Sarfaesi Proceedings Against Corporate Debtor May Not Be Continued After Admittance Of Cirp And Order Of Moratorium: The Supreme Court

CAUSE TITLE:

INDIAN OVERSEAS BANK V M/S RCM INFRASTRUCTURE LTD.AND ANOTHER 

DATE OF ORDER:  

18-05-2022

JUDGE(S):

L. NAGESWARA RAO, B.R. GAVAI.

PARTIES:

Petitioner: Indian Overseas Bank

Respondent: M/S Rcm Infrastructure Ltd and Another

SUBJECT 

A Supreme Court Bench of Justices L Nageswara Rao and BR Gavai upheld a decision by the National Company Law Appellate Tribunal that denied the Appellant Bank's appeal against an order that stayed the sale of the Corporate Debtor's assets.

BRIEF FACTS 

• The Appellant Bank offered certain credit facilities to the Corporate Debtor, but the Corporate Debtor failed to clear the dues, and the Corporate Debtor's loan account became irregular, finally becoming a Non-Performing Asset.
• The Appellant Bank filed a Demand Notice by Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, requiring the Corporate Debtor and its guarantors to reimburse the Appellant Bank the overdue amount.
• As a result of the Corporate Debtor's failure to comply with the Demand Notice, the Appellant Bank took symbolic possession of two secured assets mortgaged exclusively with it, in the exercise of powers granted to it under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. One of the properties was registered in the name of the Corporate Debtor, while the other was registered in the name of the Corporate Guarantor. The Appellant Bank issued an E-Auction notice to reclaim the public funds used by the Corporate Debtor.
• Meanwhile, the Corporate Debtor petitioned the NCLT under Section 10 of the Insolvency and Bankruptcy Code, 2016.
• Eventually, three people became successful bidders through E-auction by jointly giving a price for both the secured assets, and the sale was finalized in their favor. The successful bidders paid 25% of the bid price, including the Earnest Money Deposit, and the Appellant Bank granted them a sale certificate. They had 15 days to settle the remaining 75% debt.
• On the fifteenth day, the auction buyers wrote to the appellant bank asking for the calm and unhindered transfer of the secured property and for an additional 12 days to pay the remaining 75% of the bid sum. The Appellant Bank granted the extension after accepting the request and acting by Rule 9(4)(a) of the Rules.
• The petition submitted by the former promoter of the Corporate Debtor was accepted by the NCLT. The Corporate Insolvency Resolution Process of the Corporate Debtor began as a result of the order made according to Section 10 of the IBC, and a moratorium as provided by Section 14 of the IBC was announced as well as the appointment of an Interim Resolution Professional.
• When the Appellant Bank learned that the Corporate Debtor's bankruptcy petition had been admitted, it submitted its claim in Claim Form-C to the IRP. The Appellant Bank asserted that the remaining 75% of the bid value was not excluded from the claim made before the IRP because it had not yet been received. The Appellant Bank accepted the remaining bid amount while the CIRP was still pending and submitted its updated claim in Claim Form-C to the IRP. Additionally, the Appellant Bank informed the IRP that the secured assets had been successfully sold.
• The Corporate Debtor's promoter then applied for the ongoing company petition, pleading with the NCLT to set aside the Appellant Bank's security realization during the CIRP period or reverse the contested transaction. The NCLT issued a ruling that approved the application and blocked the sale of the Corporate Debtor's property. Angered, the Appellant Bank appealed to the NCLAT, but that was also denied.
• Following that, the Appellant Bank addressed the Supreme Court.

ANALYSIS OF COURT 

• The Supreme Court stated that any proceedings, including those taken under the SARFAESI Act to foreclose, reclaim, or enforce any security interest, are banned once the CIRP has been launched, citing Section 14(1)(c) of the IBC.
• The Court stated that the IBC is a complete Code in itself and that, in light of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail regardless of anything inconsistent therewith contained in any other law currently in effect. The Court referred to Section 238 of the IBC as well as a catena of judgments, including Innoventive Industries Limited v. ICICI Bank and Another.
• The Court noticed irregularities in the facts of the case and concluded that the sale was not completed upon receipt of the part payment.
• Furthermore, the Court held that the Appellant Bank could not have maintained the proceedings under the SARFAESI Act after the CIRP was begun and the moratorium was issued.
• To that end, the Court determined that no case could be made out for interfering with concurrent orders issued by the NCLT and rejected the Appeal.
• According to the Bench, "any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor in respect of its property, including any action under the SARFAESI Act, is prohibited in light of the provisions of Section 14(1)(c) of the IBC, which have precedence over any other law." The bench declares that once the CIRP was commenced and the moratorium was ordered, the appellant Bank could not have maintained the proceedings under the SARFAESI Act."

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