⁠Lenders Can Now Resume Recovery Against Personal Guarantors With Pending NCLT Cases : IBBI

Personal guarantors to corporate debtors can no longer treat the interim moratorium as a shield against recovery proceedings, even in cases that were already pending before the protection was withdrawn, the Insolvency and Bankruptcy Board of India (IBBI) has clarified.

In a circular dated September 21, the regulator recorded that the interim moratorium under Section 96, and correspondingly Section 124, of the Insolvency and Bankruptcy Code (IBC) ceased to operate from May 26 this year, covering applications filed under Section 95 before that date but still undecided by the National Company Law Tribunal (NCLT).

The circular, addressed to all registered insolvency professionals, insolvency professional entities and insolvency professional agencies, and signed by Sanjay Manocha, General Manager at IBBI, follows rulings by the Bombay and Delhi High Courts holding that the newly inserted Section 96(4), which strips personal guarantors of the automatic protection, applies retroactively rather than only to fresh filings.

Section 96(4) was inserted through the IBC (Amendment) Act, 2026, though the provision itself came into force only on May 26. The interim moratorium, the circular said, "has ceased to operate with effect from 26th May, 2026" for applications already pending before the adjudicating authority on that date.

The Bombay High Court, ruling on July 24 in Tata Capital Financial Services Limited v. Neel Motors LLP and others, held that the phrase "where an application is filed" in Section 96(4) covers matters already pending before the adjudicating authority, and that reading the provision this way gives it prospective, not retrospective, effect from its commencement date. The Delhi High Court, deciding IDBI Trusteeship Services Limited v. Manish Jain and others on August 19, reached the same conclusion, describing the effect as "quasi retroactivity" that reaches continuing proceedings rather than only future ones.

Both judgments were delivered in matters where the interim moratorium had been cited by guarantors to keep parallel creditor action pending or adjourned. In the Bombay case, the Section 95 applications against three individual guarantors had been filed as far back as June 2022, illustrating how long the shield could last. The distinction the courts drew was between retrospective legislation, which undoes something already settled, and retroactive legislation, which attaches new consequences from the date it takes effect to a situation still ongoing, a pending guarantor application, the courts held, falls in the latter category.

Until now, the interim moratorium began the moment a Section 95 application was filed, freezing legal action against the guarantor while the NCLT examined the matter. For guarantors facing long-pending applications, that freeze often became the practical outcome rather than a passing procedural step. Its withdrawal changes the calculation for anyone who has personally guaranteed a company's borrowings.

Legal experts said the circular removes ambiguity that lenders and insolvency professionals had been working around for months. "The amendment removes that automatic protection from May, including in pending cases," said Srinivasa Rao, senior partner and leader, risk advisory services, at Nangia Global, explaining that Section 96(4) was meant to stop guarantors from using insolvency filings as an immediate shield against recovery. Banks, non-banking financial companies, debenture trustees and other lenders stand to benefit, he added, since a personal guarantee will now carry greater enforcement risk while the insolvency application is still under consideration.

Devendra Mehta, fellow at INSOL International, said the clarification is "particularly relevant" where a guarantor continues to invoke the now-defunct protection to delay proceedings. It lets insolvency professionals proceed with such cases without treating an old filing as a ground to stall creditor action, he said.

The circular does not disturb the maintainability of pending Section 95 applications; guarantors can still pursue insolvency resolution before the NCLT. What has fallen away is only the automatic stay that accompanied the filing. The clarification comes days after IBBI separately proposed safeguards for personal guarantor insolvency, including curbs on related-party voting and closer scrutiny of asset valuations and transactions that could erode creditor recovery.

Inputs from Financial Express