The Moratorium That Isn't: Why Banks Keep Charging Interest Despite IBC Protection

[Manik is a student at Rajiv Gandhi National University of Law.]

It has been 8 years since the Insolvency and Bankruptcy Code 2016 (Code) was enacted to fix India’s broken debt landscape. However, we still find ourselves struggling to address fundamental contradictions that undermines the very foundation of the system. 

Section 14 of the Insolvency and Bankruptcy Code 2016 lays down a comprehensive moratorium enacted to protect the corporate debtors (CD) during the corporate insolvency resolution process (CIRP) by freezing all recovery actions against the CD. Nonetheless, the financial creditors (FCs) remain free to charge interest on the credit advanced before the moratorium was imposed. This creates a legal paradox that mocks the protective intent of the statute as during CIRP most of the CDs render defunct and accrual of interest during that period only increases its liabilities.

The piece examines the essential gap between the Code’s moratorium provisions and the ground reality. It explores how conflicting judicial interpretations have created uncertainty coupled with the regulator’s take, analyses why the IBC Amendment Bill 2025 missed this critical reform opportunity, and proposes straightforward solutions that align with international best practices.

A Framework in Crisis

Even after years of reforms and court interventions, creditors still recover only about 32.76% of what they are owed on average, losing nearly 67–70% of their money in the process. The problem further exacerbates due to the fact that the average resolution timeline has stretched to 713 days, nearly triple the prescribed 270-day limit. During these extended periods, banks and financial institutions continue accumulating interest on their claims, effectively inflating debt amounts beyond any reasonable prospect of recovery.

The human cost of this dysfunction extends beyond mere statistics. Companies that could have been saved as viable entities, become irredeemably insolvent due to accrued interest. This outcome serves no legitimate purpose and contradicts the Code’s rehabilitative objectives. When more than 78% of CIRP cases exceed the prescribed timeline, allowing unrestricted interest accrual would not be a wise decision.

The Great Judicial Divide and IBBI’s Take

What we have got now is inconsistent judicial pronouncements. On one side, the National Company Law Appellate Tribunal (NCLAT) in Arun Kumar v. Sripriya Kumar held that Section 14 does not explicitly prohibit interest accrual, allowing banks to charge contractual interest throughout the moratorium period. It ruled out that moratorium merely suspends enforcement actions, not contractual obligations themselves. This interpretation has given the financial institutions the green light to treat the moratorium as a mere procedural pause rather than substantive protection. It further held that “Section 14 does not specify any ‘interest waiver’ during the moratorium period” and that “interest continues to accumulate till the amount is paid.”

On the other hand, its subordinate benches or National Company Law Tribunal (NCLT) have been differential, ruling that continued charging of interest during moratorium essentially frustrates its protective purpose. In Md. Shamim Akhtar and Another v. UCO Bank and Others, the Kolkata bench has specifically ordered the banks to reverse interest charged during the moratorium period, acknowledging that such practices undermine the collective resolution process.

The NCLT’s stance has a more matured concept of the fundamentals of insolvency law. By directing the banks to rework their accounts ignoring moratorium period interest, the benches also understand that the moratorium has a role of providing substantial protection and not as a mere procedural consequence.

Recently, even the NCLAT, in Axis Bank v. Asset Reconstruction Company took a more protective stance toward moratorium. But it didn’t directly address the interest accrual dilemma. It reiterated that moratorium persists despite stay orders, ensuring that no appropriation of funds and reversal of moneys taken out are required. However, the judgment did not touch upon whether this protective principle extends to contractual interest obligations. 

The Insolvency and Bankruptcy Board of India (IBBI) has consistently maintained an unambiguous position on this matter. Their sample examination papers for July 2025 explicitly state that interest cannot be charged after the insolvency commencement date. But this regulatory clarity stands in sharp contrast to the judicial decisions.

The disconnect between IBBI’s clear theoretical position and judicial reality creates practical chaos for insolvency professionals. Resolution professionals (RPs) find themselves clueless between regulatory expectations and contradictory court orders.

A Missed Legislative Opportunity Through The IBC Amendment Bill 2025

The IBC Amendment Bill 2025, currently under parliamentary consideration, addresses various forms of moratorium misuse but maintains silence on the interest accrual issue. The Bill’s emphasis to prevent misuse of Section 96 of the Code i.e. moratorium by personal guarantors, although significant, overlooks the unrestricted interest accumulation during CIRP.

