Practical Problems Associated With Construing the IBC’s Moratorium Too Strictly

[Satvik is a student at National Law University Odisha.]

It is well-settled that Section 14 of the Insolvency and Bankruptcy Code (IBC) extends the protection of the moratorium to the corporate debtor only. Promoters, directors, group companies, and other non-debtor parties sued alongside the debtor in the same proceedings do not come under the moratorium’s cover, irrespective of how closely their conduct may be intertwined with that of the corporate debtor’s.

This reasoning, however, settles only one question: whether a non-debtor party is protected. It does not clarify what should happen when the case against the non-debtor cannot be judged without looking at what the corporate debtor did, and the corporate debtor, protected by its moratorium, is no longer taking part in it. Nor does it explain what course of action a resolution professional (RP) should take when the parties suing those non-debtors are also creditors of the corporate debtor. A strictly textualist reading of Section 14 (as has been the case thus far) leaves both of these questions open. The contention advanced in this article is that Indian law needs something between blanket protection and none at all: a conditional stay for non-debtors, granted on a case by case basis.

The Supreme Court’s decision on 27 July 2026 in Tejas Shah v. Mantri Technology Constellations Private Limited supplied an occasion to examine both questions together. The appellants were homebuyers who booked residential apartments in a project in Bengaluru. Seven respondents were arrayed before NCDRC. Respondent No. 1, Mantri Technology Constellations Private Limited was the developer and the sole signatory, on the developer's side, to the construction agreements and agreements for sale executed with the appellants in 2016. Respondent No. 2, Mantri Developers Private Limited, was pleaded only as a company “alleged to have been associated with the development” of the project by the appellants in front of the NCDRC without any particulars being furnished. Respondent Nos. 3 to 5 were alleged to be common promoters or directors of Mantri Technology and Mantri Developers. Respondent Nos. 6 and 7 were the landowners of the project land, whose relationship to the appellants would ordinarily be mediated through a joint development or land-owner arrangement with Mantri Technology rather than through any direct privity with the appellants. Midway through the proceeding, the developer was admitted into corporate insolvency resolution (CIRP), triggering the Section 14 moratorium against it alone; the National Consumer Disputes Redressal Commission (NCDRC) nonetheless adjourned the entire complaint sine die, reasoning that the moratorium barred continuation against the remaining respondents as well. The Supreme Court set this aside, holding, predictably in light of P Mohanraj v. Shah Brothers Ispat Private Limited, that a moratorium operating against the corporate debtor cannot be stretched to immunise co-respondents who are not themselves undergoing resolution. On this narrow question it chose to ask, the court answered correctly. What it left unaddressed is everything that follows.

The Empty Chair Problem

The first is the adjudicatory problem. “Deficiency in service”, as pleaded before the NCDRC and subsequently before the Supreme Court, arises out of the construction agreement and agreement for sale to which only the developer was a signatory on that side of the transaction. For the NCDRC to determine whether any of the other respondents are liable, it will, as a practical matter, first have to determine what the developer promised, what it delivered, and why the shortfall occurred, because that is the only body of fact the pleadings disclosed in front of the NCDRC, and because whatever role the promoters, directors, and landowners played can only be assessed against it. This is typical of composite proceedings whenever liability against a number of defendants depends on demonstrating what one of them did.

The difficulty is that the developer company, whose conduct lies at the heart of the proceedings, will not be in attendance to defend the issue. Its board is suspended under Section 17 of the IBC; its management is entrusted to a RP whose statutory responsibilities lie with the committee of creditors (CoC) and the preservation of the estate, not with defending, on merits, an old consumer complaint, which in any case is barred from proceeding against the company. The NCDRC is essentially tasked with determining the conduct of a party, which is an empty chair at its own hearing, and there is no law or precedent available to provide any guidance for the same.

Additionally, the documents most probative of what was promised and what went wrong (construction records, project accounts, correspondence between the developer and its co-respondents) are likely to sit in the custody of the company or its RP, and nothing indicates whether the RP should be impleaded for that limited purpose or whether discovery can be compelled from an entity that cannot, under the moratorium, be made a party to the relief actually sought.

Judges faced with the above dilemma have tended to finesse it through precedent from similar statutory settings, and the resort to P Mohanraj in the present judgment is indicative of this approach. The application involves a very wide extrapolation: P Mohanraj has held that a moratorium is no defence against prosecution under the Negotiable Instruments Act 1881, but the same derives from the deeming provision of Section 141, whereby the liability of directors is fixed regardless of any fact-specific considerations, merely through occupying that position. There is no analogue provision in the Consumer Protection Act 2019. Lacking any such deeming provision, the case for liability of promoters, directors or connected enterprises for the deficiencies of the services provided will have to be made independently on facts applicable to the particular defendants or else based on principles of the general law of lifting the corporate veil, and in doing so the NCDRC would be required to determine what promises were made by the developer, what it delivered and why there was a deficiency. Thus, the application of P Mohanraj does not avoid the empty chair problem; it simply defers arrival at it.

