Property Of Personal Guarantors Cannot Be Sold Under SARFAESI Act During Moratorium Period U/S 96 Of IBC: NCLT Mumbai

Brief Facts

This application has been filed by, Raghavendra Joshi ('the Applicant'/ 'Personal Guarantor) under Section 60(4) r/w Section 60(5) of the Insolvency and Bankruptcy Code, 2016 ('the Code'/ 'IBC') read with Section 179(2) and Rule 11 of the National Company Law Tribunal Rules, 2016.

State Bank of India ('the Financial Creditor') had extended credit facilities ('the said facility') of Rs. 1500 Lakhs on 17.05.2014 to M/s Deogiri Infrastructure Private Limited ('the Corporate Debtor'). The repayment of the said facilities was secured by personal guarantee given by the Applicant and his wife Smt. Meena Raghavendra Joshi by signing Guarantee Agreement dated 13.03.2015. The said guarantee is a continuing one for all the amounts advanced to the corporate debtor.

Upon the credit facilities becoming irregular, the loan account of the corporate debtor was classified as a Non-Performing Asset on 30.10.2018. Thereafter, State Bank of India issued notice under Section 13(2) of ('SARFAESI Act') on 10.04.2019 and initiated proceedings before Hon'ble Debts Recovery Tribunal ('DRT') at Aurangabad. Thereafter, on 30.01.2020 State Bank of India took symbolic possession of the properties at Aurangabad and Latur under Section 13(4) of the SARFAESI Act.

Thereafter, a Company Petition bearing No. 576/MB/2022 under Section 95 of the Code was filed by the Financial Creditor against the applicant on 26.04.2022. A Resolution Professional was appointed vide order dated 27.06.2022. An interlocutory application was filed by the resolution professional on 19.07.2022, recommending initiation of personal insolvency proceedings against the applicant/personal guarantor.

During the subsistence of interim moratorium under Section 96 of the Code, Indian Bank ('Respondent No.1'), on 10.05.2022 sold the property in question jointly owned by the Applicant and his wife Smt. Meena Raghvendra Joshi, under the SARFAESI Act, to Mr. Besi Kuzimanil Mathu ('Respondent No. 2'.

The Applicant has filed the present application assailing the sale of the 'property in question' by Respondent No.1 to Respondent No.2 on the ground that there is breach of interim moratorium under section 96 of the Code by Respondent No1 and seeking setting aside of the sale of the property in question.

Contentions

The Respondent No. 1 submitted that the issue involved in the present application falls within the jurisdiction of Debts Recovery Tribunal (DRT) and this Tribunal under the Insolvency and Bankruptcy Code does not have jurisdiction to entertain the present application. If the Applicant is aggrieved by the action of the Respondent No. 1 then the only remedy available to him is to approach DRT under section 17 of SARFAESI Act.

That once action under 13(4) is taken, there is vesting of interest and title in favour of the Bank which right and interest cannot be taken away even under IBC.

That applicant should have notified the filing of the petition under section 95 of IBC to Respondent No. 1 and could have prevented conclusion of sale and saved the transaction and other costs.

The Respondent No. 2 submitted that the proceedings under SARFAESI Act is not affected by the imposition of interim-moratorium as per Section 96 of the Code which provides a stay on any legal action or proceeding pending in respect of any debt whereas, Section 14 of the Code does not specifically stay the proceedings to enforce security interest over the said property.

That on attaining the symbolic possession of property as per Section 13(4) of SARFAESI, the Respondent No. 1 possesses the right to transfer by way of lease, assignment or sale for realisation of secured asset.

Per contra, the applicant submitted that the Respondent No. 1 cannot continue proceedings under SARFAESI once CIRP is initiated and interim-moratorium has commenced.

Reliance was placed on the Hon'ble Supreme Court judgment in Indian Overseas Bank versus RCM Infrastructure Limited and Another (2022) in which it was held that the IBC is a complete code in itself and as per Section 238 of IBC, the provisions of IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

That the proceedings initiated by Respondent No. 1 under SARFAESI stood stayed on account of interim-moratorium which came into operation on the date of filing of said petition on 26.04.2022 and that no right is accrued to the third party even if an instrument is registered and therefore, the sale by Indian Bank/ Respondent No.1 should be set-aside.

