Bombay High Court Slams IBC Abuse to Derail SARFAESI Auctions, Restores Rights of Auction Purchasers

Bombay High Court Slams IBC Abuse to Derail SARFAESI Auctions, Restores Rights of Auction Purchasers

Introduction

The Bombay High Court set aside an order of the Debts Recovery Tribunal (DRT) that had halted SARFAESI proceedings on account of an alleged moratorium under the Insolvency and Bankruptcy Code (IBC). The Court strongly deprecated the growing misuse of IBC provisions by defaulting borrowers and guarantors to frustrate lawful recovery actions even after auction rights had crystallised in favour of auction purchasers.

Factual Background

The dispute arose from loan facilities granted by Union Bank of India, where the borrowers defaulted despite multiple opportunities, including several One-Time Settlement proposals. The bank initiated proceedings under the SARFAESI Act and issued a notice on March 7, 2017. After several unsuccessful attempts, the secured asset was successfully auctioned on December 13, 2024, and a sale certificate was issued on December 24, 2024. At this stage, when the auction purchasers were entitled to possession, the guarantor initiated insolvency proceedings under Sections 94 and 95 of the IBC, claiming that an interim moratorium under Section 96 had come into effect, thereby stalling further steps under SARFAESI.

Procedural Background

The auction purchasers approached the High Court challenging the order dated November 26, 2025 passed by the DRT-I, Mumbai, which had restrained further SARFAESI action on the ground that the IBC moratorium had been triggered. The writ petition was heard by a Division Bench of the Bombay High Court.

Issues

1. Whether initiation of insolvency proceedings under Sections 94 and 95 of the IBC can be used to stall SARFAESI proceedings after auction rights have crystallised.

2. Whether the DRT was justified in halting further SARFAESI steps on the ground of an alleged moratorium under Section 96 of the IBC.

Contentions of Parties

The petitioners, being auction purchasers, contended that the insolvency proceedings were initiated in a collusive and mala fide manner solely to frustrate the auction sale and prevent delivery of possession, despite completion of the sale process. They argued that the rights in their favour had already crystallised and could not be defeated by belated invocation of IBC provisions. On the other hand, the borrowers and guarantors relied upon the provisions of Sections 94, 95 and 96 of the IBC to contend that initiation of insolvency proceedings automatically triggered a moratorium, thereby staying all further recovery actions under SARFAESI.

Reasoning and Analysis

The High Court undertook a detailed examination of the sequence of events and found that the conduct of the borrowers and guarantors revealed a deliberate design to frustrate lawful recovery proceedings. It observed that there is a disturbing trend of defaulting borrowers invoking IBC provisions at the last stage, particularly after auction proceedings have concluded, in order to stall enforcement actions. The Court held that such recourse to Sections 94 and 95, coupled with reliance on the interim moratorium under Section 96, was being misused in a collusive manner to paralyse SARFAESI proceedings.

The Court emphasized that the IBC is intended to facilitate genuine insolvency resolution in a time-bound manner and to promote economic growth, and cannot be used as a tool to obstruct lawful recovery actions of secured creditors. It further observed that the writ court cannot remain a “blind eye” when the facts disclose a clear attempt to abuse legal processes. The Court thus rejected the interpretation that mere initiation of insolvency proceedings could automatically stall SARFAESI actions in such circumstances, especially when rights of third-party auction purchasers had already crystallised.

Decision

The Bombay High Court set aside the impugned order of the DRT and held that the secured creditor was entitled to proceed with SARFAESI enforcement, including handing over possession to the auction purchasers. The Court clarified that the bank was not required to await disposal of the insolvency proceedings in the facts of the case.