Misusing Insolvency to Stall SARFAESI Enforcement: Key Lessons from a Bombay High Court Ruling

1. Overview: When Insolvency Becomes a Delay Tactic

The Insolvency and Bankruptcy Code, 2016 was enacted to provide a coherent, time-bound mechanism for resolving financial distress. Over time, however, courts have increasingly confronted a worrying pattern—borrowers and personal guarantors initiating insolvency processes at the last possible moment, not to genuinely restructure their liabilities, but to obstruct lawful recovery efforts already nearing completion.

A recent decision of the Bombay High Court examines this misuse in the specific context of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, and its impact on enforcement under the SARFAESI Act, 2002. The Court has clarified that insolvency provisions cannot be wielded as a last-minute weapon to derail concluded SARFAESI actions or unsettle rights that have already crystallised in favour of auction purchasers.

This judgment is particularly significant because it:

  • Precisely delineates the scope of the interim moratorium under Section 96
  • Reaffirms the finality of auction sales conducted under SARFAESI
  • Condemns tactical use of insolvency proceedings as an abuse of process
  • Demonstrates when constitutional courts will step in despite alternate remedies

2. Factual Matrix: A Common Story of Delay and Obstruction

The facts considered by the Bombay High Court mirror a scenario that many secured creditors routinely face.

  1. A secured lender initiated recovery under the SARFAESI Act, 2002.
  2. A statutory demand notice was issued, followed by measures under Section 13(4) of the SARFAESI Act.
  3. Steps were taken to secure possession of the secured asset through the legally prescribed procedure.

Throughout this period, the borrower did not clear the outstanding dues. Instead, there followed a long trail of negotiations, primarily via repeated One-Time Settlement (OTS) offers. On the face of it, these proposals appeared to signal an intention to repay. In practice, they remained unimplemented, effectively operating as tools for securing more time rather than for genuinely resolving the debt.

Despite these delays, the secured creditor continued with SARFAESI enforcement. After some initial difficulty in finding a buyer, the lender eventually conducted a successful auction. The highest bid—say, for illustration, from an individual like Mr. Sharma—was accepted. A sale certificate was issued and duly registered in favour of the auction purchaser in accordance with the SARFAESI Act and applicable rules. At this juncture, from the lender’s perspective, the enforcement process was substantially complete and the purchaser’s rights had crystallised.

However, just as physical possession of the property was about to be delivered to the auction purchaser, the borrower initiated proceedings under Sections 94 and 95 of the Insolvency and Bankruptcy Code, 2016, thereby triggering the interim moratorium under Section 96. The timing made the real objective apparent—this move was less about insolvency resolution and more about putting a last-minute brake on an almost completed enforcement action.

Against this backdrop, the Bombay High Court was called upon to determine:

  • Whether borrowers or personal guarantors can invoke Sections 94 and 95 at such a late stage that SARFAESI proceedings have already culminated in a completed auction and registered sale certificate.
  • Whether the interim moratorium under Section 96 has the effect of freezing or undoing transactions that are already lawfully concluded.
  • Whether using the insolvency framework in this manner amounts to an abuse of legal process, warranting intervention under Article 226 of the Constitution of India.

These issues required the Court to balance the protective objective of the interim moratorium with the need for commercial certainty and finality in SARFAESI enforcement.

4. Judicial Analysis: Scope and Limits of Section 96

4.1 Nature and Reach of the Interim Moratorium Under Section 96

The Bombay High Court carefully examined the language and purpose of Section 96.