Retroactivity under the Insolvency and Bankruptcy Code: High Courts clarify
The distinction between retrospective and retroactive legislation has assumed considerable significance in insolvency jurisprudence following the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (“2026 Amendment”). The insertion of Section 96(4) into the Insolvency and Bankruptcy Code, 2016 (“IBC”), has raised an important question: can an amendment that does not expressly provide for retrospective operation nevertheless affect insolvency proceedings initiated before its commencement?
In Tata Capital Financial Services Limited v. Neel Motors LLP and Others (Bombay High Court, 24 July 2026) and IDBI Trusteeship Services Ltd. v. Manish Jain and Others (Delhi High Court, 19 August 2026), the High Courts answered this question in the affirmative. Both decisions recognised the retroactive, or quasi-retroactive, operation of Section 96(4), holding that the interim moratorium available to personal guarantors to corporate debtors ceased to operate in respect of applications pending on 26 May 2026.
The position has been subsequently affirmed through the IBBI Circular No. IBBI/II/106/2026 dated 21 September 2026.
The Legislative change and objective
Before the 2026 Amendment, Section 96(1) of the IBC provided for an interim moratorium upon the filing of an application under Section 94 or Section 95. During this period, pending legal proceedings concerning the relevant debt were deemed to be stayed, and creditors were prohibited from initiating legal proceedings in respect of such debt.
The 2026 Amendment inserted Section 96(4), providing that Section 96 would not apply where an application is filed to initiate an insolvency resolution process in respect of a personal guarantor to a corporate debtor. A corresponding provision was inserted into Section 124, which concerns the effect of an application in the bankruptcy process.
The legislative materials examined by the Delhi High Court identified the misuse of interim moratorium protection by personal guarantors who initiated insolvency proceedings to obstruct or delay legitimate recovery actions. The amendment sought to remove this pre-admission protection without depriving personal guarantors of their ability to seek insolvency resolution or bankruptcy under Part III of the IBC.
The amendment came into force on 26 May 2026. However, it did not expressly specify whether it would apply to insolvency applications already pending on that date.
Retrospective and Retroactive Legislation: The jurisprudential distinction
The central legal issue was whether applying Section 96(4) to pending applications would amount to impermissible retrospectivity or permissible retroactivity. A retrospective law operates backwards by applying a new legal rule to completed acts or transactions, potentially impairing rights acquired under the previous law. In contrast, a retroactive law operates prospectively from its commencement but applies to an existing status, circumstance or transaction that remains continuing or incomplete.
The starting point for resolving this question is the Supreme Court’s recognition that the terms retrospective and retroactive describe distinct modes of legislative operation, even though they have sometimes been used interchangeably in judicial decisions.
The Supreme Court’s decisions in Vineeta Sharma v. Rakesh Sharma, (2020) 9 SCC 1; State Bank’s Staff Union (Madras Circle) v. Union of India, (2005) 7 SCC 584; and Securities and Exchange Board of India v. Rajkumar Nagpal, (2023) 8 SCC 274, provided the jurisprudential foundation for this distinction. Three principles emerge from this jurisprudence.
Firstly, the absence of an express retrospective clause does not, by itself, preclude the application of a provision to an existing legal situation. Secondly, the continued existence of a status or proceeding that originated before the amendment may provide the basis for prospective regulation under the new law. Thirdly, the court must examine the statutory language, the nature of the right or legal consequence involved, the legislative objective and whether the relevant transaction or proceeding remains pending.
The distinction is therefore substantive rather than merely terminological. The question is not simply whether an amendment affects events predating its commencement, but whether it seeks to alter the legal consequences of completed events or regulate the future operation of an existing situation.
The High Courts’ Approach
In Tata Capital Financial Services Limited v. Neel Motors LLP and Others, the Bombay High Court interpreted the expression “where an application is filed” in Section 96(4) to include applications that had already been filed and remained pending before the Adjudicating Authority on 26 May 2026. The Court held that the interim moratorium ceased to operate from that date in respect of such applications.
The Delhi High Court adopted the same reasoning in IDBI Trusteeship Services Ltd. v. Manish Jain and Others. It held that Section 96(4) was retroactive, notwithstanding the absence of an express declaration thereof. The High Court observed that the legislative intent behind the insertion of Section 96(4) of the IBC was unequivocal: to remedy the mischief arising from the misuse and abuse of the interim moratorium under Sections 96(1) to 96(3). The amendment was specifically intended to ensure that the interim moratorium would not apply where an application to initiate insolvency resolution proceedings against a personal guarantor to a corporate debtor is filed, whether by the creditor or the debtor itself. The Court concluded that the provision applied to pending Section 95 applications and that the interim moratorium previously available to the personal guarantor was deemed to have ceased.
Significantly, the Delhi High Court rejected the contention that the interim moratorium constituted a vested right that could not be affected by the amendment.
IBBI Circular: Regulatory Clarification
The IBBI subsequently issued Circular No. IBBI/II/106/2026 dated 21 September 2026. Referring to both High Court decisions, the Circular clarified that the interim moratorium under Sections 96 and 124, insofar as it concerns personal guarantors to corporate debtors, ceased to operate with effect from 26 May 2026 in respect of applications pending before the Adjudicating Authority on that date.
The Circular provides an important regulatory clarification for insolvency professionals and creditors dealing with pending personal guarantor proceedings. It aligns the administration of the amended provisions with the judicial interpretation adopted by both High Courts.
Practical Implications and Conclusion
The decisions establish an important principle of statutory interpretation: the absence of express language does not, by itself, prevent an amendment from applying to pending proceedings. The decisive considerations include the nature of the amendment, the continuing character of the relevant legal situation, and the legislative objective sought to be achieved.
For creditors, the position clarified by the High Courts and the IBBI enables recovery proceedings against personal guarantors to corporate debtors to proceed without the interim moratorium under Section 96, where the relevant insolvency application remained pending on 26 May 2026.
The broader significance of these developments lies in the distinction between taking away a vested right retrospectively and regulating the future operation of an existing legal situation retroactively. By applying this distinction, the courts have given effect to the legislative objective of preventing misuse of interim moratorium protection while preserving the personal guarantor’s statutory right to seek insolvency resolution under the IBC.
