Moratorium refers to a temporary suspension or interlude of some actions. In insolvency proceedings, it is a time in which a company is not liable to any recovery action or lawsuit and enforcement.
Simply, moratorium affords the company a breathing space when it is in great financial distress.
When Does it Apply?
Moratorium typically comes into effect once a company is in the Corporate Insolvency Resolution Process (CIRP) of the Insolvency and Bankruptcy Code, 2016. Moratorium becomes automatic after the insolvency case is submitted before the National Company Law Tribunal (NCLT).
What occurs during the Moratorium?
In the course of the moratorium period:
● The creditors will not be able to commence or maintain lawsuits against the company.
● Banks are not able to retrieve loans or reclaim assets.
● Security cannot be enforced through the law.
● The assets of the company cannot be sold and transferred.
This stays until CIRP is accomplished or the case proceeds to liquidation.
Simple Case to Understand.
Imagine that XYZ Ltd. failed to pay the loans. With the company going into CIRP a moratorium commences. All the actions should be halted even in case of the bank or suppliers planning to file cases or collect dues. This enables the professionals to determine the ability of XYZ Ltd. to be resuscitated.
Why is Moratorium Important?
The reason why moratorium is significant is that it avoids chaos, ensures preservation of company assets, and gives the company an opportunity to resolve its financial problems without fear of pressure from creditors. It creates a structured and fair legal environment where all stakeholders are treated equally and transparently during the insolvency resolution process.
That is why the expression moratorium is frequently used in insolvency proceedings and in news related to NCLT cases under the Insolvency and Bankruptcy Code in India.
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