VOLUNTARY SURRENDER AS AN EXCEPTION TO MORATORIUM: ADDRESSING THE LEGISLATIVE GAP ON DISCLAIMER OF ONEROUS ASSETS IN INDIAN INSOLVENCY LAW

This post is authored by Vibha Patel, 3rd Year, B.Com LL.B. (Hons.) student at Tamil Nadu National Law University, Tiruchirappalli and Nitin Raj, 4th Year, B.B.A. LL.B. (Hons.) student at Symbiosis Law School, Pune

INTRODUCTION

The Insolvency and Bankruptcy Code 2016 (“IBC”) changes how insolvency is handled in India by focusing on revival of businesses instead of just closing them. It aims to protect companies while also making sure creditors get paid. Section 14, which creates a moratorium, is key because it puts a temporary stop to all recovery and legal actions as soon as the Corporate Insolvency Resolution Process (“CIRP”) begins.

The moratorium’s rationale is noble: to preserve the corporate debtor’s assets and ensure an orderly resolution. Yet, in practice, this protective wall often morphs into an impediment, delaying recovery, freezing value, and allowing non-viable assets to stagnate. The recent decision of the Supreme Court in Sincere Securities Pvt. Ltd. v Chandrakant Khemka (“Sincere Securities”) represents a landmark attempt to recalibrate this delicate balance, which has allowed voluntary surrender of leased property and upheld the commercial wisdom of the committee of creditors. 

This blog examines the Sincere Securities ruling as a turning point in interpreting Section 14. It explores how the judgment has provided crucial interpretive clarity on the distinction between coercive recovery and voluntary surrender.  It also analyses the persistent problems faced by creditors under the IBC, and argues for legislative reform drawing from US and UK insolvency systems to introduce specific provisions for managing onerous assets and executory contracts during the moratorium.

THE MORATORIUM: SHIELD OR SHACKLES?

Section 14 of the IBC prohibits institution or continuation of suits, execution of judgments, and any form of recovery against the corporate debtor. The provision was intended to create a “breathing space” insulating the debtor from parallel enforcement while the Resolution Professional (“RP”) and Committee of Creditors (“CoC”) explore revival. However, experience has shown that a strict interpretation of the moratorium can defeat the very purpose of ensuring the maximisation of value of the corporate debtor’s assets as envisaged under the Code.

The central issue in the present case was whether the RP could surrender a leased property during the moratorium if its retention imposed an excessive financial burden. The Supreme Court answered affirmatively, holding that while Section 14(1)(d) bars coercive recovery, it does not prevent voluntary surrender when such action preserves the corporate debtor’s value. The Court observed, “The moratorium protects the debtor’s assets from coercive action, but it cannot compel retention of unviable property.” This clarification infused commercial sense into statutory silence and reaffirmed that insolvency law must serve economic purpose, not procedural rigidity.

The decision signifies an evolution in judicial thinking. Prior interpretations often treated Section 14 as an absolute embargo, frequently leading to undesirable outcomes where corporate debtors were compelled to retain financially onerous or redundant assets solely because enforcement mechanisms were suspended. By clearly distinguishing between voluntary surrender and coercive eviction, the Supreme Court represents a decisive move to align the IBC with commercial reality.

BRIEF FACTS

The factual basis of Sincere Securities lay in the insolvency of Nandini Impex Pvt. Ltd., which had defaulted on loans while occupying a high-rent commercial property in New Delhi. The monthly rent of ₹12,00,000 had become a substantial drain on the debtor’s resources. Recognising this, UCO Bank, the sole financial creditor, directed the RP to evaluate the cost-benefit of retaining the premises. The RP concluded that continued occupation would erode value and recommended surrender.

However, the suspended director challenged the move, contending that surrender would contravene Section 14(1)(d). The NCLT upheld the CoC’s decision; however, the NCLAT reversed this, adopting a literal view of Section 14. When the matter reached the Supreme Court under Section 62 of the IBC, the Court reinstated the NCLT’s order, holding that judicial authorities cannot sit in appeal over the CoC’s business judgment; they can only look into procedural irregularities. Supreme Court, by citing K. Sashidhar v Indian Overseas Bank, reaffirmed that “The collective business decisions of the CoC are non-justiciable and must be accorded due respect by all judicial and quasi-judicial authorities under the IBC.”

ABSOLUTE SHIELD BUT COMPLICATED RECOVERY

While intended as an essential safeguard to preserve the Corporate Debtor’s (“CD”) estate, the moratorium has historically complicated the path to recovery for creditors. Judicial experience reveals a persistent struggle where the protective barrier often results in asset stagnation and inefficient use of resources.