While legislators addresses the pressing issue of preventing moratorium abuse by personal guarantors, they remain ignorant to the systemic violation perpetrated by FCs who inflate claims by including post-commencement interest charges. This lack of attention to moratorium misuse suggests inadequate understanding of the problem. But the gravity of the situation is much greater.

The Impact and Outcome

The economic consequences of this judicial rift extends far deeper than individual cases. When FCs inflate their claims in post-commencement interest, they impact the entire creditor structure, rendering equitable distribution practically impossible. Resolution plans, which otherwise may have proven to be a feasible solution, becomes economically unachievable when it is burdened with months or years of accumulated interest. While the FCs cite contractual obligations to justify their accrual of interest, the prospective resolution applicants (RAs) factors these inflated claims into their valuations, leading to a far lower offers and reduced recovery rates for all the creditors.

Further, the FCs have nothing to gain in hastening the CIRP as it directly works to their advantage in the form of accumulated interest charges. RPs face impossible scenarios as tenable restructuring plans are rendered unfeasible due to interest-inflated claims. The resulting lower recovery rates hurt all stakeholders, including the very FCs who insist on their right to charge interest throughout the proceeding. The practice effectively makes the Code a wealth-transfer system rather than a value-preservation mechanism, that benefits creditors at the expense of other stakeholders. 

International Perspective

International jurisdictions with more mature insolvency laws offer more protective approaches to interest accrual during insolvency proceedings. Within the US, post-petition interest claims are barred under Section 502(b)(2) of the US Bankruptcy Code in Chapter 11 proceedings, treating such claims as “unmatured interest.” This statutory prohibition prevents creditors from inflating claims during lengthy reorganization proceedings, thereby securing estate value for equitable distribution.

The UK provides a more comprehensive framework through its dual moratorium regime. With the Corporate Insolvency and Governance Act 2020, the standalone moratorium provides companies with “payment holiday” for pre-moratorium debts, effectively suspending interest accumulation for unsecured creditors throughout the 20-40 business day moratorium period. Despite that, the system distinguishes between creditor types, with certain financial contracts continuing to require payment, including secured lending arrangements where “usual capital and interest payments due to lenders will still be payable.”

Both the systems recognize that insolvency law serves fundamentally different purposes than ordinary contract enforcement. While India allow permits individual creditors to extract maximum value by continued accrual of interest, these mature jurisdictions freeze claims at commencement date to maximize collective recovery. This categorical difference is one of the major reason behind India’s low recovery rates despite adopting a similar legal framework.

Suggestive Reforms

The solution to this crisis is remarkably straightforward. A plain piece of legislative amendment to the effect that no interest will accrue on admitted claims in the course of the moratorium period will remove present doubts and provide for consistent application to all the tribunals. It will regulate Indian practice to international standards while restoring the moratorium’s protective purpose.

India should incorporate similar exceptions like in US and UK while maintaining strict safeguards against the abuse. Over-secured financial creditors could be permitted post-commencement interest but only to the extent of their collateral value exceeding the principal debt. Additionally, where CDs prove to be solvent, creditors should receive full contractual interest before any distributions to equity shareholders. However, default interest, penal charges, and other punitive rates must remain absolutely prohibited during moratorium regardless of security or solvency status.

Reform requires immediate action. First, the Supreme Court must make a binding precedent to clarify that moratorium protection encompasses interest suspension as the general rule, with courts recognizing only legislatively specified exceptions. Second, IBBI must issue detailed regulations operationalizing these exceptions, including valuation methodologies for determining over-secured status, solvency certification procedures, and circulars mandating reversal of excess interest that has been taken during moratorium periods. Third, and most important, Parliament must introduce an explicit provision on post-commencement interest accrual in the current amendment bill to ensure certainty.

The economic benefits of such reform would be substantial. RPs could concentrate on value maximization, rather than managing ever-expanding debt burdens. RAs would have certain predictable claim structures, resulting in more competitive bidding, higher recovery percentages. The entire ecosystem, in the end, would gain from the restored commercial certainty and improved resolution outcomes.

Conclusion 

The time for half-measures and judicial ambiguity has run its course. Clear legislative intervention is required to restore the moratorium’s protective purpose and make the IBC deliver on its transformative potential. The contradiction between moratorium theory and interest accrual practice represents more than a technical legal gap. With the IBC Amendment Bill 2025 currently pending before the Parliament, the opportunity for meaningful reform arises. It remains to be seen if policymakers will take this opportunity to correct a gross flaw that has undermined the system’s effectiveness since its inception.