Pendency Of Proceedings Before DRT, SARFAESI Or Other Fora-Not A Bar For Initiating CIRP: NCLAT Chennai

Background Facts

Mr. Amar Vora ("Appellant"/"Corporate Debtor") had obtained three Credit facilities from the City Union Bank ("Respondent"/"Financial Creditor") amounting to Rs. 5,20,00,000/- for developing a mall and a property was mortgaged as collateral security.

A demand notice under Section 13(2) of SARFAESI Act, 2002 was issued by the Financial Creditor to the Corporate Debtor on 30.08.2018, for a default of Rs. 14,14,61,066/-. The Authorised Officer had also taken a symbolic possession of the mortgaged property as per Section 13(4) of the SARFAESI ACT, 2002. Thereafter, the subject property was attached with Debt Recovery Tribunal ("DRT") Madurai Bench. Subsequently, the Financial Creditor had also filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before the NCLT Chennai ("Adjudicating Authority") seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. Additionally, proceedings under the Prohibition of Benami Property Transaction Act, 1988 ("PBPT") were also pending against the Corporate Debtor.

Contentions Of The Appellant

The Appellant submitted that parallel proceedings initiated by the Financial Creditor before the NCLT and Debt Recovery Tribunal amounts to forum shopping. It was contended that as the mortgaged property was under symbolic possession in SARFAESI proceedings, Section 7 of IBC petition should have been kept in abeyance.

Further, the Appellant had filed an application before the Adjudicating Authority praying to keep the Section 7 petition in abeyance till the matter under PBPT Act is decided.

Issue

1. Whether the pendency of proceedings under SARFAESI Act, DRT and before PBPT, prohibits the Financial Creditor to initiation proceedings under IBC, 2016?

Observation Of The NCLAT

The NCLAT observed that IBC is a special enactment; it consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individual; in a time bound manner for maximization of value of assets of such persons and to promote entrepreneurship. The aim and object of the IBC is not recovery of debt but resolution of Corporate Persons and Section 238 of IBC deals with provisions to override other laws:

"238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

The Bench observed that in view of Section 238 of IBC, a Financial Creditor or Operational Creditor or Corporate Person can file an application under Section 7, 9 & 10 of the IBC respectively, even when proceedings are pending before other forums in respect to the same debt. It is because IBC has overriding effect on other laws.

The NCLAT held that the petition under Section 7 of the IBC was maintainable even when proceedings were pending before DRT and PBPT in relation to the same debt. The appeal was dismissed.

Case Title: Mr. Amar Vora v City Union Bank Ltd., Company Appeal (AT) (CH) (Ins) No. 130 of 2022.

Counsel for Appellant: Ms. Tamizh Malar and Mr. T. Lajapathi Roy, Advocates.

Counsel for Respondents: Mr. Veerabathran Prasanth and Mr. Raghav Rajeev Menon, Advocates.

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