Pending creditor applications against personal guarantors no longer trigger Section 96 IBC moratorium, Delhi High Court rules

The plaintiff, IDBI Trusteeship Services Limited, instituted the commercial suit against, inter alia, Defendant Nos. 1 and 2, who were personal guarantors to Defendant No. 3, the principal borrower/corporate debtor.

The plaintiff had initiated insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against Defendant No. 2 on 10 August 2024, and the application remained pending before the NCLT.

Defendant No. 2 consequently claimed the benefit of the interim moratorium under Section 96 IBC.

The suit was filed on 28 July 2025.

Defendant No. 2 sought rejection of the plaint under Order VII Rule 11(a) and (d), CPC, contending that the suit was barred by the interim moratorium under Section 96 IBC and disclosed no cause of action.

During the pendency of the suit, Section 96 was amended by insertion of sub-section (4), effective from 26 May 2026, excluding personal guarantors to corporate debtors from the operation of the interim moratorium where an insolvency-resolution application was filed by the creditor or debtor.

Whether the insertion of Section 96(4) IBC operates retroactively or quasi-retroactively so as to apply to a pending Section 95 application filed before the amendment came into force.

Whether, after the amendment, the suit against Defendant No. 2 was barred by the interim moratorium under Section 96 IBC and liable to be rejected under Order VII Rule 11(a) or (d), CPC.

Whether the objection that Section 96 was brought into force only in relation to personal guarantors to corporate debtors, and not personal guarantors generally, rendered the provision otiose or defeated the plaintiff’s interpretation.

The Court applied Order VII Rule 11(a) and (d), CPC, under which a plaint may be rejected where it does not disclose a cause of action or is barred by law.

Section 96(1) IBC provides for an interim moratorium upon filing an application under Section 94 or 95, during which pending legal proceedings concerning the debt are stayed and creditors cannot initiate such proceedings.

Section 96(4), inserted by the 2026 amendment, provides that Section 96 does not apply where an application to initiate insolvency resolution proceedings in respect of a personal guarantor to a corporate debtor is filed by the creditor or debtor.

Relying on Vineeta Sharma v. Rakesh Sharma, (2020) 9 SCC 1, State Bank’s Staff Union (Madras Circle) v. Union of India, (2005) 7 SCC 584, and SEBI v. Rajkumar Nagpal, (2023) 8 SCC 274, the Court distinguished true retrospectivity from retroactivity or quasi-retroactivity: a provision may operate prospectively on an existing and continuing state of affairs or pending proceeding without impairing a completed transaction.

The Court also relied on Dilip B. Jiwrajka v. Union of India, (2024) 5 SCC 435, and the Bombay High Court’s decision in Tata Capital Financial Services Ltd. v. Neel Motors LLP, Commercial Arbitration Petition No. 620/2021, decided on 24 July 2026.

The Court held that Section 96(4) was enacted to remedy the misuse of the interim moratorium by personal guarantors who filed insolvency applications to obstruct or delay recovery proceedings.

The legislative materials demonstrated that the amendment was intended to remove the pre-admission shield for personal guarantors to corporate debtors and create a level playing field for creditors.

Applying the doctrine of retroactivity/quasi-retroactivity, the Court construed the expression “where an application is filed” in Section 96(4) as encompassing applications already filed but still pending on 26 May 2026.

The amendment therefore operated prospectively from its effective date upon the continuing pendency of the Section 95 proceedings, rather than retrospectively upon a completed transaction.

Since Defendant No. 2 was admittedly a personal guarantor to the corporate debtor and the plaintiff’s Section 95 application remained pending, the interim moratorium ceased to operate from 26 May 2026.

Consequently, the suit was no longer barred by Section 96 IBC.

The Court further held that the partial applicability of Section 96 did not render the provision otiose, as the provision could operate in futuro in relation to personal guarantors generally if the relevant statutory provisions were brought into force.

The Court declined to examine the separate factual objection concerning absence of cause of action at that stage.

The interim moratorium and the corresponding bar against instituting proceedings against Defendant No. 2 were deemed vacated from 26 May 2026.

The application under Order VII Rule 11 CPC was accordingly held to be legally unmerited and was rejected.

The suit and connected applications were directed to be listed on 2 November 2026.