Abstract
A recent decision of the Bombay High Court once again brings into focus a growing concern in India’s financial and legal ecosystem—the strategic misuse of insolvency proceedings to delay legitimate recovery actions.
In a well-reasoned and practical ruling, the Court has clarified the true scope of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 and reaffirmed the sanctity of enforcement actions carried out under the SARFAESI Act, 2002.
What makes this judgment particularly relevant is not just the legal clarity it provides, but the strong message it sends—the insolvency framework cannot be converted into a last-minute shield to frustrate recovery proceedings.
1. Introduction
The introduction of the Insolvency and Bankruptcy Code, 2016 was widely seen as a turning point in India’s approach to financial distress. It replaced fragmented and time-consuming processes with a structured, time-bound mechanism aimed at resolution rather than mere recovery.
But as is often the case with any powerful legal tool, its effectiveness depends on how it is used.
In recent years, courts have started noticing a pattern—borrowers and guarantors invoking insolvency provisions not at the onset of financial distress, but at the very last stage of recovery proceedings. The intention, in many such cases, is not resolution but delay.
This is where the present judgment becomes important. It does not just decide a dispute—it addresses a broader behavioral trend and draws a clear line between legitimate use and tactical misuse of the law.
2. Factual Background: A Story That’s Becoming Familiar
The facts of the case reflect a situation that many lenders would find all too familiar.
The secured creditor initiated action under the SARFAESI Act, 2002, beginning with the statutory demand notice. This was followed by measures under Section 13(4), and eventually, steps were taken for securing possession through the appropriate legal mechanism.
At no stage did the borrower successfully discharge the liability.
Instead, what followed was a prolonged phase of negotiations through multiple One-Time Settlement (OTS) proposals. On paper, these proposals suggested willingness to repay. In reality, they remained unfulfilled—serving more as a means to buy time than to resolve the debt.
Meanwhile, the lender continued with the enforcement process. After facing initial hurdles in auctioning the asset, a successful auction was eventually conducted. The highest bid was accepted, and importantly, a sale certificate was issued and duly registered in favour of the auction purchaser.
At this point, the transaction had effectively reached its logical conclusion.
Yet, just when physical possession was to be handed over, the borrower initiated proceedings under Sections 94 and 95 of the IBC, thereby triggering an interim moratorium under Section 96.
The timing raises an obvious question—was this a genuine attempt at insolvency resolution, or simply a calculated move to stall the inevitable?
3. Issues Before the Court
Against this backdrop, the Bombay High Court was required to consider:
- Whether insolvency proceedings can be invoked at such an advanced stage of SARFAESI enforcement
- Whether the interim moratorium under Section 96 can extend to transactions that have already been concluded
- Whether such conduct amounts to an abuse of the insolvency framework
- Judicial Analysis
4.1 Understanding the True Scope of Section 96
One of the most important contributions of this judgment lies in how it interprets Section 96.
The Court took a balanced view. It acknowledged that the moratorium is a crucial protection—it ensures that during insolvency proceedings, creditors do not take disruptive actions that could derail the process.
However, the Court was equally clear that this protection is not without limits.
It cannot be stretched to undo actions that have already been completed in accordance with law. The moratorium is meant to preserve the present—not to rewrite the past.
This distinction, though subtle, is extremely significant in practice.
4.2 Commercial Certainty and Finality of Auction Sales
The Court’s emphasis on the finality of auction sales reflects a deeper concern—maintaining trust in the system.
Auction purchasers participate with the expectation that once they comply with the process and obtain a valid sale certificate, their rights will be secure. If such rights can be unsettled at a later stage, it would discourage participation and ultimately weaken recovery mechanisms.
The Court rightly held that once the auction process is complete and the sale certificate is issued, the purchaser’s rights crystallize and deserve protection.
This approach reinforces commercial certainty—something that is essential for a functioning credit market.
4.3 Conduct Matters: Waiver, Estoppel, and Fairness
Another striking aspect of the judgment is its focus on conduct.
The borrower had multiple opportunities to challenge the SARFAESI proceedings at the appropriate time. Instead of doing so, they chose to engage in OTS negotiations—effectively acknowledging their liability and seeking time.
The Court found this significant.
Drawing from the Supreme Court’s ruling in Arce Polymers Pvt. Ltd. v. Alphine Pharmaceuticals Pvt. Ltd., it reiterated that a party cannot later turn around and challenge a process it had earlier accepted or acquiesced in.
Similarly, in ITC Ltd. v. Blue Coast Hotels Ltd., the Supreme Court emphasized that borrowers cannot take advantage of their own inconsistent conduct.
Put simply—you cannot play along when it suits you, and then challenge the same process when it doesn’t.
4.4 Drawing the Line: Misuse of Insolvency Proceedings
Perhaps the most candid part of the judgment is where the Court addresses the misuse of the IBC.
The repeated and strategically timed filings were not seen as isolated actions. Instead, the Court viewed them as part of a pattern aimed at delaying enforcement.
This is important because misuse at this level has consequences beyond a single case. It affects:
- lenders trying to recover dues
- third-party purchasers investing in distressed assets
- and ultimately, the broader financial system
By calling out such conduct, the Court has taken a step towards preserving the integrity of the insolvency framework.
4.5 Role of Constitutional Courts
The decision to exercise writ jurisdiction under Article 226 is also noteworthy.
Ordinarily, courts are cautious in intervening where alternative remedies exist. But here, the Bombay High Court recognized that the issue went beyond a routine dispute.
It was a clear case of abuse of process.
In such situations, the Court observed that it cannot remain a silent observer. This reflects a broader principle—that courts must step in when legal provisions are used in a manner that defeats their purpose.
Decision
In conclusion, the Court set aside the tribunal’s order that had stalled the enforcement process.
It allowed the secured creditor to proceed and directed that possession be handed over to the auction purchaser. It also emphasized the need for expeditious disposal of pending proceedings.
The outcome was practical, but more importantly, it was principled.
6. Broader Implications
This judgment carries important takeaways:
- It reinforces that the Insolvency and Bankruptcy Code, 2016 is meant for resolution, not delay
- It strengthens confidence in enforcement under the SARFAESI Act, 2002
- It protects the rights of bona fide third-party purchasers
- It sends a clear signal that courts will not encourage procedural abuse
For professionals working in insolvency, banking, and real estate, this ruling offers both clarity and reassurance.
7. Conclusion
At a broader level, this decision reflects the judiciary’s evolving approach towards maintaining balance in financial laws.
While the insolvency framework must remain accessible to those in genuine distress, it cannot become a convenient escape route for those seeking to delay inevitable outcomes.
The message is clear and timely—the law will protect fairness, but it will not reward strategy at the cost of justice.
Author
CS Raj Pokar
Secretarial Head
Royal Realtors Group of Companies
