Personal Guarantors Cannot Use Pending Insolvency Petitions to Stall Bank Recovery: Bombay High Court Makes New Section 96(4) IBC Rule Applicable to Pending Cases
IBC Amendment Ends Interim Moratorium Even in Pending Personal Guarantor Cases From 26 May 2026: Bombay High Court
Facts
A Division Bench of the Bombay High Court dealt with a batch of writ petitions filed by Indian Bank, RBL Bank Limited, Godrej Finance Limited, Asset Reconstruction Company (India) Limited and Apna Sahakari Bank Limited, raising a common and important question under the Insolvency and Bankruptcy Code, 2016. The lead matter was Indian Bank v. Shabbir Abbas Patel & Ors., Writ Petition No. 2819 of 2026.
The central controversy arose after Section 96(4) of the IBC was introduced with effect from 26 May 2026. The amendment provides, in substance, that the interim moratorium contemplated under Section 96 would not apply where proceedings under Sections 94 or 95 concern insolvency resolution of a personal guarantor to a corporate debtor.
The crucial question was whether this amendment applied only to insolvency applications filed after 26 May 2026, or whether it also affected Section 94/95 proceedings that had already been filed and were pending on that date.
The controversy had substantial consequences for banks and secured creditors because Section 96’s interim moratorium had been invoked in several cases to stall ongoing recovery, auction, SARFAESI and DRT proceedings.
Issues
The principal issue was:
Whether Section 96(4) of the IBC, introduced with effect from 26 May 2026, operates retroactively so that it applies even to applications under Sections 94 or 95 that were already pending on that date?
Connected questions included whether an interim moratorium is a vested or substantive right of a debtor/personal guarantor, and whether recovery proceedings initiated by secured creditors could resume once Section 96(4) became operative.
Petitioners’ Arguments
The banks and secured creditors argued that Section 96(4) was enacted specifically to cure the misuse of the automatic interim moratorium.
They contended that borrowers and personal guarantors were invoking Sections 94 and 95 at strategic stages of recovery proceedings merely to trigger Section 96 and stall legitimate enforcement action.
According to the petitioners, restricting the amendment only to insolvency petitions filed after 26 May 2026 would preserve the very mischief Parliament intended to eliminate in all previously filed cases.
They relied upon the Mischief Rule/Heydon’s Rule, the legislative history of the amendment and reports concerning misuse of Section 96.
It was further argued that the interim moratorium was merely a temporary procedural protection operating during the preliminary insolvency process and did not create a vested right capable of surviving a subsequent statutory amendment.
Respondents’ Arguments
The borrowers and guarantors contended that Section 96(4) should operate prospectively only.
According to them, once an application under Section 94 or 95 had been filed before 26 May 2026 and an interim moratorium had come into existence, that protection could not subsequently be taken away by applying the amendment to an already pending proceeding.
They relied upon the general presumption that legislation affecting substantive or existing rights operates prospectively unless retrospective operation is expressly stated or follows by necessary implication.
They also emphasised the statutory expression “where an application is filed”, arguing that it contemplated applications filed after the amendment came into force.
Analysis of the Law
The High Court drew an important distinction between retrospective and retroactive operation.
The Court did not treat Section 96(4) as operating from a date prior to 26 May 2026. Instead, the amendment operates from 26 May 2026 onwards, but its legal effect extends to proceedings that were already pending on that date.
Thus, a Section 95 proceeding filed before 26 May 2026 does not disappear or become invalid. What changes is the availability of the interim moratorium from 26 May 2026 onwards where Section 96(4) applies.
The Court also rejected the argument that the interim moratorium constitutes a vested right of the debtor or personal guarantor.
It viewed the protection as operating within the procedural framework between Sections 94 and 99 of the IBC rather than as an indefeasible substantive entitlement.
Why the Amendment Was Held Retroactive
The Court placed considerable emphasis on the purpose behind the 2026 amendment.
It noted the concern that borrowers and guarantors could initiate personal insolvency proceedings at critical stages of enforcement to obtain an automatic moratorium and thereby stall otherwise lawful recovery proceedings.
The Court applied the Mischief Rule and reasoned that Parliament’s remedy had to be interpreted in a manner that actually suppressed the identified mischief.
If Section 96(4) were confined only to new applications filed after 26 May 2026, the alleged misuse would continue indefinitely in all pending applications, while being prohibited only in future cases.
That interpretation, according to the Court, would undermine the legislative purpose.