The Supreme Court in Rajendra K. Bhutta v MHADA clarified that the moratorium under Section 14, read with Section 238 of the IBC, operates as an overriding statutory injunction, barring all recovery and enforcement actions against the corporate debtor's assets by any third party. This interpretation laid the foundation for a rigid application of the moratorium, where even bona fide recovery attempts were viewed as violations of Section 14, often at the cost of creditor interests.

Building on this understanding, the Supreme Court in China Development Bank v Doha Bank QPSC further clarified the position of creditor claims under the moratorium. The Court explained that although Section 14(1) of the IBC bars recovery suits and the enforcement of payment, it does not extinguish the underlying claim. The creditor’s right to payment survives but remains temporarily unenforceable during the moratorium, underscoring that the provision delays recovery rather than cancelling the debt. This ruling highlighted the uncertainty faced by creditors, whose claims are legally protected yet practically suspended, often leading to liquidity strain and business disruption.

Despite continued judicial refinement, creditor recovery under the moratorium remains complex. In Ghanashyam Mishra and Sons Pvt. Ltd. v Edelweiss ARC, the Supreme Court held that Section 14 acts as a statutory injunction suspending all proceedings against the corporate debtor during the CIRP. While the right to payment survives, its enforcement depends entirely on inclusion in the approved resolution plan. Any claim, whether operational, financial, or statutory, that is not incorporated within the plan stands extinguished, leaving creditors in a position of uncertainty and financial strain, particularly those whose businesses rely on continuous cash flow. The Supreme Court’s judgment in Sincere Securities stands out for blending legal principle with practical business needs. The Court observed that “the moratorium cannot be used as a tool of unjust enrichment or obstruction,” particularly when both the Committee of Creditors and the Resolution Professional have found that retaining the property undermines the purpose of the Corporate Insolvency Resolution Process. The judgment emphasises that the protective role of the moratorium must not become an instrument of delay or misuse by management, and that the commercial wisdom of the Committee of Creditors in deciding not to retain an asset during CIRP should be respected.

MORATORIUM AND ITS IMPACT ON LEASED PROPERTY AND ONEROUS ASSETS

The moratorium ensures that the Corporate Debtor (“CD”) continues as a going concern during the CIRP and sustains operational viability by preventing disruption of assets essential to ongoing business operations. In cases involving leased or third-party property, the lessor does not have a conventional “claim” under the IBC, as their assets are not part of the insolvency estate under Explanation (a) to Section 18 of the IBC, which excludes assets owned by a third party but held by the CD under trust or contractual arrangements, including bailment. Before the Supreme Court’s clarification in Sincere Securities Pvt. Ltd. v Chandrakant Khemka, recovery of possession was nevertheless barred during the moratorium, as repossession was seen to interrupt business continuity and frustrate the resolution process.

This strict interpretation was reflected in M/s. Navbharat Castings LLP v Moser Baer India Ltd. (2018), where the NCLAT held that under Section 14(1)(d), a landlord cannot recover possession of leased premises during moratorium, even after an eviction decree. Similarly, in Ms. Rajalakshmi Vardarajan, RP v G. Dhananjaya Naidu (2021), the tribunal ruled that property physically occupied by the CD could not be repossessed until the moratorium concluded. The same approach was followed in Divyesh Desai v GIDC (2025), where even termination of a high-cost lease was treated as a prohibited recovery of property under Section 14(1)(d), compelling the CD to retain a loss-making asset.

Section 14(1)(b) of the Insolvency and Bankruptcy Code prohibits “transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.” On a plain reading, this clause appears to prevent the corporate debtor from giving up possession of leased property during the moratorium, as such surrender could be viewed as a form of disposal of its legal interest. The Supreme Court in Sincere Securities, however, filled this interpretative gap by clarifying that the moratorium cannot compel the corporate debtor to retain commercially unviable assets. By upholding the Committee of Creditors’ commercial wisdom to voluntarily surrender a leased property when continued occupation undermines value, the Court introduced a pragmatic balance between statutory protection and business efficiency, which is a significant step toward harmonising insolvency principles with economic reality.

ADDRESSING THE LEGISLATIVE GAP IN INDIAN INSOLVENCY LAW

The Supreme Court’s reinforcement of the CoC’s authority has also highlighted a notable gap in India’s insolvency legislation. While the Court rightly upheld the decision to surrender an uneconomically leased asset, the IBC lacks explicit provisions for addressing onerous assets and executory contracts. This omission often leads to interpretative uncertainty and the potential for conflicting judicial outcomes.

