Bombay High Court Flags Misuse Of IBC By Borrowers To Stall SARFAESI Recovery After Auction Sale

The Bombay High Court on Wednesday flagged a disturbing trend of defaulting borrowers invoking provisions of the Insolvency and Bankruptcy Code to frustrate proceedings under the SARFAESI Act, even after auction rights had crystallised in favour of auction purchasers.

A Division Bench of Justices Manish Pitale and Shreeram V. Shirsat was hearing a writ petition filed by auction purchasers challenging a November 26, 2025 order of the Debts Recovery Tribunal-I, Mumbai, which had halted further steps after accepting the borrowers' claim that a moratorium under the IBC had been triggered.

“We find that the manner in which the defaulting borrowers and guarantors have been taking recourse to the provisions of the IBC, particularly Sections 94, 95 and 96 thereof, shows that such strategies are frustrating the very object of the IBC, apart from paralyzing the whole process of lawful steps taken by secured creditors in respect of secured assets under the provisions of the Securitisation Act apart from As noted hereinabove, chronic defaulters of loan and financial facilities, when facing the heat of proceedings initiated by secured creditors reaching culmination, scamper to file proceedings under Sections 94 and 95 of the IBC in a collusive manner, so as to claim that the moment such proceedings are initiated, moratorium is triggered under Section 96 thereof, as a result of which further lawful proceedings are stayed. The filing of such proceedings under the IBC is only with the object of frustrating the legal process and it has nothing to do with the object with which the IBC was enacted.”

The court made the observation while examining a challenge by auction purchasers to the DRT's order restraining further action under the SARFAESI Act on the ground that insolvency proceedings filed by the guarantor had triggered a moratorium under the IBC, thereby stopping the bank from handing over possession of the secured asset despite completion of the auction sale.

The dispute arose from loan facilities granted by the Union Bank of India, where the borrowers defaulted despite repeated opportunities, including multiple One-Time Settlement (OTS) proposals. The bank initiated SARFAESI proceedings and issued notice on March 7, 2017. After several failed auctions, the bank successfully conducted an auction on December 13, 2024, and a sale certificate was issued on December 24, 2024.

At this stage, the guarantor initiated insolvency proceedings under Section 94 of the IBC, and later proceedings under Section 95 were also invoked, claiming that the moratorium under Section 96 had come into effect, which stalled further steps for handing over possession of the secured asset to the auction purchasers.

Emphasizing that the writ court cannot remain a “blind eye” where the sequence of events reveals a deliberate design to frustrate the legal process, the court observed:

“We have made a detailed reference to the events leading upto filing of the present petition, as we are of the opinion that the writ Court cannot turn a blind-eye and remain aloof when the admitted sequence of events does bring out a design on the part of a set of parties before the Court, to somehow frustrate the legal process and to prevent the other parties from proceeding in accordance with law.”

The court further said the IBC is intended for genuine insolvency resolution and economic development of the country and not as a tool for defaulting borrowers to stall lawful recovery proceedings.

“The object of the IBC is to ensure that insolvency resolution of corporate persons and individuals is undertaken in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all stake holders. The whole purpose of enactment of IBC is for improving the ease of doing business, facilitating more investments, leading to higher economic growth and development in the country.The IBC emphasizes upon an effective legal framework for the timely resolution of insolvency and bankruptcy, so that an opportunity is made available for revival of the debtor to support development of credit markets and to encourage entrepreneurship, with liquidation being the last resort”

Setting aside the DRT's order, the High Court held that the secured creditor need not await disposal of the interim application and was entitled to proceed in accordance with law to take possession of the secured asset pursuant to the auction sale and sale certificate.