By Nihit Nagpal and Anuj Jhawar
The Hon’ble Supreme Court vide its order dated May 18, 2022 in Indian Overseas Bank Versus M/S Rcm Infrastructure Ltd. And Another[1] observed that the proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) cannot be continued once the Corporate Insolvency Resolution Process (CIRP) has been initiated and moratorium is ordered under the Insolvency and Bankruptcy Code, 2016. The Apex Court further observed 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, 2002 is prohibited.
Brief facts of the case
The Appellant in the present case, namely Indian Overseas Bank, had issued a Demand Notice under Section 13(2) of the SARFAESI Act, 2002, inter alia calling upon the Corporate Debtor and its guarantors to repay the outstanding amount due to the Appellant Bank. Since the Corporate Debtor had failed to comply with the Demand Notice and repay the outstanding dues, the Appellant Bank had taken symbolic possession of two secured assets mortgaged exclusively with it. The same was done by the Appellant Bank in exercise of powers conferred on it under Section 13(4) of the SARFAESI Act, 2002 read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. One of the said properties was in the name of Corporate Debtor, and the other in the name of Corporate Guarantor. An e-auction notice dated September 27, 2018 had also been issued by the Appellant Bank to recover the public money availed by the Corporate Debtor. In the meantime, on October 22, 2018, the Corporate Debtor had filed a petition (being CP(IB) No. 601/10 /HDB/2018 under Section 10 of the Insolvency and Bankruptcy Code, 2016) before the learned National Company Law Tribunal. In the first e-auction held on November 06, 2018, no bids had been received. The second e-auction notice had been issued on November 27, 2018, and scheduled to be held on December 12, 2018. In the second e-auction, three persons had become successful
bidders by offering jointly a price of Rs.32.92 Crore for both the secured assets. On December 13, 2018, the sale had been confirmed in favour of the successful bidders/auction purchasers in the public auction. The successful bidders had deposited 25% of the bid amount, i.e., Rs.8.23 Crore, including the “earnest money” deposit of the said amount, and the Appellant Bank had issued a sale certificate to them. The auction purchasers had been directed to pay the balance 75% of the bid amount within 15 days, i.e., prior to December 28, 2018.
The present appeal has been filed challenging the judgment dated March 26, 2021 passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi in Company Appeal (AT) (Insolvency) No. 736 of 2020, thereby dismissing the appeal filed by the present Appellant Indian Overseas Bank, which had been, in turn, filed challenging the order dated July 15, 2020 passed by the National Company Law Tribunal, Hyderabad Bench-1, Hyderabad in I.A. No.832 of 2019 in C.P. (IB) No. 601/10/HDB/2018, vide which the learned National Company Law Tribunal, Hyderabad Bench-1 had allowed the application filed by the former Managing Director of the Corporate Debtor and set aside the sale of the assets of the Corporate Debtor.
Judgement by the Hon’ble Supreme Court
The Hon’ble Supreme Court observed that the sale under the statutory scheme as contemplated under Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 would stand completed only on March 08, 2019 which falls much after January 03, 2019, i.e. the date on which the Corporate Insolvency Resolution Process (CIRP) had commenced and moratorium had been ordered.
The Hon’ble Supreme Court observed that after the CIRP has been 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, 2002, and once the process has actually 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” are significant and the legislative intent is clear that after the CIRP has been initiated, all actions including any action under the SARFAESI Act, 2002 to foreclose, recover or enforce any security interest are prohibited. The Hon’ble Supreme Court held that the Appellant Bank could not have continued the proceedings under the SARFAESI Act, 2002 once the CIRP had been initiated and the moratorium had come into play.
Conclusion
In view of the provisions of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016, 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, 2002 is prohibited post initiation of CIRP.
[1] CIVIL APPEAL NO. 4750 OF 2021
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