Mumbai, March 19: The Bombay High Court has deprecated the growing misuse of the Insolvency and Bankruptcy Code (IBC) by loan defaulters and guarantors to stall recovery proceedings, warning that such practices could adversely affect the country’s economy.
Court flags misuse by defaulters
A bench of Justices Manish Pitale and Shreeram Shirsat, in an order passed on Wednesday, observed that defaulting borrowers are increasingly attempting to “wear a cloak of immunity” by triggering a moratorium under the IBC at the last stage of recovery proceedings.
The court said such tactics frustrate the very objective of the insolvency law and obstruct legitimate action by secured creditors.
‘Disturbing trend’ in recovery cases
The bench noted a “disturbing trend” where borrowers and guarantors remain inactive while banks proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, but step in only after the process nears completion and auction purchasers enter the picture.
“At this stage, the borrowers/guarantors initiate collusive proceedings under the IBC… claiming triggering of moratorium,” the court said. “As a consequence, all steps taken under the Securitisation Act suddenly come to a standstill and such borrowers… wear a cloak of immunity under the garb of moratorium.”
IBC objective being frustrated
The court emphasised that the IBC was enacted to ensure time-bound resolution of insolvency, maximise asset value, and balance stakeholder interests.
However, it said that the manner in which defaulters are invoking the law “shows that such strategies are frustrating the very objective of the IBC, apart from paralysing the whole process” under the SARFAESI Act.
Litigation delays and economic impact
It further observed that creditors and auction purchasers are then forced into prolonged litigation before the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT), and eventually the Supreme Court, leading to undue delays and frustration.
“Such a practice has the tendency of adversely affecting the economy, financial health and business environment in the country,” the bench remarked, adding that courts cannot remain a “mute spectator” when misuse of legal provisions leads to a failure of justice.
Relief granted to petitioners
The observations came while allowing a petition filed by Rozina Firoz Hajiani and others, who were successful bidders for a flat in Mazgaon Terrace Co-op. Housing Society Limited in Mazgaon. They had challenged a Debts Recovery Tribunal (DRT) order that stalled registration of the sale after borrowers initiated insolvency proceedings.
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The High Court noted that the sale certificate had been issued before the borrowers approached the NCLT, and therefore the moratorium could not invalidate the auction. It quashed the DRT’s order and permitted the bank to proceed with registration of the sale certificate in favour of the petitioners.
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