A comparative look at other jurisdictions highlights the need for codifying such mechanisms within India’s framework. In the United States, Section 365 of the Bankruptcy Code authorises a debtor-in-possession or trustee, with court approval, to assume or reject executory contracts and unexpired leases, allowing the debtor to discard burdensome obligations while retaining those that are commercially beneficial. Similarly, Section 178 of the United Kingdom Insolvency Act, 1986 empowers a liquidator to disclaim onerous property, thereby preventing the estate from being burdened by unprofitable or valueless assets. Together, these statutory provisions provide clarity and enhance the efficiency of insolvency administration.

India’s lawmakers should draw from these examples and introduce corresponding provisions within or alongside Section 14 of the IBC, creating a coherent statutory framework that empowers resolution professionals to manage onerous assets effectively. Such legislative reform would ensure predictability, reduce judicial dependence, and align India’s insolvency regime with global best practices.

These comparative frameworks demonstrate how statutory empowerment of insolvency professionals to disclaim onerous obligations can transform India’s insolvency law from a reactive to a commercially responsive mechanism.

THE MODULAR VIEW: BUILDING FLEXIBILITY IN INSOLVENCY LAW

The modular approach to insolvency law rejects the “one-size-fits-all” model, recognising that different businesses require different solutions. It builds a system around common principles such as moratorium, creditor participation, and value maximisation, while adding specialised modules that address specific issues like onerous property, executory contracts, or pre-insolvency restructuring. Supported by UNCITRAL and the World Bank, this model has been adopted in Italy and the United Kingdom, both of which recently modernised their insolvency laws to make them more flexible and rescue-oriented.

In Italy, the Codice della Crisi d’Impresa e dell’Insolvenza (C.C.I.I.) introduced a layered framework combining pre-insolvency, rescue, and liquidation procedures. It allows liquidators to continue or terminate executory contracts, where obligations remain on both sides based on commercial benefit, with court oversight. Termination clauses triggered solely by insolvency (ipso facto clauses) are void, ensuring business continuity during restructuring. Likewise, the C.C.I.I. permits rejection of onerous or unprofitable property, freeing the estate from burdensome obligations while protecting creditor rights.

The UK’s Corporate Insolvency and Governance Act 2020 (CIGA) reflects a similar modular vision. It introduced a stand-alone moratorium and restructuring plan to prioritise rescue over liquidation. Under Section 233B, suppliers cannot terminate contracts merely because of insolvency, and Section 178 empowers liquidators to disclaim onerous property, principles affirmed in Hindcastle v Barbara Attenborough Associates (1996). Both systems demonstrate how modular frameworks create clarity, flexibility, and fairness, giving insolvency professionals the discretion to act commercially while maintaining judicial supervision.

Adopting such a model under India’s IBC would bridge existing gaps, particularly on onerous assets and executory contracts, and move the Code toward a pragmatic, responsive, and value-preserving regime. If implemented in India, the modular framework could operate through amendments introducing sector-specific modules under the IBC similar to UNCITRAL’s structure. For instance, a dedicated module on executory contracts could empower resolution professionals to reject or retain such contracts based on commercial viability, subject to approval by the Committee of Creditors and oversight by the NCLT.

Such reforms would directly impact key provisions like Sections 14, 18, and 20 of the IBC by clarifying the treatment of onerous assets during moratorium and expanding the powers of resolution professionals to act in a commercially efficient manner. Ultimately, a modular and adaptive structure would ensure that India’s insolvency regime remains both economically relevant and globally competitive.

CONCLUSION

The Insolvency and Bankruptcy Code was enacted to promote resolution over liquidation, ensure the maximisation of value of assets, and prevent debtor manipulation through a time-bound and commercially viable process. The Supreme Court’s decision in Sincere Securities aligns with these legislative objectives by reinforcing that the moratorium, though protective in nature, cannot operate to the detriment of commercial wisdom or economic efficiency. The law must safeguard both the interests of the corporate debtor and the creditors, without obstructing pragmatic business decisions. However, the task remains unfinished. The legislature must now translate this judicial wisdom into clear statutory provisions. Provisions that permit the surrender of burdensome property, address executory contracts, and protect creditors’ rights would render the Insolvency and Bankruptcy Code truly robust. To conclude, the Supreme Court has laid the foundation; it is now for the legislature to provide a clear and comprehensive framework to ensure the Code’s true effectiveness.