Moratorium Under Section 14 IBC: What Happens to Pending Suits and Cheque Cases

For a creditor with a suit or a cheque case pending against a company, an insolvency admission is a sudden stop. The Insolvency and Bankruptcy Code, 2016 provides that, from the date the NCLT admits an application and starts the corporate insolvency resolution process, a moratorium applies. The aim is to protect the company's assets while a resolution plan is sought, but the effect on creditors is immediate and wide.

What Does the Moratorium Prohibit?

Under Section 14(1), the NCLT declares a moratorium that prohibits:

• Suits or proceedings against the company, including execution of any decree or order
• Transferring, encumbering, alienating or disposing of any of the company's assets or legal rights
• Any action to foreclose, recover or enforce any security interest created by the company
• The recovery of any property by an owner or lessor where it is occupied by or in the possession of the company

The prohibition covers courts, tribunals, arbitration panels and other authorities. A decree-holder who has started execution against the company must stop. A supplier with a pending recovery suit sees it stayed. An arbitration against the company cannot continue. Secured creditors acting under the SARFAESI Act are also barred from enforcing security.

There are protections for the company's operations. Supply of essential goods and services to the company cannot be terminated during the moratorium, and the moratorium does not apply to certain transactions notified by the Central Government.

Does It Stop Cheque Bounce Cases?

In P. Mohanraj v. Shah Brothers Ispat Pvt Ltd (2021), the Supreme Court held that a criminal complaint under Section 138 of the Negotiable Instruments Act against the corporate debtor is a proceeding covered by the moratorium. The reasoning was that the complaint, though criminal in form, serves to recover the amount and so falls within the object of Section 14. The company's prosecution therefore pauses until the moratorium ends.

The Court drew a distinction for individuals. The moratorium protects the corporate debtor, not its directors or officers who are prosecuted under Section 141. Proceedings against directors, signatories and others who are liable under Section 141 can continue, because they are natural persons and are not themselves in insolvency. This has an important practical effect: a creditor with a cheque bounce case can keep the pressure on the directors, while the company is protected. Our note on director liability in cheque bounce cases explains who can be held liable.

What About Guarantors?

The moratorium protects the corporate debtor, not those who guarantee its debts. Section 14(3) states that it does not apply to a surety in a contract of guarantee to the corporate debtor. In Lalit Kumar Jain v. Union of India (2021), the Supreme Court confirmed that a resolution plan approved for the company does not extinguish the liability of personal guarantors, so a creditor can proceed against them. Guarantors cannot assume that the company's insolvency shields them.

How Long Does the Moratorium Last?

The moratorium lasts from the date of admission until the process ends, which can happen in one of three ways: on completion of the insolvency resolution process, which the Code requires within 330 days including extensions and litigation time; on approval of a resolution plan by the NCLT under Section 31; or on an order for liquidation under Section 33. In liquidation, a separate bar on suits against the company applies under Section 33(5).

What Should a Creditor Do When a Moratorium Is Declared?

The creditor's remedy shifts from the court to the process. The creditor should:

• Stop execution and recovery steps against the company, and seek a stay in the pending cases
• Submit a proof of claim to the interim resolution professional or resolution professional in the prescribed form
• Attach evidence, including invoices, contracts, ledger statements and any decree
• Monitor the process and consider whether to support or oppose a resolution plan
• Continue any steps against guarantors and, where relevant, directors under Section 141

The claim must be filed within the time fixed in the public announcement. A claim filed late may still be accepted before the resolution plan is approved, but the creditor risks being left out of the plan's distribution. Operational creditors usually receive a modest share, and in many cases less than financial creditors, so early and accurate claims matter. A creditor whose decree is pending should file the decree as the basis of the claim.

What If You Are the Company?

For the company and its management, the moratorium is a pause, not a cure. Powers of the board are suspended and the interim resolution professional takes control. Management should cooperate, provide information, and consider whether a resolution plan can preserve the business. Preparing before a Section 9 application is admitted is more effective than dealing with it afterwards, as we discuss in our guide to responding to a Section 8 demand notice.

For a wider view of how insolvency fits among recovery options, see our overview of recovering dues from a company that is not paying. Our NCLT & Corporate Litigation practice acts for creditors and companies in insolvency proceedings, and you can request a consultation.