The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and Insolvency and Bankruptcy Code, 2016 (IBC) have had an uneasy interface since the initiation of IBC in India and has recently come into sharp focus. The recent judgements of Bombay High Court including Arrow Business Development Consultants Pvt. Ltd. v. Union Bank of India & Ors have exposed a critical gap in the statutory framework. This inconsistency allows insolvency proceedings to be invoked at advanced stages of recovery to stall and delay enforcement actions. While courts eventually stepped in to fill the gaps and curb misuse of the provisions of IBC by the involved parties, it is yet to be addressed via legislative reforms. Even the failure of the IBC Amendment Act, 2026 to address the matter raises concerns about long-term certainty in the credit enforcement ecosystem.
The system is currently at war with itself. While SARFAESI is essentially a creditor-centric mechanism that enables lenders to enforce their security interests swiftly and without much judicial intervention and review, the IBC is a collective resolution framework that prefers fair treatment of all creditors through the imposition of a moratorium over individual enforcement actions. Both the statutes have their specific legal objectives but their interaction in the context of timing has created opportunities for malafide behavioral pattern among debtors.
A typical trend has emerged in the process of debt recovery wherein a secured creditor initiates legitimate recovery proceedings under SARFAESI, takes possession of the secured asset, and conducts an auction. Thereafter a successful bidder is declared and most or all of the sale consideration is paid. At this particular stage, just before the issuance of the sale certificate, the borrower initiates insolvency proceedings under the IBC. As a result of which, the moratorium invoked under Section 96 or Section 14 of the IBC halts the transfer of the asset, leaving the auction purchaser without title and the creditor without recovery.
It has been historically held in various court's judgements that ownership in an auctioned property passes only upon issuance of a sale certificate. This position has been validated in the Apex Court's decisions in B. Arvind Kumar v. Government of India (2007) and Shakeena v. Bank of India (2019) which clearly states that as long as sale certificate is not issued, the purchaser acquires only an inchoate right. But if moratorium is triggered prior to the issuance of a sale certificate, the courts are compelled to halt the process.
However, recent judgments of the Bombay High Court indicate a significant departure from this strictly formalistic approach. In Rozina Firoz Hajiani v. Union of India (2026), the Bombay High Court took cognisance of repeated and strategic insolvency filings aimed at stalling SARFAESI enforcement wherein the Hon'ble Court specifically stated that, “A disturbing trend is noticed by this writ Court as to the manner in which chronic defaulters are taking resort to the provisions of IBC to frustrate secured creditors and auction purchasers from proceeding, in accordance with law, under the provisions of the SARFAESI Act”. In this matter, the Court transcended the literal meaning of statutory provisions by examining the broader purpose behind the enactment of such legislation and the potential misuse of the insolvency framework by chronic defaulters.
This pro-active judicial stance is not an isolated event but is firmly rooted in the anti-abuse doctrine that has evolved under the IBC. Indian courts have unequivocally reprimanded parties, debtors and creditors alike, who abuse the process of law or approach courts without clean hands. In multiple judgments of the Supreme Court, whether it is Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017) or Swiss Ribbons Pvt. Ltd. v. Union of India (2019), the court has time and again reiterated that IBC is a beneficial legislation and not a mere recovery legislation for creditors. Even in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021), the Court held that tribunals must lift the corporate veil and examine the substance over form to detect collusion among the involved parties in an insolvency proceeding.
The High Courts have started applying the same principles of pro-active judicial stance in the context of SARFAESI to refuse the initiation of insolvency proceedings to be used as tactical shield against recovery. They have recognised that when auction processes have substantially progressed and third-party rights have crystallised, permitting a moratorium to freeze such recovery mechanisms would undermine both commercial certainty and the efficacy of secured credit enforcement.
Despite judicial interventions in matters concerning the conflict of IBC and SARFAESI, recently legislative developments have not directly addressed the issue. The latest IBC Amendment Bill, 2026, which was proposed and passed in the most recent parliamentary session focuses on improving procedural efficiency, reduce legal uncertainties and maximise value realisation for stakeholders. These reforms are significant but do not mention the specific issue pertaining to 11th hour insolvency filing specifically aimed at disrupting SARFAESI proceedings.
The silence of legislature on this issue is problematic for several reasons. Firstly, although judicial interventions are effective for individual matters, it cannot substitute clear statutory provisions. Courts operate within the confines of existing laws and often rely on case specific facts to prevent abuse, owing to which outcomes can vary depending on the stage of auction process, timing of filing for insolvency and the interpretation of the judgments by different benches of the same or different courts, thus creating ambiguity and uncertainty.
Secondly, lack of a clear rule creates panic in the auction markets. Any prospective bidder who expects to acquire a valid and enforceable title upon compliance with the terms of sale would be wary of the risk of subsequent insolvency proceedings leading to reduced participation in such auctions and therefore impact dues recovery by financial institutions.
Thirdly, the current framework without ample guidelines may inadvertently incentivise malafide behaviour by defaulting borrowers who can initiate insolvency proceedings at a late stage, thus delaying or complicating recovery without any intent of genuine resolution.
Therefore, in the light of the issues addressed, the need of the hour is a legislative intervention that finds a balance with the objectives of SARFAESI and IBC. One possible approach could be to introduce a statutory cut-off stage, post which any insolvency proceedings shall not affect a SARFAESI sale. For instance, in such auctions, when the bid gets accepted and 90% of the consideration is paid, the law could deem the sale to be complete only for the limited purpose of insulating it from a subsequent moratorium. This protection could be conditional upon the auction purchaser paying 100% of the bid amount within a specified time. Another option could be to readily provide the sale certificate to the auction purchaser if all necessary conditions have been fulfilled and the sale is effectively complete with the payment of full consideration, thereby preventing delays from affecting the purchaser's rights.
Another important reform would be to ensure that the bonafide auction purchasers are protected under law, i.e. if insolvency proceedings deprive them of the auctioned assets, they should not run from pillar to post seeking enforcement of their rights over the property or the paid amount. Additionally, safeguards could be introduced to prevent repetitive or collusive insolvency filings by chronic defaulters.
Ultimately, the goal must be to ensure that the IBC does not defeat the very purpose of SARFAESI. Both statutes are integral to India's financial architecture and their objectives are not entirely incompatible. However, without clear legislative directions, their interaction may produce unintended consequences that undermine efficiency, fairness, and certainty.
Although the judiciary's commendable steps to prevent the misuse of insolvency proceedings as a shield against recovery has been impactful, the absence of the legislature's response on the same leaves the issue only partially resolved. Therefore, a coherent statutory framework is essential to preserve the integrity of both the IBC and SARFAESI. As long as such clarity remains elusive, the risk of strategic behaviour will continue to cast a shadow over the recovery process, to the detriment of creditors, purchasers, and the broader financial system.
Author is an Advocate practicing at Delhi High Court and also a Panel Advocate for RITES Ltd., a CPSE under Ministry of Railway, Govt. of India. Views are personal.