Reforming Insolvency Proceedings: A Step Towards Creditor Rights
The recent amendment to the Insolvency and Bankruptcy Code (Amendment) Act, 2026, marks a significant reform in the insolvency framework, addressing a long-standing issue of abuse by personal guarantors.
- The amendment excludes personal guarantors to corporate debtors from the benefit of interim moratorium under Section 96, allowing creditors to continue recovery actions uninterrupted.
- The change ensures that personal guarantors cannot misuse the interim moratorium to delay enforcement without pursuing resolution.
- The amendment preserves the protective framework of interim moratorium for genuine individual and partnership insolvency cases.
Readers should care about this development as it strengthens creditor rights, prevents procedural delays, and reinforces the principle that insolvency mechanisms should facilitate genuine resolution rather than serve as a tactical shield against enforcement actions.
Summary: The Insolvency and Bankruptcy Code (Amendment) Act, 2026 introduces a significant reform by excluding personal guarantors to corporate debtors from the benefit of interim moratorium under Section 96. Earlier, filing an insolvency application automatically triggered a moratorium, staying all recovery and legal proceedings, which was frequently misused by guarantors to delay enforcement without pursuing resolution. Courts had also recognized this pattern of abuse, where applicants failed to advance proceedings after securing protection. The amendment addresses this loophole by ensuring that no automatic stay applies upon filing insolvency applications against personal guarantors, thereby allowing creditors to continue recovery actions such as SARFAESI and DRT proceedings uninterrupted. However, the interim moratorium continues to apply for other individuals and partnership firms. This reform strengthens creditor rights, prevents procedural delays, and reinforces that insolvency mechanisms should facilitate genuine resolution rather than serve as a tactical shield against enforcement actions.
Background and Legislative Context
Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) provides for an interim moratorium upon the filing of an application for initiation of insolvency resolution or bankruptcy process against individuals and partnership firms under Sections 94 or 95. This moratorium operates automatically from the date of filing and stays all legal actions and proceedings in respect of any debt until the application is either admitted or rejected.
At present, the provisions relating to personal insolvency under the Code are operational primarily in respect of personal guarantors to corporate debtors. Under this framework, such personal guarantors could invoke the interim moratorium upon filing an application, thereby pausing recovery actions and legal proceedings, which often led to delays in enforcement.
Potential for Abuse and Regulatory Concern
In September 2022, the Ministry of Corporate Affairs (MCA) issued a public consultation paper proposing reforms to the IBC framework. Paragraph 22.2 of the consultation paper specifically suggested that “Section 96 may be made inapplicable to personal guarantors.”
This proposal stemmed from a growing concern that personal guarantors were misusing the interim moratorium by filing insolvency applications strategically to obtain an automatic stay on recovery proceedings, without any genuine intent to pursue resolution.
Judicial Recognition of Misuse
The issue was also examined by the Bank of Baroda v. Union of India, where the Bombay High Court observed a recurring pattern:
Position Prior to the 2026 Amendment
As of July 2025, no statutory amendment had been enacted, and the interim moratorium under Section 96 continued to apply automatically upon filing of applications by personal guarantors. This allowed scope for continued procedural delays despite judicial intervention.
Amendment under the IBC (Amendment) Act, 2026
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 addresses this issue by introducing a critical clarification to Section 96. A new sub-section (4) has been inserted, which excludes personal guarantors to corporate debtors from the benefit of interim moratorium.
The amendment removes the applicability of the interim moratorium in cases involving personal guarantors to corporate debtors (CDs). In effect, where an application is filed to initiate insolvency resolution or bankruptcy proceedings against a personal guarantor, the interim moratorium under Section 96 shall not come into force.
This change is particularly important because, at present, the provisions relating to personal insolvency under the Code are operational primarily in respect of personal guarantors to corporate debtors. Under the earlier framework, such personal guarantors could invoke the interim moratorium upon filing an application, thereby pausing recovery actions and legal proceedings, which often led to delays in enforcement.
By excluding personal guarantors from the scope of Section 96, the amendment ensures that:
Key Features of the Amendment
Continued Applicability for Other Individuals
Importantly, the amendment does not alter the position for other individuals and partnership firms:
Impact and Significance
This amendment brings much-needed clarity and balance to the insolvency framework by:
At the same time, it preserves the protective framework of interim moratorium for genuine individual and partnership insolvency cases.
Practical Illustration – Misuse by Personal Guarantor and Position After Amendment
Position Before Amendment (Misuse of Section 96)
1. To stall recovery, Mr. X files an application under Section 94 of the IBC for initiating his personal insolvency process.
2. Immediate Effect:
3. Strategic Delay Tactics:
Position After Amendment (IBC Amendment Act, 2026)
1. Mr. X again files an application under Section 94.
2. Effect of Amendment to Section 96:
The bank can continue recovery proceedings without interruption, including:
Position After Amendment (IBC Amendment Act, 2026)
1. Mr. X again files an application under Section 94.
2. Effect of Amendment to Section 96:
Conclusion: The exclusion of personal guarantors from the scope of Section 96 marks a targeted and pragmatic reform under the IBC. By eliminating the automatic stay in such cases, the legislature has reinforced the principle that insolvency proceedings should not be used as a shield for delay, but as a mechanism for bona fide resolution and recovery.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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Readers should treat this as a tax and compliance update, not as personal advice.
This article is for general information based on available source information. It should not be considered legal, tax, investment, or financial advice.