Supreme Court Dismisses Claims Of Mala Fide Intent While Addressing The Overriding Impact Of Section 238 Of The Insolvency Code - The Case Of Indian Overseas Bank Vs M/s Rcm Infrastructure Ltd

Case title:

Indian Overseas Bank vs M/S Rcm Infrastructure Ltd. 

Date of Order:

18 May 2022 

Bench:

Hon’ble Justice L. Nageswara Rao

Hon’ble Justice B.R. Gavai

SUBJECT

The Appellant Bank extended credit facilities to the Corporate Debtor but the latter failed to repay the dues, leading to the loan account becoming a "Non-Performing Asset" on 13th June 2016. 

The court held that the provisions of the IBC will have effect despite any conflict with any other law or instrument; the Bank's claim that the petition submitted by the CD was filed in bad faith was unsupported due to lack of evidence.

IMPORTANT PROVISIONS

1) The defaulting company has the right, under Section 10 of the IBC, to file an application with the National Company Law Tribunal to request that the tribunal declare it insolvent.

2) Section 238 essentially gives the IBC an overriding effect, ensuring that its provisions will remain in full force even if they conflict with any other laws.

OVERVIEW

• The appellant bank issued a Demand Notice requesting repayment of the outstanding amount owed to the former from the corporate debtor and its guarantors. Due to the Corporate Debtor's failure to abide by the Demand Notice, the appellant Bank exercised its authority under Section 13(4) of the SARFAESI Act and Rule 8 of the Security Interest (Enforcement) Rules, 2002, and took symbolic possession of two secured assets.
• On September 27, 2018, the appellant Bank published a notice for an electronic auction in an effort to recoup the public funds used by the Corporate Debtor (CD).
• The CD submitted a petition to the NCLT in accordance with Section 10 of the IBC,2016. On November 6, 2018, the first E-auction was held and no bids were submitted. The 2nd E-auction notice was published on November 27, 2018, and the auction took place on December 12, 2018. Three bidders won, and the sale was confirmed on December 13, 2018. The winning bidders paid 25% of the bid amount, plus the Earnest Money Deposit, and the appellant Bank issued a sale certificate. The auction buyers were instructed to pay the remaining 75% of their bid within 15 days.
• Auction buyers requested control of the pledged property and an extension of time to pay the remaining 75% of the bid amount until March 8, 2019. The appellant Bank agreed to the request on December 29, 2018. 
• The NCLT in Jan 2019 accepted the petition submitted by the CD’s former promoter, allowing the Corporate Insolvency Resolution Process to get started. In addition to appointing an interim resolution professional (IRP), a moratorium under Section 14 was announced. 
• On January 21, 2019, the appellant Bank filed its claim with the IRP after learning that the CD’s insolvency petition had been admitted. The appellant accepted the remaining 75% of the bid amount while the CIRP was ongoing, and the promoter of the CD filed an application to overturn the appellant Bank's security realization during the CIRP period or revoke the contested transaction.
• The IRP was informed of the successful sale of secured assets by the appellant. The promoter of the CD filed an application with the NCLT to overturn the Bank's security realization or revoke the transaction. The NCLT approved the application and rescinded the sale of the Corporate Debtor's property.
• The appellant Bank then filed an appeal before the NCLAT, which was rejected by the impugned judgment, leading to the present appeal.

ARGUMENTS ADVANCED BY THE APPELLANT

• On behalf of the appellant, Shri Tushar Mehta asserted that the former promoter of the Corporate Debtor's voluntary insolvency proceedings was acting with mala fide intent and as a result was in violation of Section 65 of the IBC.
• The appellant Bank exercised a symbolic possession under Section 10 of the SARFAESI Act after the CD failed to pay. On September 26, 2018, an E-auction notice was published, which the CD contested by submitting an application to the Hyderabad-based Debt Recovery Tribunal. However, the application did not receive a stay.
• The CD claims that the DRT issued an order on October 29, 2018, delaying the confirmation of the sale in exchange for the Corporate Debtor's deposit of Rs. 12 crores. The respondent then filed a petition with mala fide intent to delay the sale under section 10 of IBC.
• It was argued that the order of the learned NCLT admitting the petition under Section 10 was only made on January 3, 2019, which is before the sale was confirmed, and that the SARFAESI proceedings were only delayed by the CIRP and that the IRP's ulterior motives are obvious given that liquidation was mandated by the learned NCLT in an order dated February 7, 2022.
• Since the moratorium under Section 14 has ceased to subsist, the secured creditors were allowed to realize their security interests. In view of Section 54, the sale was completed after the appellant Bank had received 25% of the bid amount. It was submitted that Section 14(1)(c) of the IBC interdicts any action to foreclose, recover or enforce any security interest, including any action under SARFAESI, but does not undo actions that stand completed, referring to the case of Vidhyadhar v. Manikrao and Anothe, B. Arvind Kumar v. Govt. of India and Others and Kaliaperumal v. Rajagopal and Another.

