The Bombay High Court has strongly deprecated the growing tendency of loan defaulters and guarantors to exploit the Insolvency and Bankruptcy Code (IBC) to create a “cloak of immunity” against lawful recovery actions. A division bench of Justices Manish Pitale and Shreeram Shirsat, in an order passed on Wednesday, observed that chronic defaulters are increasingly using the IBC to trigger moratoriums specifically to frustrate secured creditors and successful auction purchasers.
The court warned that such strategies “paralyse the whole process of lawful steps” taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, ultimately having an adverse impact on the country’s financial health and business environment.
The ruling came during a petition filed by Rozina Firoz Hajiani and others, who were the successful bidders in an auction for a property in South Mumbai. The property had been mortgaged to Union Bank of India against a credit facility of ₹6.25 crore.
After the borrowers defaulted, the bank initiated recovery under the SARFAESI Act. Despite multiple opportunities to repay, the borrowers failed to clear their dues. Consequently, the bank scheduled an auction in November 2024. The petitioners emerged as the successful bidders, and a sale certificate was duly issued in their favour.
However, after the sale certificate was issued, the borrowers approached the National Company Law Tribunal (NCLT) under the IBC to initiate insolvency resolution, claiming an interim moratorium had been triggered. Based on this, the Debts Recovery Tribunal (DRT) in January 2025 stayed the registration of the sale, stalling the recovery process.
The High Court noted a “disturbing trend” where borrowers act as “fence-sitters,” remaining silent while creditors proceed with auctions, only to “scamper to file proceedings” under the IBC once an auction purchaser enters the picture.
“As a consequence, all steps taken under the Securitisation Act suddenly come to a standstill and such borrowers/guarantors, who are defaulters, wear a cloak of immunity under the garb of moratorium triggered under the IBC,” the bench remarked.
The court emphasized that the primary objective of the IBC—the time-bound maximization of asset value and balancing stakeholder interests—is being frustrated by these collusive tactics. The bench stated:
“We find that the manner in which the defaulting borrowers and guarantors have been taking recourse to the provisions of the IBC, shows that such strategies are frustrating the very objective of the IBC… the court cannot remain a ‘mute spectator’ when misuse of legal provisions demonstrates failure of justice.”
The bench highlighted the broader implications of this legal maneuvering, noting that creditors and auction purchasers are often forced into prolonged litigation across the NCLT, the National Company Law Appellate Tribunal (NCLAT), and the Supreme Court. This cycle of litigation, the court said, tends to “adversely affect the economy, financial health and business environment in the country.”
Regarding the specific case, the High Court found that the sale certificate had been issued prior to the borrowers filing their petition before the NCLT. Therefore, the subsequent moratorium could not retroactively affect the completed sale.
The High Court quashed the DRT’s order and cleared the path for the bank to proceed with the registration of the sale certificate in favor of the petitioners.
