High Court Slams Loan Defaulters for Misusing Bankruptcy Code

The Bombay High Court has criticized loan defaulters for abusing the Insolvency and Bankruptcy Code (IBC) to halt creditor actions, harming the economy. Judge noted the tactic undermines the IBC's purpose and obstructs creditor actions. The case involved borrowers challenging an auction under false bankruptcy proceedings.

The Bombay High Court has expressed serious concerns over the misuse of the Insolvency and Bankruptcy Code (IBC) by loan defaulters and guarantors aiming to avoid creditor actions. According to a judgment passed by Justices Manish Pitale and Shreeram Shirsat, defaulters employ the code to unjustly trigger moratoriums, stalling the legal processes designed to protect secured creditors.

Such practices, emphasized the judges, frustrate the very objectives of the IBC, which is meant to facilitate a timely resolution of insolvency and balance the interests of all stakeholders. Chronic defaulters are increasingly filing collusive proceedings to claim moratoriums, bringing creditor actions to a standstill and consequently impacting the nation's financial health.

The court's observations were made during a petition filed by Rozina Firoz Hajiani and others—successful auction bidders of a South Mumbai property—challenging a Debts Recovery Tribunal (DRT) order. The order put their sale registration on hold, based on bankruptcy claims initiated under the IBC, despite the auction being completed prior to the proceedings.

(With inputs from agencies.)