUPTCY OF AN INDIVIDUAL UNDER THE IBC, CODE, 2016

As per section 101 of the code, When an application under section 94 of the IBC code is admitted by the adjudicating authority under section 100 of the code, the moratorium commences and will cease to exist at the end of 180 days from the date of admission or on the date of the repayment plan is approved by the adjudicating authority under section 114 of the code. 

MORATORIUM.

Moratorium under section 101(2)(a) envisages that “any pending legal action or proceeding with respect to any debt shall be deemed to have been stayed. (b) the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and (c) the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein;” 

When the Repayment plan is approved by the Adjudicating Authority under section 114 of the code on the basis of the report of the CoC, after successful implementation of the same, an application under section 119 of the code can be applied for the discharge order. Application for bankruptcy under section 121 of the code. 

BANKRUPTCY.

In the event of the Repayment plan being rejected by the Adjudicating authority under section 114 of the code, an application for bankruptcy under section 121 of the code may be preferred. An interim moratorium under section 124 of the code shall commence from the date of making the application till the bankruptcy commencement date. 

Section 124(b) of the code envisages that: (b) during the interim-moratorium period— (i) any pending legal action or legal proceeding against any property of the debtor in respect of any of his debts shall be deemed to have been stayed; (ii) the creditors of the debtor shall not be entitled to initiate any legal action or legal proceedings against any property of the debtor in respect of any of his debts. Furthermore, once the bankruptcy order is passed by the Adjudicating authority under section 126 of the code, the same shall continue to have effect till the debtor is discharged. 

THE EFFECT OF BANKRUPTCY

The Effect of bankruptcy order under section 128 envisages that —(1) On the passing of the bankruptcy order under section 126,— (a) the estate of the bankrupt shall vest in the bankruptcy trustee as provided in section 154; (b) the estate of the bankrupt shall be divided among his creditors; (c) subject to provisions of sub-section (2), a creditor of the bankrupt indebted in respect of any debt claimed as a bankruptcy debt shall not— 81 (i) initiate any action against the property of the bankrupt in respect of such debt; or (ii) commence any suit or other legal proceedings except with the leave of the Adjudicating Authority and on such terms as the Adjudicating Authority may impose. 

DISCHARGE

A discharge order may be filed under section 138 of the code after the expiry of one year from the date of commencement and the approval of the report by the creditor committee,However section 139 of the code envisages that the discharge shall not be implemented if it (a) affect the functions of the bankruptcy trustee; or (b) affect the operation of the provisions of Chapters IV and V of Part III; or (c) release the bankrupt from any debt incurred by means of fraud or breach of trust to which he was a party; or (d) discharge the bankrupt from any excluded debt. 

LEGAL PRECEDENTS 

The Supreme Court In Rakesh Bhanot v. M/s. Gurdas Agro Pvt. Ltd, 2025 INSC 445 opined that Moratorium extends only to the extent to the  legal action or proceedings relating to recovery of debt not to the extent of penal actions. It held that: “12. The legislative intent behind the Insolvency and Bankruptcy Code (IBC) is to provide a structured framework for the resolution of corporate debtors’ financial distress, facilitating their rehabilitation and ensuring the maximization of asset value. The application under Section 94 or 95 would fall under Chapter III of the IBC. An application under Section 94, when taken out by a debtor in the capacity of a personal guarantor of a company, to declare him/ her as insolvent, is to be disposed by following the procedures in Sections 97 to 119. The application filed under Section 94 is scrutinized by the Resolution Professional and a report is submitted as contemplated under Section 99 recommending either the approval or rejection of the application. The interim moratorium which commences on the presentation of the application will expire on the admission of the application by an order of the adjudicating authority under Section 100. Upon admission, the moratorium under Section 101 comes into operation. The interim moratorium under Section 96 and the moratorium under Section 101 IBC are designed to offer a breathing space to the corporate debtor, allowing them to reorganize their financial affairs without the immediate threat of creditor actions. However, this moratorium is not intended to shield individuals from personal criminal liabilities arising from their actions outside the scope of corporate debt restructuring. The respective appellants  / petitioners, having filed insolvency applications as personal guarantors under Section 94 IBC, cannot extend this protection to avoid prosecution under Section 138 of the N.I. Act, 1881. Upon filing of the application under section 94 IPC, a moratorium comes into effect, designed to protect the debtors from any legal actions concerning their debts. Specifically, Section 96 IBC provides that any legal proceedings pending against the debtor concerning any debt shall be deemed to have been stayed. The term “any legal action or proceedings” does not mean “every legal action or proceedings”. In sub-clauses 96 (b) (i) and (ii), the term “legal action or proceedings” are followed by the term “in respect of any debt”. The term “legal action or proceedings” would have to be understood to include such legal action or proceedings relating to recovery of debt by invoking the principles of noscitur a sociis. The purpose of interim moratorium contemplated under Section 96 is to be derived from the object of the act, which is not to stall the proceedings unrelated to the recovery of the debt. The protection is not available against penal actions, the object of which is to not recover any debt. This moratorium serves as a critical mechanism, allowing the debtor to reorganize their financial affairs without the immediate threat of creditor actions. The clear and unequivocal language of this provision reflects the legislative intent to provide a protective shield for debtors during the insolvency process. 14. …the object of moratorium or for that purpose, the provision enabling the debtor to approach the Tribunal under Section 94 is not to stall the criminal prosecution, but to only postpone any civil actions to recover any debt." 

The Supreme Court in State Bank of India v. V.Ramakrishnan, (2018) 17 SCC 394 has held that the protection of moratorium under these sections 96 and 101 IBC is far greater than the moratorium under section 14 IBC. It held that “23. We are also of the opinion that Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these Sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why 24 Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor – often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force.” 

The Supreme Court in Indian Overseas Bank Versus RCM Infrastructure Limited and Another 2022 SCC OnLine SC 634 held that the moratorium had come into place, the bank could not have continued with the proceedings under the SARFAESI Act and could not have accepted the balance payment after the commencement of the moratorium. It opined that “26. It could thus be seen that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. 27. It has been consistently held by this Court that the IBC is a complete code in itself and in view of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. 35. In view of the provisions of Section 14(1)(c) of the IBC, which have overriding effect over any other law, any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Sarfaesi Act is prohibited. We are of the view that the appellant Bank could not have continued the proceedings under the Sarfaesi Act once CIRP was initiated and the moratorium was ordered.” ● The High Court of Delhi in  SANJAY DHINGRA vs IDBI BANK LIMITED & ORS 2024 DHC 4908 held that “22. In view of the aforesaid, it is clear that once the interim moratorium has come into play on account of the insolvency proceedings against the petitioner under the IBC, 2016, the respondent-bank cannot proceed any further in the proceedings under the SARFAESI Act with respect to the property mortgaged by the petitioner with the bank, in his capacity as a personal guarantor”