Impact on the IBC and the RPs

The second, and more structurally consequential gap concerns what happens on the insolvency side of the ledger. Real-estate allottees are financial creditors of their developer for the purposes of its CIRP (a status the IBC and courts have conferred on them). Consequently, buyers in this scenario very often wear two hats. Outside the CIRP, the buyer is a claimant against the non-debtor respondents. Inside it, the same buyer is a financial creditor of the developer, for what is substantially the same loss: flats that were never delivered.

This is not, per se, a problem of duplicative recovery. BRS Ventures Investments Limited v. SREI Infrastructure Finance Limited forecloses that outcome: while creditors may pursue multiple avenues for recovery, including against a debtor and a guarantor, but the total amount reclaimed cannot exceed the total debt, which in this case implies that pursuing the claims against the non-debtor respondents would not affect the corporate debtor’s liability to repay the appellants/creditors after adjusting the amount recovered from the other respondents. What BRS Ventures does not resolve is a live and more immediate problem for resolution professionals: should they admit the entire claim of such creditors while constituting the CoC or should they only admit their claims after deducting the amount prayed for in parallel consumer complaints, thereby affecting the voting weight of such creditors?

On the one hand, it would be manifestly unfair to admit the entire claim of such creditors (with the consequent voting power in the CoC) when they could obtain a decree in their favor before a Tribunal, thereby necessitating a reduction in their right to the recovered amount. Even if the resolution process concludes before the suit, this would make the latter redundant, contributing to multiplicity of litigation, filing of cases for vexatious purposes and an overall weakening of the insolvency resolution process.

However, if the RP proactively discounts the admitted claim to account for relief sought outside the CIRP, that dilutes the affected creditors’ stake in the debtor’s revival at precisely the moment the process needs their engagement most. The IBC’s primary purpose has always been stated to be that of revival, not recovery. However, strip away even the modest incentive of a personal, monetary stake, and it is fair to ask whether homebuyers in particular would keep investing the exertions, risk, and effort that a successful CIRP demands of its creditors. Nothing in the law as it presently stands tells an RP which way to resolve this, and the question will recur in every subsequent CIRP where allottees or other creditors pursue parallel remedies against a debtor’s promoters, directors, or group entities for the same underlying loss which, after this judgment, they now routinely may.

Conditional Stay to Non-Debtors

An efficient way to narrow both gaps, rather than leaving each forum and each RP to improvise an answer case by case, is to develop a doctrine of conditional protection for non-debtor parties, along lines already familiar to American bankruptcy jurisprudence. Under Sections 362(a) and 105 of the US Bankruptcy Code, courts have, in defined circumstances, extended the automatic stay (the equivalent of a Section 14 IBC moratorium) in the form of a preliminary, temporary injunction to parties who are not themselves debtors, particularly where a claim against the non-debtor would have an immediate adverse economic consequence for the debtor’s estate. For example, courts may extend the stay when: (1) the debtor is effectively the real party in interest and a judgment against the third-party defendant would, in practical terms, amount to a judgment or finding against the debtor, (2) protecting the third party is necessary to facilitate the debtor’s reorganization, and (3) litigation between non-debtors could interfere with the integrity or proper administration of the bankruptcy proceedings. This form of a reasoned and discretionary approach towards the effect and scope of a moratorium is currently absent in Indian insolvency law.

Conclusion

None of the above is to suggest that promoters or directors of a company undergoing CIRP should enjoy blanket immunity for their own conduct in handling the debtor company’s day-to-day affairs. The point is narrower, and more basic: a moratorium construed strictly enough to protect only the named corporate debtor answers a textual question without resolving the adjudicatory and systemic ones that composite proceedings against non-debtors actually raise. Tejas Shah answered the narrowest available version of that textual question, correctly, while leaving the NCDRC to conduct a composite adjudication with its central party functionally absent, and leaving open, without acknowledgment, a real risk that alternative-forum relief and financial-creditor status inside a CIRP will collide in ways the law has not yet had to reconcile. A workable answer will have to come from somewhere: comparative bankruptcy jurisprudence on conditional, fact-specific extensions of protection to non-debtors offers one place to start looking, and the question is unlikely to wait long before the next such case forces it.