Deadlines and Default: Bombay High Court Cracks Down on Procedural Abuse in Bank Recoveries

In a pointed dismissal of a petition seeking to halt an urgent e-auction of immovable property, the Bombay High Court has reaffirmed the supremacy of the Insolvency and Bankruptcy Code (IBC) framework over individual attempts to stall recovery proceedings. The bench, comprising justices M.S. Karnik and N.R. Borkar, ruled that once a company is in liquidation, the rights of former directors are extinguished, leaving them without the legal standing to challenge ongoing recovery actions.

The Backdrop: A Last-Minute Bid to Halt Recovery

The petitioner, Manoj Lalwani, a former director of Ritu Automobiles Pvt. Ltd., approached the court seeking an urgent stay on an e-auction of the company’s assets scheduled for June 21, 2025. Lalwani argued that the bank had failed to adhere to the 2015 MSMED notification, alleging that the bank did not implement the required corrective action plans before classifying the company’s account as a Non-Performing Asset (NPA).

The petitioner went further, claiming that the SARFAESI Act, the Recovery of Debts and Bankruptcy (RDB) Act, and the IBC were fundamentally unconstitutional as they biasedly favored creditors over struggling MSMEs.

The Tug-of-War: Statutory Duty vs. Insolvency Norms

Representing the petitioner, counsel argued that the "backbone of our economy," MSMEs, was not given a fair chance at revival, citing the landmark NBCC (India) Limited vs. State of West Bengal ruling. They contended that the bank was legally obligated to foster rehabilitation rather than focusing narrowly on debt recovery, and that current laws effectively bar the borrower’s right to seek remedies against the lender.

Conversely, the Respondent—HDFC Bank—and the Reserve Bank of India (RBI) pointed to the hard reality of the corporate status. They argued that the account of the petitioner’s company was classified as an NPA as far back as 2019, and the debt stood at over ₹30 crores. More importantly, they highlighted that the company was already under the Corporate Insolvency Resolution Process (CIRP) and subsequently in liquidation, which explicitly divested the former board of any management or representative authority.

Legal Analysis: The IBC "Clock" Keeps Ticking

The Court’s reasoning was anchored in the strict statutory hierarchy mandated by the IBC. The judges observed that once an Intermediary Resolution Professional (IRP) or Liquidator is appointed, the powers of the board are suspended in favor of the liquidator. Therefore, an individual director lacks the "locus standi" to litigate on behalf of a company currently under liquidation.

The Court noted: * Borrower’s Proactive Duty: Citing Pro Knits vs. Canara Bank , the court clarified that the burden to invoke the MSME revival framework rests with the borrower, not just the bank. * Procedural Exhaustion: The Court found the petitioner had already tapped into multiple forums, including the NCLAT, and was merely attempting to "stall the auction" through successive litigation. * Exclusion of Limits: The Court accepted RBI’s submission that the 2015 MSME notification and the 2016 framework for revival actually excluded loan accounts with exposure above ₹25 crores, effectively rendering the petitioner's argument inapplicable.

Key Observations

> "There is nothing on record to indicate that the MSME borrower notified the bank of stress and request assistance for resolution or that the petitioner approached the bank for assistance under the MSME notification."

> "Under Section 34(2) of the IBC, on the appointment of liquidator... all powers of board of directors... shall cease to have effect and shall be vested in the liquidator."

> "We are satisfied that this petition and the application is only an attempt to stall the recovery proceedings. The petitioner has already availed of alternate statutory remedies."

The Verdict: A Warning Against Judicial Delay

The High Court ultimately dismissed the petition with no order as to costs, signaling a strict zero-tolerance policy toward using constitutional writ petitions as a tool to bypass the established mechanism provided under the IBC. By affirming that the management of the firm rests now with the liquidator, the Court has effectively shored up the integrity of the insolvency process, ensuring that the wheels of recovery continue to turn without obstruction from defunct former management.

For legal professionals, this judgment serves as a sharp reminder: once the insolvency regime is triggered, the statutory machinery of the IBC takes absolute precedence, rendering former directors toothless in their attempts to re-litigate debt recovery.