IBC Section 124: Effect of application

Section 124 of Insolvency and Bankruptcy Code, 2016: Effect of application

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) When an application is filed under section 122 or section 123,-

(a) an interim-moratorium shall commence on the date of the making of the application on all actions against the properties of the debtor in respect of his debts and such moratorium shall cease to have effect on the bankruptcy commencement date; and

(b) during the interim-moratorium period-

(i) any pending legal action or legal proceeding against any property of the debtor in respect of any of his debts shall be deemed to have been stayed;

(ii) the creditors of the debtor shall not be entitled to initiate any legal action or legal proceedings against any property of the debtor in respect of any of his debts.

(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the making of the application.

(3) The provisions of this section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

Legal Commentary & Landmark Judgments: Section 124

Section 124 triggers an automatic statutory interim-moratorium immediately upon the filing of a bankruptcy application, staying pending and fresh recovery proceedings against the debtor.

Immediate Statutory Inception: The interim-moratorium commences automatically on the date of filing of the bankruptcy application under Section 121, without requiring any judicial order.
Universal Recovery Stay: All legal proceedings and suits in respect of any debt of the individual debtor are automatically stayed, and no creditor may initiate any fresh legal proceeding.
Duration of Interim Protection: The interim-moratorium remains operational until the Adjudicating Authority passes a final order either admitting the bankruptcy application under Section 126 or rejecting it.

Key Landmark Precedents:

Dilip B. Jiwrajka v. Union of India (2024) 5 SCC 436: The Supreme Court examined the interim-moratorium mechanism under Part III, holding that it operates by statutory mandate to preserve the debtor's estate until formal adjudication takes place.
State Bank of India v. V. Ramakrishnan (2018) 17 SCC 394: Distinguished the scope of individual moratoriums under Part III from corporate moratoriums under Section 14, affirming their specialized debtor-centric protective perimeter.

Courtroom Practice & Strategic Litigation Guidance:

Counsel representing creditors facing a Section 124 interim-moratorium should inspect whether the pending proceeding involves excluded debts (such as maintenance or fraud claims); if excluded, an application for clarification/exemption should be moved immediately.