NCLT's Analysis

The first question before the tribunal was whether this Tribunal has jurisdiction to entertain the present application.

The tribunal referred to section 60 of the IBC and noted that Section 60(2) states that where a CIRP of a corporate debtor is pending before National Company Law Tribunal, an application relating to the insolvency resolution of personal guarantor shall be filed before such National Company Law Tribunal.

The tribunal noted that the Corporate Debtor i.e. M/s Deogiri Infrastructure Pvt. Ltd. was admitted to CIRP on 26.04.2022 and as such CIRP process is pending before National Company Law Tribunal Mumbai Bench. Therefore, any application relating to the insolvency of the personal guarantor to the corporate Debtor has to be filed before National Company Law Tribunal, Mumbai.

The tribunal further noted that By virtue of sub-section (4) of section 60 of IBC, the National Company Law Tribunal shall be vested with all the powers of the Debt Recovery Tribunal under Part III of this Code for the purpose of sub section (2).

Part III of the IBC deals with Insolvency Resolution and Bankruptcy for Individuals. According to Section 179 of IBC, the Adjudicating Authority in relation to insolvency matters of individuals shall be the Debt Recovery Tribunal. We note that section 179 is subject to the provisions of section 60 and according to section 60(2) discussed above, the National Company Law Tribunal is vested with all powers of DRT under Part III of the Code, the tribunal noted.

The while answering the first question observed that this Tribunal has jurisdiction to entertain the present application challenging the sale by Respondent No 1 conducted during the subsistence of the Interim Moratorium.

The next issue before the tribunal was whether the sale of the 'property in question' on 10.05.2022 by Indian Bank to Respondent No.2 under the provisions of SARFAESI Act is a valid sale despite having concluded during interim moratorium under section 96 of the Code.

The tribunal further noted that State Bank of India had filed the petition, bearing Company Petition (IB) No. 575 of 2022, under section 95 of the Code against the Applicant on 26.04.2022. Therefore, the provisions of section 96 pertaining to the Interim Moratorium are attracted with effect from 26.04.2022.

The tribunal while referring to section 96 of the Code noted that section 96(1)(a) states that an interim moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application. It is further made clear under clause (b) that during the moratorium period, all legal proceedings pending in respect of any debt shall be stayed and that the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

Based on the above, the tribunal came to the conclusion that no doubt the auction notice was issued on 20.04.2022 but the sale of the property in question was concluded on 10.05.2022. On the date of commencement of interim moratorium under section 96 of IBC, i.e. on 26.04.2022 all legal action and all proceedings in respect of any debt of the Personal Guarantor stood stayed and Respondent No. 1 could not have proceeded to conduct sale on 10.05.2022 and issued Sale Certificate on 31.05.2022.

The tribunal further noted that according to section 238 the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The judgment of Hon'ble High Court of Delhi in the matter of Sanjay Dhingra versus IDBI Bank Limited and Others (2024) was referred in which under similar circumstances,it was held that provisions of IBC would prevail over the provisions of SARFAESI.

The Delhi High Court in the above also noted the difference between section 14 and 101 of the IBC and observed that when an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due. First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III. Secondly, the protection of the moratorium under these sections is far greater than that of Section 14 in that pending legal proceedings in respect of the debt and not the debtor are stayed.

Based on the above, the tribunal rejected the contention of the respondents that the property in question was not hit by section 96 of the code.The tribunal concluded that the sale of the property in question on 10.05.2022 by Respondent No. 1 Bank to Respondent No. 2 is violative of section 96 of the Code and is therefore not a valid sale.Accordingly, the present application was allowed.

Case Title: Raghavendra Joshi Residing Versus Indian Bank and Anr.

Case Reference: I.A. No. 2247/2023 IN C.P. NO. 575(IB)/MB/2022

Judgment Date: 13/11/2024

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