Section 14 of IBC : Section 14: Moratorium

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., is facing financial difficulties and is unable to pay its debts. One of its creditors initiates insolvency proceedings against XYZ Pvt. Ltd. by filing an application to the National Company Law Tribunal (NCLT), which is the Adjudicating Authority for insolvency cases. On the date the insolvency process commences (known as the insolvency commencement date), the NCLT, per Section 14 of the Insolvency and Bankruptcy Code, 2016, declares a moratorium.

As a result, the following occurs:

• Any ongoing lawsuits or legal actions against XYZ Pvt. Ltd. are halted.
• XYZ Pvt. Ltd. cannot sell or pledge any assets.
• Creditors cannot enforce any security interest against the company's property.
• The landlord cannot take back the premises leased to XYZ Pvt. Ltd. despite the company's insolvency.

However, XYZ Pvt. Ltd. must continue to pay for essential services like electricity and water during the moratorium, and these services cannot be cut off due to non-payment of past dues. If XYZ Pvt. Ltd. fails to pay for these essential services during the moratorium, the service providers can terminate the services.

The moratorium remains in effect until the insolvency resolution process is complete, which could end with the approval of a resolution plan or liquidation of the company, whichever comes first.