The Supreme Court ruled on Wednesday that proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) cannot continue once the Corporate Insolvency Resolution Process (CIRP) is initiated [Indian Overseas Bank v. M/s RCM Infrastructure Limited and Another].
Referring to Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC), the Bench of Justices L Nageswara Rao and BR Gavai,
“It is clear that once the CIRP is commenced, there is complete prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property…The legislative intent is clear that after the CIRP is initiated, all actions including any action under the SARFAESI Act to foreclose, recover or enforce any security interest are prohibited.”
The Court also reiterated that in view of Section 238 of the IBC, the provisions of the Code would prevail notwithstanding anything inconsistent with it, contained in any other law for the time being in force.
The Court thus dismissed an appeal filed by Indian Overseas Bank (IOB) challenging a ruling passed by the National Company Law Appellate Tribunal (NCLAT).
The facts of the case are that IOB had extended credit facilities to the respondent corporate debtor. However, the respondent company failed to repay the dues, owing to which its account was eventually classified as a Non-Performing Asset (NPA) on June 13, 2016.
Consequently, pursuant to Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002, IOB took symbolic possession of the two mortgaged secured assets and put them up for auction.
During the second e-auction of the mortgaged assets of the respondent, three persons became successful bidders by jointly offering a price of ₹32.92 crore for both the secured assets. On December 13, 2018, the sale was confirmed in the favour of the successful bidders.
While the auction process was ongoing, the respondent had filed a petition under Section 10 of the Code before the National Company Law Tribunal (NCLT) at Hyderabad to initiate the CIRP. In January 2019, the NCLT admitted the Section 10 petition, and consequently, the CIRP was initiated.
A moratorium as provided under Section 14 of the IBC was notified and an Interim Resolution Professional (IRP) was also appointed. Before the NCLT, IOB claiming that since it had not received 75% of the bid amount from the successful bidders, it was not excluded from the claim filed before the IRP.
Subsequently, an application was filed by the respondent company urging the NCLT to set aside the security realization carried out by IOB during the CIRP period, or in the alternative, to cancel the transaction. The NCLT allowed the same, prompting the bank to approach the NCLAT in appeal. After the Appellate Tribunal rejected the appeal in March 2021, IOB moved the Supreme Court.
Solicitor General Tushar Mehta, appearing for IOB, submitted that the very initiation of the voluntary insolvency proceedings under Section 10 of the Code, was with mala fide intent and should be dealt under Section 65 of the Code (initiation of CIRP with malicious intent).
He also submitted that Section 14(1)(c) of the IBC interdicts any action to foreclose, recover or enforce any security interest including any action under the SARFAESI Act.
Supporting the arguments of SG Mehta, Senior Advocate CS Vaidyanathan submitted that the corporate debtor’s right in respect of the mortgaged property is the right of redemption under Section 60 of the Transfer of Property Act, 1882 and that under Section 13(8) of the SARFAESI Act, the right of redemption is lost on issuance of a public notice of auction or tender.
Arguing for the respondents, Senior Advocate KV Viswanathan submitted that the title of the secured assets cannot be conveyed to the auction purchasers merely upon confirmation of sale even before receiving full sale consideration.
He further argued that the continuation of any proceeding including the proceeding under the SARFAESI Act is totally illegal in view of Section 14(1)(c) of the IBC (Moratorium: prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property).
The Court noted that in the present case, the sale of the attached properties is a statutory sale governed by Rules 8 (sale other than public auction to be governed by terms of the parties) and 9 (Time of sale) of the 2002 Rules. The sale would be complete only when the auction purchaser makes the entire payment.
Since, in the present case, the balance amount was accepted by the bank on March 8, 2019, the sale would stand completed only on that date. In addition, since this date falls much after January 3, 2019 (the date of initiation of CIRP) the argument of the bank that the sale was complete upon receipt of the part payment, was rejected by the Court. It thus held,
“We are of the view that the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered.”
It thus found no reason to interfere with the orders of the NCLAT and NCLT, and dismissed the appeal.