Until recently, the filing of an insolvency application against a personal guarantor to a corporate debtor produced an immediate consequence under Section 96 of the Insolvency and Bankruptcy Code, 20161. An interim moratorium commenced from the date of filing itself, staying pending legal proceedings in respect of the debt and preventing creditors from commencing fresh action.
The Insolvency and Bankruptcy Code (Amendment) Act, 20262 changed that position. With effect from 26 May 2026, Section 96(4)3 provides that Section 96 shall not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor.
The question that remained was: what happens where the Section 954 application had already been filed, and the interim moratorium was already operating, before Section 96(4) came into force?
The Delhi High Court addressed this question in IDBI Trusteeship Services Limited v. Manish Jain & Ors.5 A Section 95 application against the personal guarantor had been filed on 10 August 2024. The guarantor therefore argued that the interim moratorium had been deemed in his favour long before the amendment and continued to bar proceedings against him.
The Court rejected that argument. Section 96(4), it held, operates retroactively and is applicable to pending applications. Consequently, the interim moratorium enjoyed by the personal guarantor would be deemed to have been vacated.
The Court further held that the interim protection of moratorium and the bar against the plaintiff instituting a suit against the personal guarantor to the corporate debtor stood removed by retroactive operation of law.
Does Section 96(4) Apply to Pending Applications under Section 95?
Before the amendment, Section 96(1) provided that once an application under Section 94 or Section 95 was filed, an interim moratorium commenced automatically in relation to all debts. Pending legal proceedings concerning those debts were deemed stayed, while creditors were prohibited from initiating fresh proceedings.
Section 96(4) now provides that Section 96 does not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor.
The issue before the Delhi High Court arose from the expression “where an application is filed”. The personal guarantor contended that because the Section 95 application against him had been filed nearly two years before the amendment, the interim moratorium had already arisen under the law then prevailing. In the absence of express retrospective language, a subsequent amendment could not take away that protection.
The Court approached the issue through the distinction between retrospective and retroactive legislation. Relying upon Vineeta Sharma v. Rakesh Sharma6, State Bank’s Staff Union (Madras Circle) v. Union of India7 and SEBI v. Rajkumar Nagpal8, the Court explained that a retroactive provision does not operate retrospectively, but in futuro, with its operation based upon a character or status that arose earlier.
That distinction became decisive because the Section 95 application was still pending on 26 May 2026. The Court also relied upon the Bombay High Court’s decision in Tata Capital Financial Services Ltd. v. Neel Motors LLP9, which had interpreted the same amendment. The Bombay High Court had held that the words “is filed” include applications that had already been filed and remained pending before the Adjudicating Authority when Section 96(4) came into effect.
The Delhi High Court agreed.
It held that Section 96(4) is retroactive, or quasi-retroactive, in operation. It therefore applies to Section 95 proceedings instituted before 26 May 2026 but still pending on that date. The interim moratorium previously enjoyed by the personal guarantor was consequently deemed to have been vacated.
The distinction is important. The Court did not hold that Section 96(4) retrospectively invalidated the moratorium during the period in which the old law was in force. Rather, the words “is filed” were read to include applications filed prior in time but still pending adjudication as on 26 May 2026.
From Interim Moratorium to Section 96(4)
The reasoning becomes more significant when viewed against the legislative purpose behind Section 96(4). The Delhi High Court examined the Select Committee’s report on the Insolvency and Bankruptcy Code (Amendment) Bill, 202510. The material recorded concerns that personal guarantors were invoking the individual insolvency resolution process to obtain an automatic interim moratorium and thereby obstruct or delay legitimate recovery proceedings.
The Committee described the interim moratorium as a pre-admission shield that had, in practice, been misused by personal guarantors who filed applications solely to obstruct or delay legitimate recovery proceedings. The Ministry of Corporate Affairs similarly explained that removing the interim moratorium for personal guarantors was intended primarily to prevent misuse.
Section 96(4), therefore, seeks to ensure that the provisions of Section 96 would not apply where an application to initiate an insolvency resolution process in respect of a personal guarantor to a corporate debtor is filed by the creditor or the debtor itself.
Previously, the filing of the application itself restrained debt-related proceedings. After Section 96(4), the provisions of Section 96 do not apply where an application is filed for initiating an insolvency resolution process in respect of a personal guarantor to a corporate debtor.
The Delhi High Court’s decision holds that Section 96(4) is applicable to pending applications. In the present case, the Section 95 application filed by the plaintiff was still pending adjudication before the National Company Law Tribunal. The Court therefore held that Section 96(4) applied to that pending application and that the interim moratorium enjoyed by Defendant No. 2 would be deemed to have been vacated.
At the same time, the decision should be read within its precise limits. The Court was considering whether the suit was barred by Section 96 for the purpose of an application under Order VII Rule 11 of the Code of Civil Procedure. It was not determining the merits of the underlying creditor claim or the personal guarantor’s substantive liability.
Conclusion
Section 96(4) marks a change in the application of Section 96 to a personal guarantor to a corporate debtor. IDBI Trusteeship Services v. Manish Jain clarifies that this change is not confined to applications filed after 26 May 2026.
Where a Section 95 application concerning a personal guarantor to a corporate debtor was already pending when the amendment came into force, the earlier interim moratorium does not continue merely because it arose under the previous statutory regime. Section 96(4) applies to an application filed prior in time but still pending adjudication as on 26 May 2026.
With both the Bombay and Delhi High Courts now treating Section 96(4) as applicable to pending applications, the words “is filed” include applications which were filed prior in time but remained pending adjudication when the amendment came into force.
For a pending application under Section 95, the consequence of Section 96(4) is that the interim moratorium enjoyed by the personal guarantor to the corporate debtor would be deemed to have been vacated.
The decisive distinction after the amendment is therefore between an application that was filed prior in time and remained pending adjudication, and the continued availability of the interim moratorium under Section 96. The Delhi High Court held that Section 96(4) applies to the former and, by deeming fiction, the interim protection of moratorium stands removed by retroactive operation of law.
Citations
Expositor(s): Adv. Vatsala Pandit
