Section 124 of the Insolvency and Bankruptcy Code, 2016: Effect of Bankruptcy Application
Section 124 explains the immediate legal effect of filing a bankruptcy application under Section 122 or Section 123. It establishes an interim moratorium protecting the debtor's property from specified debt-related legal actions until the bankruptcy commencement date, subject to statutory exceptions.
Section 124: Effect of application - statutory text
124. (1) When an application is filed under sections 122 or 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.
What does Section 124 mean?
Section 124(1)(a): When the interim moratorium begins and ends
The interim moratorium starts on the date the bankruptcy application is made under Section 122 (application by debtor) or Section 123 (application by creditor). It does not require the bankruptcy order to have already been passed. The protection is tied to actions against the properties of the debtor in respect of debts, rather than creating an unrestricted suspension of every possible proceeding involving the debtor.
It ends on the bankruptcy commencement date. Under Section 126, that date is associated with the passing of the bankruptcy order. The subsequent legal consequences of a bankruptcy order are addressed separately by the Code, including Section 128.
Section 124(1)(b)(i): Pending proceedings are stayed
During the interim moratorium, an existing legal action or proceeding against the debtor's property in respect of a debt is deemed to be stayed. The statutory wording makes the stay automatic for proceedings within its scope, subject to any applicable exclusion or judicial determination of scope.
Section 124(1)(b)(ii): Restriction on new creditor proceedings
Creditors cannot initiate fresh legal actions or proceedings against the debtor's property in respect of debts during this period. The provision preserves the position pending consideration of the bankruptcy application; it does not itself extinguish the debt, decide creditor priorities, or grant a discharge.
Section 124(2): Effect when the debtor is a firm
Where the application concerns a firm, the interim moratorium extends to all partners of the firm as on the date the application is made. This is a specific statutory rule; its practical operation must be assessed together with the commencement and applicability of the relevant Part III provisions.
Section 124(3): Exceptions for notified transactions
Section 124(3) allows the Central Government, in consultation with a financial sector regulator, to notify transactions to which the protection does not apply. A claim that a transaction is excluded should be supported by the applicable notification; an exemption should not be presumed merely because the creditor is a bank or another regulated institution.
Interim moratorium compared with a bankruptcy order
- Filing stage: Section 124 operates from the making of a qualifying application.
- Bankruptcy order: Sections 125 and 126 govern the bankruptcy order and its timing; Section 128 addresses its effects.
- No automatic discharge: Filing an application and obtaining interim protection do not by themselves release the debtor from debts.
- Scope matters: Section 124 specifically concerns proceedings against the debtor's property in respect of debts.
Related sections and official legal references
- Section 121: Circumstances and time limit for applying for bankruptcy.
- Section 122: Debtor's bankruptcy application and accompanying information.
- Section 123: Creditor's bankruptcy application, including secured-creditor requirements.
- Section 125: Appointment of an insolvency professional as bankruptcy trustee.
- Section 126: Bankruptcy order.
- Section 128: Effect of bankruptcy order.
- Section 196: Powers and functions of the Insolvency and Bankruptcy Board of India.
Read the Insolvency and Bankruptcy Code, 2016 overview and consult the India Code official legislation database and the IBBI legal framework for the current Act, notifications, regulations and rules.
Frequently asked questions
Does the interim moratorium begin when the bankruptcy application is filed?
Yes. Section 124(1) specifies the date of making the application under Section 122 or 123 as the starting point, provided the relevant statutory regime applies.
Does Section 124 stop every case against the debtor?
No. Its express language addresses legal actions or proceedings against the debtor's property in respect of debts. Other proceedings require separate legal analysis.
How long does the interim moratorium last?
It lasts until the bankruptcy commencement date, as specified in Section 124(1)(a), rather than for a fixed number of days stated in Section 124 itself.
Does the moratorium cancel the debt?
No. The moratorium temporarily restricts specified enforcement steps; it does not by itself discharge or extinguish the debt.
This article is general legal information, not advice for a specific proceeding. Verify the current law, applicable commencement notifications and court orders before taking action.