Mumbai, March 19 The Bombay High Court has criticized the misuse of provisions of the Insolvency and Bankruptcy Code (IBC) by loan defaulters and guarantors to "gain immunity" by imposing a moratorium, and said this practice has the potential to negatively impact the country's economy.
A bench of Justices Manish Pitale and Shreeram Shirsat, in an order passed on Wednesday, said that such strategies by loan defaulters frustrate the very objective of the IBC and paralyze the entire process of lawful steps taken by secured creditors, adding that the court cannot remain a passive observer when the misuse of legal provisions demonstrates a failure of justice.
The court noted a "disturbing trend" in which chronic defaulters take recourse to the provisions of the IBC to prevent secured creditors and auction purchasers from proceeding under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
In several such cases, it has been found that borrowers/guarantors act as passive observers and do not take any action when secured creditors proceed under the Securitisation Act, and until the process and auction purchasers are involved, the HC said.
At this stage, the borrowers/guarantors initiate collusive proceedings under the IBC, claiming that a moratorium has been triggered before the National Company Law Tribunal (NCLT), it said.
"As a consequence, all steps taken under the Securitisation Act suddenly come to a standstill, and such borrowers/guarantors, who are defaulters, gain immunity under the guise of the moratorium triggered under the IBC," the court said.
In its judgment, the HC noted that the objective of the IBC was to ensure that insolvency resolution of corporate persons and individuals are undertaken in a time-bound manner to maximize asset value, facilitate credit availability, and balance the interests of all stakeholders.
"We find that the manner in which 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, apart from paralyzing the entire process of lawful steps taken by secured creditors under the Securitisation Act," the HC said.
Chronic defaulters of loans and financial facilities, when facing the proceedings initiated by secured creditors, rush to file proceedings under the IBC in a collusive manner so as to claim that a moratorium has been triggered, the HC said.
It added that in such a situation, the creditor or the auction purchaser has to approach the NCLT, followed by the National Company Law Appellate Tribunal (NCLAT) and then the Supreme Court, until which time they are completely frustrated.
The bench said that this practice has the potential to adversely affect the economy, financial health, and business environment in the country.
In such situations, the court cannot remain a "passive observer" when misuse of legal provisions demonstrates a failure of justice, it said.
These remarks were made in a petition filed by Rozina Firoz Hajiani and others, who were successful bidders for a property in south Mumbai, challenging an order passed by the Debts Recovery Tribunal (DRT) putting their sale registration on hold because the borrowers had initiated proceedings under the IBC before the NCLT.
The Union Bank of India had extended a credit facility of Rs 6.25 crore to the borrowers in return for which the property in south Mumbai was mortgaged.
When the borrower defaulted in the payment, the bank first issued a notice and then filed an application before a local court to take physical possession of the mortgaged property, which was allowed.
In the meantime, the bank gave the borrower several opportunities to repay the loan amount, which they failed to do.
In November 2024, the bank scheduled an auction of the property, following which the borrower approached the DRT challenging the same under the Securitisation Act.
The auction was conducted and the petitioner was declared as the successful bidder, and a sale certificate was issued in their favour.
The borrowers then approached the NCLT under the IBC initiating insolvency resolution and also claiming that as per the provisions of the Act, an interim moratorium had been triggered.
Based on this, in January 2025, the DRT held that there was a moratorium and hence all further proceedings under the Securitisation Act were stalled.
The high court in its order noted that in this case, the sale certificate was issued prior to the proceedings filed by the borrowers before the NCLT, and hence the moratorium could not affect the sale, and the DRT failed to appreciate this.
The court quashed the order passed by the DRT and said that the bank can take further steps in pursuance of the auction sale and registration of the sale certificate issued in favour of the petitioners.