Bombay High Court Quashes DRT Stay Order on Post-Sale Process of Mortgaged Flat

The Bombay High Court recently quashed a stay order issued by the Debt Recovery Tribunal (DRT) on the post-sale process of a mortgaged flat in south Mumbai. The court observed a disturbing trend where borrowers and chronic defaulters often take no action when banks proceed with recovery processes. Instead, they invoke collusive proceedings under the Insolvency and Bankruptcy Code (IBC) only when auction purchasers are to be handed physical possession of the property.

In a March 18 order, the bench of Justices Manish Pitale and Shreeram Shirsat expressed distress at the misuse of the IBC. The court noted that borrowers often claim that a moratorium is triggered the moment such proceedings are filed before the National Company Law Tribunal (NCLT). As a result, all steps taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act) come to a standstill, and defaulting borrowers claim immunity under the guise of a moratorium.

The Union Bank had loaned Rs 6.25 crore and issued a notice in March 2017 to the borrower for default in repayment. The High Court observed that chronic defaulters resort to provisions of the IBC to frustrate secured creditors and auction purchasers from proceeding in accordance with the law under the Securitisation Act. The judgment was in a petition filed by the purchasers of the auctioned flat at Mazgaon, who claimed they were being deprived of possession.

In November 2019, following two failed attempts at a one-time settlement (OTS), a magistrate's court allowed the bank to take physical possession. The bank took symbolic possession in November 2022, and the borrower did not challenge this. The bank then set auction dates but received no bidders. After several failed attempts at OTS and auctions, the 10th auction in November 2024 was challenged by the borrower and guarantors before the DRT in December 2024. The flat was successfully auctioned on December 12, 2024.

The borrower then moved the NCLT to initiate the insolvency resolution process and immediately followed with a plea before the DRT to claim that the moratorium kicks in once IBC proceedings are filed. More litigation ensued, leading up to the Supreme Court, which on February 26, 2026, confirmed orders of the NCLT and its appellate tribunal in Delhi to exclude the Mazgaon flat from the moratorium.

The purchasers' counsel, Sidhart Samantaray, argued that the borrowers and guarantors were frustrating and thwarting the process and depriving physical possession. Charles Dsouza, counsel for the bank, supported the purchasers' contention. However, Kruti Bhavsar, counsel for the loan borrowers and guarantors, argued that the DRT's order was lawful and that the moratorium had kicked in on October 6, 2025, before the auction by a creditor invoking IBC in the Guwahati NCLT.

The High Court emphasized that the IBC is meant as an effective legal framework for timely resolution, improving the ease of doing business, facilitating more investments, and leading to higher economic growth and development in the country. However, chronic defaulters use the IBC to frustrate and paralyze the process.