SARFAESI Act | Secured Creditor May Initiate Recovery Proceedings Against Guarantor Even If Defaulter Is Placed Under Moratorium: Bombay High Court

The Bombay High Court recently held that a secured creditor can initiate proceedings under the SARFAESI Act against the guarantor in case of loan default even when there is a moratorium on action against borrower under section 14 of the Insolvency and Bankruptcy Code (IBC).

A division bench of Justices GS Kulkarni and Rajesh S Patil dismissed a guarantor’s writ petition seeking to restrain a bank from acting against it to recover a loan on the ground that National Company Law Tribunal (NCLT) has issued a moratorium on action against the borrower.

“NCLT has declared a moratorium against the action being taken against the Borrower, including the SARFAESI proceedings. However, the Secured Asset is owned by the Petitioner/Guarantor. Therefore, according to us, as such, the Respondent No.3 /Bank can proceed against the Mortgaged Property of Personal Guarantor as per S.13(11) of the SARFAESI…the bank has not violated the moratorium as ordered by the NCLT, in initiating SARFAESI Proceedings against Petitioner / Guarantor”, the court held.

One Latif Yusuf Manikkoth, owner of a building (Secured Asset) in Fort, Mumbai is the Guarantor of one Alaska Creations Pvt. Ltd. (Borrower Company), which was engaged in the export business of readymade garments and footwear. The Borrower defaulted on a loan from Bank of Baroda, and the account was declared as a non performing asset (NPA).

The bank took symbolic possession of the secured asset owned by Manikkoth, the guarantor, and filed Securitisation Application. The Chief Metropolitan Magistrate on April 19, 2022, appointed the Assistant Registrar as Court Commissioner to take possession of the Secured Asset. The Assistant Registrar directed the Police to provide security for taking forceful possession of the Secured Assets from the Petitioner.

The Borrower Company is also facing proceedings under the IBC initiated by Kiwi International, a supplier, claiming to be an operational creditor. Kiwi International claimed Rs.97,10,749/- along with interest at 18 percent per annum as dues. The NCLT on September 11, 2019 admitted petition filed under section 9 of the IBC by Kiwi International and declared a moratorium as per Section 14 against action against the Borrower, including the SARFAESI proceedings.

The petitioner filed the present writ petition seeking a declaration that the company was a Micro, Small, and Medium Enterprises (MSME) entity, and as such, the proceedings for recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), Recovery of Debts and Bankruptcy Act (RDB Act), and the IBC would not be applicable.

The petitioner further sought to declare that the bank's claims should be set-off/adjusted against the petitioner's claim for damages and compensation. The petitioner also challenged the classification of the Borrower's account as an NPA.

The court took into account multiple proceedings filed by the petitioner and the Borrower Company in different forums challenging the bank's actions, including a civil suit, a writ petition, and a Securitisation Application before the Debt Recovery Tribunal (DRT) against the CMM’s order date April 19, 2022. The court noted that the same reliefs were sought in the present petition, which had already been disposed of in previous proceedings.

The petitioner argued that the MSME Act of 2006 took precedence over the SARFAESI Act, RDB Act, and the IBC, providing a resolution mechanism for financial stress.

The bank argued that the court should not entertain the petition as the SARFAESI Act provided for statutory remedies, including appeals before DRT and the Appellate Tribunal. The Petitioner has neither objected to the demand notice nor has he and or borrower approached the Bank, with a proposal for restructure or settlement of the dues, as per the bank.

The court cited Supreme Court judgments in State Bank of Travancore v. Mathew K.C. and Phoenix ARC Private Ltd. v. Vishwa Bharati Vidhya Mandir, emphasizing that High Courts should refrain from exercising jurisdiction under Article 226 when statutory remedies were available under the SARFAESI Act.

The court held that the petitioner has already availed its right to appeal against the secured creditor’s actions under Section 17 of the SARFAESI Act by filing a Securitisation Application before the DRT, which is closed for orders.

Advocates MJ Nedumpara, Hemali Kurne, Neha Mishra of Nedumpara & Nedumpara represented the Petitioner.

Advocate Akshaya Putharan of S.K. Singhi & Partners represented Bank of Baroda.

AGP Himanshu Takke and AGP Sukanta Karmakar represented the state.

Case no. – Writ Petition (L) No. 9116 of 2023

Case Title – Latif Yusuf Manikkoth v. Board of Directors of the Bank of Baroda and Ors.

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