High Court Imposes Costs on Defaulters Misusing IBC to Stall Recovery

The petitioners, Rozina Firoz Hajiani and others, approached the High Court seeking to restrain Bank of Baroda from taking physical possession of a secured asset. They argued that since an application under Section 94 of the Insolvency and Bankruptcy Code (IBC) had been filed before the NBRT, an interim moratorium was in effect, which should stay all recovery proceedings.

However, the court discovered a “disturbing trend” of suppressed facts: the petitioners had failed to mention that the NCLT had already dismissed a previous insolvency application involving the same parties just days prior. The court found that the petitioners were part of a group of “chronic defaulters” who had consistently failed to honor settlements and were now using serial IBC filings as a tactic to stall the bank’s recovery actions.

Central Issue: Whether a debtor can claim the benefit of an interim moratorium under the IBC to stall recovery of a secured asset when they have suppressed material facts regarding previous failed insolvency proceedings and breached multiple court sanctioned settlements.

HC Held: The High Court dismissed the petition with heavy costs of Rs. 5 Lakhs, payable to the Maharashtra State Legal Services Authority. The court ruled that the protection of the IBC cannot be extended to those who approach the court with “unclean hands” or who use the legal process to commit a fraud on the system.

It held that the automatic interim moratorium is not an absolute shield for chronic defaulters who engage in “forum shopping” or suppress previous adverse orders. The court clarified that the bank is free to proceed with taking physical possession of the property, as the petitioners’ conduct disentitled them to any equitable relief under Article 226 of the Constitution

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