Misuse of IBC by defaulters impacts economy: HC

The Bombay High Court has deprecated the misuse of provisions of the Insolvency and Bankruptcy Code (IBC) by loan defaulters and guarantors to “wear a cloak of immunity” by triggering a moratorium, and said this practice has the tendency to adversely impact the country’s economy.

A bench of Justices Manish Pitale and Shreeram Shirsat, in an order passed on Wednesday, said such strategies by loan defaulters frustrate the very objective of the IBC and paralyse the whole process of lawful steps taken by secured creditors, adding that the court cannot remain a mute spectator when misuse of legal provisions demonstrates failure of justice.

The court said it has noticed a “disturbing trend” in which chronic defaulters take resort to the provisions of the IBC to frustrate 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 a number of such matters, it is found that the borrowers/guarantors act as fence sitters and do not take any steps when secured creditors proceed under the Securitisation Act and till the culmination of the process and auction purchasers come into the picture, the HC said.

At this stage, the borrowers/guarantors initiate collusive proceedings under the IBC, claiming triggering of moratorium 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, wear a cloak of immunity under the garb of 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 for the maximisation of the value of assets, the availability of credit and balance the interest of all stakeholders. “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, apart from paralysing the whole 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 heat of proceedings initiated by secured creditors, scamper to file proceedings under the IBC in a collusive manner so as to claim that the moratorium is 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, till which time they are completely frustrated.

The bench said such a practice has the tendency of adversely affecting the economy, financial health and business environment in the country.

In such situations, the court cannot remain a “mute spectator” when misuse of legal provisions demonstrates failure of justice, it said. The remarks were made in a petition filed by Rozina Firoz Hajiani and others, who were successful auction bidders for a south Mumbai property, challenging an order passed by the Debts Recovery Tribunal (DRT) putting their sale registration on hold as 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 of 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 meanwhile, the bank gave the borrower several opportunities to repay the loan amount which they failed.

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 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 provisions of the Act, the interim moratorium was 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 the present 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 the bank can take further steps in pursuance of the auction sale and registration of the sale certificate issued in favour of the petitioners.