ARGUMENTS ADVANCED BY THE RESPONDENT

• Shri Viswanathan submitted that the title of secured assets cannot be conveyed to auction purchasers unless they receive full sale consideration. This is contrary to various provisions of the SARFAESI Act, the Rules, as well as Sections 14(1)(c), 31(1), and 238 of the IBC. Only after the transfer takes place under Rules 8 and 9 of the Rules, the title will be passed over to the auction purchasers.
• Accordingly, Section 13(8) of the SARFAESI Act gives the owner or debtor the option to redeem the secured property. The ruling rendered by this Court in the case of S. Karthik v. N. Subhash Chand Jain and Others was referred. The Corporate Debtor, its employees, members, creditors, all Government dues, and the successful resolution applicant would all be entitled to a fresh start following approval of the Resolution Plan, which would render all debts legally resolved.
• It is asserted that the corporate debtor explicitly mentioned the appellant bank's and Andhra Bank's NPA declarations as well as the beginning of the auction process in the petition submitted under Section 10. The IBC proceedings to resolve all of the Corporate Debtor's debts cannot be characterized as a dishonest attempt. The mechanism and the remedy for dealing with malicious proceedings started under the SARFAESI Act are expressly provided for in Section 65 of the IBC.
• It is claimed that the appellant Bank never contested the order from January 3rd, 2019, by which the knowledgeable NCLT started the CIRP. Even though the NCLT had issued the order of liquidation on February 7, 2022, it ceased it on March 8, 2022.
• The appellant Bank submitted its claim on January 21, 2019, after the CIRP was launched, for an amount of Rs. 79.94 crores, which included the entire value of the assets. As a result, the appellant is forbidden from arguing that the sum of Rs. 8.23 crore cannot be included in the funding for CIRP.

JUDGEMENT ANALYSIS

• The Court has consistently held that the IBC is a complete Code and that its provisions would prevail notwithstanding any inconsistent laws in force, due to its Section 238.
• The learned Solicitor General contended that although some of the payment was received after CIRP, the appellant Bank is still eligible to receive funds related to the already-completed sale despite this, based on several of this Court's rulings.
• In the Vidhyadhar (supra) case, even if the full purchase price of the property has not been paid, the sale will still go through and the title will transfer. The SC ruled that the parties' intentions serve as the true litmus test, as they must have intended to transfer ownership of the property and to have the payment made either in the present or in the future.
• The B. Arvind Kumar case (supra) was a suit property sold at a public auction. The District Judge, Civil and Military Station, Bangalore, confirmed the sale. The Court has held that when a property is sold at public auction in accordance with a court order, the bid is accepted and the sale is confirmed in the buyer's favor, the sale is final and the buyer receives the title. A sale certificate will only be given to the buyer once the sale is final. Additionally, the sale certificate itself was registered in the aforementioned case.
• The sale deed was registered with partial payment of consideration in the case of Kaliaperumal, but the court determined that the parties’ intentions were more important. The appellant would only acquire ownership of the property after the vendors had received the full purchase price, and the title was only intended to pass upon payment of the remaining consideration.
• Any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor in relation to its property, including any action under the SARFAESI Act, is prohibited by Section 14(1)(c) of the IBC. We believe that once the CIRP was started and the moratorium was mandated, the appellant Bank could not have continued the SARFAESI Act proceedings.
• The Appellant Bank's claim that the petition submitted by the Corporate Debtor was made in bad faith was dismissed. As of now, the claim that a liquidation order was issued is being contested before the learned NCLAT, and no observation was made in that regard. The court determined that there is no basis for interfering with orders issued by the NCLT on July 15, 2020, and by the NCLAT on March 26, 2021.
• The currently filed appeal was denied. Any pending applications would be resolved accordingly.