Introduction

When a company is unable to pay its debts and insolvency proceedings are initiated against it, the law provides a protective mechanism known as moratorium. Many creditors are surprised to learn that once moratorium comes into force, all debt-related cases against the corporate debtor are stayed, even if the creditor already holds a court decree.

This blog explains what moratorium means, its legal purpose, and why execution of money decrees and all recovery actions are barred during this period.

What Is Moratorium?

A moratorium is a statutory “freeze” imposed by law on all legal proceedings and recovery actions against a corporate debtor once insolvency proceedings commence.

The objective of moratorium is to:

• Maintain the company as a going concern

• Prevent asset depletion

• Ensure equal treatment of all creditors

• Allow time for resolution rather than piecemeal recovery

Moratorium is not a relief to defaulting promoters; it is a legal necessity to protect the insolvency resolution process.

When Does Moratorium Begin and End?

Moratorium begins from the date when insolvency proceedings are admitted by the adjudicating authority against the corporate debtor.

It continues:

• During the entire insolvency resolution process, and

• Until approval of a resolution plan or initiation of liquidation

During this period, the corporate debtor is placed under legal protection.

What Actions Are Stayed During Moratorium?

Once moratorium is declared, the following actions are legally prohibited:

1. Institution of New Suits or Proceedings

No new civil suits, recovery proceedings, or arbitration cases can be initiated against the corporate debtor for recovery of dues.

2. Continuation of Pending Cases

All ongoing proceedings related to debt recovery must be kept in abeyance. Courts and tribunals cannot proceed further during moratorium.

3. Execution of Money Decrees

Even if a creditor has:

• A civil court decree

• An arbitral award

• A recovery certificate

Execution of such money decrees is completely stayed during moratorium. A decree-holder cannot attach bank accounts, seize assets, or enforce recovery.

4. Recovery by Any Authority

No authority can:

• Attach property

• Recover dues

• Enforce security interests

This applies uniformly to private creditors and statutory authorities.

Why Execution of Money Decrees Is Stayed

Many creditors believe that once a decree is passed, it can always be executed. Insolvency law changes this position.

Execution is stayed because:

• Insolvency law overrides individual recovery rights

• Allowing execution would give unfair advantage to one creditor

• Assets must be preserved for collective resolution

In insolvency, creditors cannot race against each other. All claims are addressed together through a structured process.

Effect on Secured and Unsecured Creditors

Moratorium applies to:

• Secured creditors

• Unsecured creditors

• Decree holders

• Operational creditors

Even secured creditors cannot enforce mortgages or charge over assets during moratorium.

What Creditors Should Do During Moratorium

Creditors are not without remedy. During moratorium, they should:

• File their claims before the resolution professional

• Participate in the insolvency resolution process

• Await resolution plan or liquidation outcome

Recovery shifts from court execution to insolvency-based distribution.

What Moratorium Does Not Mean

Moratorium does not mean:

• Debts are written off automatically

• Creditors lose their rights permanently

• Proceedings are dismissed

It only means that enforcement is temporarily suspended to enable orderly resolution.

Legal Consequences of Violating Moratorium

Any action taken in violation of moratorium:

• Is void in law

• Can be set aside by the adjudicating authority

• May expose the creditor to legal consequences

Courts have consistently held that moratorium must be strictly respected.

Importance of Moratorium in Corporate Insolvency

Without moratorium:

• Stronger creditors would seize assets

• The company would collapse immediately

• Resolution would become impossible

Moratorium ensures stability, fairness, and an opportunity to revive the business.

Conclusion

Moratorium is the backbone of corporate insolvency proceedings. Once it comes into force, all debt-related cases against the corporate debtor are stayed, including execution of money decrees, attachment of assets, and recovery actions.

Creditors must understand that insolvency law prioritises collective resolution over individual enforcement. The moratorium period is not a denial of rights but a legal pause to ensure fair and effective resolution of corporate debt.