Precedent Analysis
The Court agreed with the earlier Bombay High Court Single Judge decision in Tata Capital Financial Services Limited v. Neel Motors LLP & Ors., which had treated the amendment as retroactively applicable.
It also agreed with the approach adopted by the Delhi High Court in IDBI Trusteeship Services Limited v. Manish Jain & Ors.
Among the authorities considered were BCCI v. Kochi Cricket Pvt. Ltd., M. Rajendran v. KPK Oils and Proteins India Pvt. Ltd., Vineeta Sharma v. Rakesh Sharma, SEBI v. Rajkumar Nagpal, Dilip B. Jiwrajka v. Union of India, Vatika Township, Hitendra Vishnu Thakur and Manish Kumar v. Union of India.
The Court ultimately held that authorities dealing with the ordinary presumption against retrospectivity did not prevent the present amendment from operating retroactively upon pending proceedings.
Court’s Reasoning
The Court held that Section 96(4):
came into force on 26 May 2026; operates from that date forward; but applies even where the Section 94 or Section 95 application was filed before that date and remained pending on 26 May 2026.
Therefore, personal guarantors could not claim continuation of the pre-amendment interim moratorium merely because their insolvency proceedings had been instituted earlier.
The Court found that applying the amendment to pending cases was necessary to give full effect to the legislative object of preventing misuse of the automatic moratorium.
It consequently held that Section 96(4) applies retroactively even to pending proceedings. The Bench expressly agreed with the view in Tata Capital Financial Services v. Neel Motors LLP.
Indian Bank v. Shabbir Abbas Patel
In the lead Indian Bank matter, the Bank challenged DRT-I, Mumbai orders dated 3 October 2024 and 13 March 2026, which restrained it from proceeding further with an auction.
An earlier Section 95 insolvency petition had been dismissed by the NCLT on 18 February 2026. The respondents subsequently relied upon another Section 95 petition filed on 19 February 2026 and registered on 6 May 2026 to claim a fresh interim moratorium.
The High Court found that the subsequent moratorium also ceased to operate from 26 May 2026 because of the retroactive application of Section 96(4).
The Court described the factual circumstances as illustrating the very abuse or “mischief” that the amendment was intended to address.
Accordingly, the DRT orders restraining Indian Bank were quashed and set aside.
The Court further upheld the Bank’s steps concerning the auction conducted on 30 September 2024, the sale certificate dated 25 February 2026, and its registration on 27 February 2026, and permitted the Court Commissioner to proceed in accordance with law for taking physical possession of the secured asset, with police assistance where required.
Broader Effect on Secured Creditors
The judgment is significant because it permits banks and secured creditors, subject to the facts and applicable orders in individual cases, to proceed with enforcement merely notwithstanding a pre-26 May 2026 Section 94/95 application where Section 96(4) applies to the personal guarantor concerned.
In the connected RBL Bank matters, the Court held that the pending interim moratorium could no longer prevent execution of Magistrate orders under Section 14 of the SARFAESI Act for taking physical possession of secured assets.
The Court directed the Court Commissioners to proceed with physical possession and directed the concerned police authorities to provide assistance, including proportionate force if required.
Conclusion
The Bombay High Court conclusively answered the common question by holding:
Section 96(4) of the IBC, effective from 26 May 2026, operates retroactively and therefore applies even to Section 94/95 proceedings that were already pending on that date.
It operates prospectively from 26 May 2026 in the sense that it does not rewrite the legal position before that date, but from that date its effect extends to existing pending proceedings.
Consequently, the interim moratorium cannot continue after 26 May 2026 merely because the relevant personal insolvency application had been filed before the amendment.
The connected writ petitions were disposed of by applying this principle to their individual factual circumstances.
Case Details
Lead Case: Indian Bank v. Shabbir Abbas Patel & Ors.
Connected Matters: RBL Bank Limited, Godrej Finance Limited, Asset Reconstruction Company (India) Limited and Apna Sahakari Bank Limited matters
Court: Bombay High Court
Jurisdiction: Ordinary Original Civil Jurisdiction / Civil Appellate Jurisdiction
Lead Case No.: Writ Petition No. 2819 of 2026
Coram: Justice Manish Pitale and Justice Shreeram V. Shirsat
Reserved: 14 August 2026
Pronounced: 18 September 2026
Citation: 2026:BHC-OS:20542-DB
Result: Section 96(4) IBC held retroactively applicable to pending Section 94/95 proceedings; connected writ petitions disposed of by applying that principle.
