IBC Misuse to Stall SARFAESI Action: HC Intervenes Against Defaulters

The dispute arose from recovery proceedings initiated by a bank against defaulting borrowers and guarantors in respect of a secured loan account. Despite issuance of notice under Section 13(2) of the SARFAESI Act as far back as March 2017 and multiple subsequent steps including symbolic possession and repeated auction attempts, the borrowers failed to challenge the proceedings at any stage. Instead, they repeatedly submitted One Time Settlement (OTS) proposals ten in total without honouring any of them. Eventually, after several failed auctions, the secured asset was successfully auctioned in December 2024, and a sale certificate was issued and registered in favour of the auction purchasers.

At the stage when physical possession was to be handed over, the borrowers and guarantors adopted a different strategy. They initiated proceedings under Sections 94 and later 95 of the Insolvency and Bankruptcy Code, 2016, claiming that an interim moratorium under Section 96 had come into effect. This resulted in stalling further SARFAESI action. Although the NCLT, NCLAT, and even the Supreme Court had already held that the secured asset stood excluded from the moratorium (as the sale had been completed prior to insolvency proceedings), the borrowers again triggered fresh proceedings before a different NCLT bench, leading the DRT to halt further action. Aggrieved by this, the auction purchasers approached the High Court.

Issue Raised: Whether borrowers/guarantors can misuse IBC provisions to repeatedly trigger moratorium and stall SARFAESI proceedings after completion of auction sale.

HC Ruling: The High Court allowed the writ petition and set aside the DRT’s order. It held that the conduct of the borrowers and guarantors clearly demonstrated a deliberate and collusive attempt to frustrate lawful recovery proceedings. The Court observed that once the auction sale had concluded and rights of the auction purchaser had crystallized, subsequent insolvency filings could not be used as a tool to derail the process.

The Court strongly deprecated the growing trend of chronic defaulters invoking Sections 94, 95, and 96 of the IBC at the last stage of recovery proceedings merely to obtain a moratorium and delay enforcement. It noted that such tactics defeat the very object of both the IBC and SARFAESI Act. The Court also found the later insolvency proceedings to be suspicious and collusive in nature.

Holding that the DRT committed a jurisdictional error by mechanically accepting the plea of moratorium, the High Court directed that the bank and auction purchasers need not await disposal of pending applications and may proceed with taking physical possession. It further directed expeditious disposal of the securitisation application on merits.

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