SARFAESI Proceedings Cannot Be Continued Against Corporate Debtor Once CIRP Is Admitted And Moratorium Is Ordered: Supreme Court

The Supreme Court observed that the proceedings under the SARFAESI Act cannot be continued once the CIRP is initiated and the moratorium is ordered.

The bench comprising Justices L. Nageswara Rao and B R Gavai noted that, in such a situation, 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 this case, the Indian Overseas Bank had extended certain credit facilities to the Corporate Debtor. Eventually, SARFAESI proceedings were initiated against the Corporate Debtor. The Bank  took symbolic possession of two secured assets mortgaged exclusively with it in exercise of powers conferred on it under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. An E-­auction notice came to be issued by the Bank to recover the public money availed by the Corporate Debtor. At this stage, the Corporate Debtor filed a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 before NCLT. NCLT,  on 3rd January 2019, admitted the petition and a moratorium was also notified. But even thereafter, the Bank continued the auction proceedings and accepted the balance 75% of the bid amount and completed the sale. NCLT, allowing the application filed by Corporate Debtor, passed an order setting aside the sale. NCLAT dismissed the appeal filed by the Bank and therefore it approached the Apex Court.

The bank contended that (1) the sale in question was complete on its confirmation on 13th December 2018 and as such, the admission of the petition on 3rd January 2019 by the learned NCLT would not affect the said sale (2) merely because a part of the payment was received subsequently after initiation of CIRP, it will not deprive the Bank from receiving the said money in pursuance to the sale which has already been completed.

Referring to Section 14 and 238 of the IBC, the court observed:

After the CIRP is initiated, there is moratorium for 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. 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 words "including any action under the SARFAESI Act" are significant. 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.

Referring to the relevant dates, the bench noted that The sale under the statutory scheme as contemplated under Rules 8 and 9 of the said Rules would stand completed only on 8th March 2019. Admittedly, this date falls much after 3rd January 2019, i.e., on which date CIRP commenced and moratorium was ordered, the court said. While dismissing the appeal, the bench observed:

In view of the provisions of Section 14(1)(c) of the IBC, which have overriding effect over any other law, 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. 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.

Case details

Indian Overseas Bank vs RCM Infrastructure Ltd | 2022 LiveLaw (SC) 496 | CA 4750 OF 2021 | 18 May 2022

Coram: L. Nageswara Rao and B R Gavai

Counsel: SG Tushar Mehta for appellant, Sr. Adv K.V. Viswanathan and Adv Aditya Verma for respondents, Sr.Adv C.S. Vidyanathan for impleading applicants

Headnotes

Insolvency and Bankruptcy Code, 2016 ; Section 14, 238 - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - After the CIRP is initiated, all actions including any action under the SARFAESI Act to foreclose, recover or enforce any security interest are prohibited. (Para 24, 35)

Insolvency and Bankruptcy Code, 2016 ; Section 238 - IBC is a complete Code in itself - The provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. (Para 25-27)

Security Interest (Enforcement) Rules, 2002 ; Rules 8,9 - The sale would be complete only when the auction purchaser makes the entire payment and the authorised officer, exercising the power of sale, shall issue a certificate of sale of the property in favour of the purchaser in the Form given in Appendix V to the said Rules - The sale certificate does not require registration and  the sale process is complete on issuance of the sale certificate. (Para 32-33)

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