Bank Cannot Proceed Under SARFAESI Act Against Personal Guarantor During Interim Moratorium Under IBC, 2016: NCLAT Principal Bench

Brief Facts:

The matter pertained to an appeal which challenged an order issued by the National Company Law Tribunal (NCLT), New Delhi. The impugned order directed the restoration of possession of a property, which belongs to Pawan Kapoor (Respondent) and was previously taken over by Indiabulls Asset Reconstruction Company Ltd (Appellant) to the Interim Resolution Professional (IRP) immediately.

The Appellant argued that before the insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code (IBC), the Appellant already initiated proceedings under Section 13(4) of the SARFAESI Act, 2002. On June 20, 2019, the Appellant had taken symbolic possession of the mortgaged property. Subsequently, the District Magistrate granted the Appellant's application and ordered the possession of the property. On January 27, 2021, actual physical possession of the mortgaged property was taken over by the Tehsildar in accordance with the District Magistrate. However, later, an application was filed under Section 95 of the IBC to initiate insolvency proceedings against the Personal Guarantor. The NCLT initiated personal insolvency proceedings against the Respondent, and held that the moratorium commenced with the filing of the Company Petition on January 7, 2021.

The primary issue before the NCLAT was whether the proceedings under the SARFAESI Act, 2002, were completed on June 20, 2019, when the Appellant took symbolic possession of the property, and whether the moratorium under Section 96 of the IBC would affect the Appellant's rights. The Appellant contended that it acquired a vested right in the property upon taking symbolic possession, thereby becoming the de facto owner of the property and holding the right to dispose of it to any intending purchaser. The Appellant argued that the principles laid down in Section 14 of the IBC should apply to proceedings under Section 95 of the IBC.

Observations by the NCLAT:

The NCLAT referred to a recent judgment from the Delhi High Court in the case of Sanjay Dhingra vs. IDBI Bank Ltd. & Ors., WP(C) No.8131/2020. According to the Delhi High Court's judgment, the moratorium under Section 96 of the IBC does not apply in cases where the bank has already taken possession of the property under the SARFAESI Act prior to the commencement of insolvency proceedings. The High Court held that once the bank invokes its rights under Section 13(2) of the SARFAESI Act and takes possession of the property, those rights are vested in the bank and are free from encumbrances.

The High Court the bank in that case issued a notice of possession and took physical possession of the property before the initiation of the insolvency proceedings under the IBC. The physical possession of the property was completed on October 17, 2020, while the insolvency proceedings commenced only in June 2021. This sequence of events indicated that the bank's actions concerning the property were completed before the insolvency proceedings began. Therefore, the High Court held that no debt was being enforced against the petitioner in relation to the property as the rights had already been transferred to the bank.

The High Court further elaborated that the interim moratorium under Section 96 of the IBC is intended to stay legal actions and proceedings in respect of any debt, rather than focusing on the debtor alone. This principle was reinforced by the Supreme Court's decision in the case of Dilip B. Jiwrajka vs. Union of India, which held that the interim moratorium is designed to restrain legal actions concerning debts, not individual debtors.

Therefore, the High Court held that the respondent-bank could not proceed further with actions under the SARFAESI Act after the initiation of insolvency proceedings.

Thus, the NCLAT agreed with the Delhi High Court's decision and dismissed the appeal.

Case Title: Indiabulls Asset Reconstruction Company Ltd vs Pawan Kapoor

Case Number: COMPANY APPEAL (AT)(Insolvency) No.192/2021

For Appellant:Mr Sumesh Dhawan, Ms Vatsala Kak, Mr. Raghav Dembla, Mr Kholi Rakuzhuro, Mr. Chirag Sharma, Ms Manmilan Sidhu, Mr. ravi Tyagi, Ms Saksha Jha, Advocates.

For Respondent:Ms Ranjana Roy Gawai, Mr Pervinder, Ms Vasudha Sen, Mr Shikher Upadhyay, Advocates.

Date of Judgment: 28-8-2024

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