SARFAESI proceedings cannot be pursued against the debtor company once the CIRP is admitted and a moratorium is ordered: Supreme Court

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

The bench composed of Justices L. Nageswara Rao and BR Gavai noted that in such a situation, any action to seize, recover or enforce any security interest created by the debtor company in its assets, including any action under the SARFAESI law, is prohibited.

In this case, the Indian Overseas Bank had granted certain credit facilities to the debtor company. Finally, SARFAESI proceedings were initiated against the Debtor Company. The Bank has symbolically taken possession of two secured assets mortgaged exclusively to it in the exercise of the powers conferred upon it under Article 13(4) of the SARFAESI Act read together with Rule 8 of the Rules 2002 on securities (enforcement). was issued by the Bank to recover public funds available to the Debtor Company. At this stage, the debtor company has filed a petition under Section 10 of the Insolvency and Bankruptcy Code 2016 before NCLT. NCLT, on January 3, 2019, granted the petition and a moratorium was also notified. But even afterwards, the Bank continued the bidding process and accepted the balance of 75% of the bid amount and concluded the sale. NCLT, granting the petition filed by Corporate Debtor, issued an order rescinding the sale. The NCLAT rejected the Bank’s appeal and therefore went to the Apex Court.

The bank argued that (1) the sale in question was complete when confirmed on December 13, 2018 and as such, the admission of the petition on January 3, 2019 by the NCLT scholar would not affect said sale ( 2) simply because part of the payment was received later after the initiation of the CIRP, it will not deprive the Bank of receiving said money in execution of the sale already made.

Referring to Articles 14 and 238 of the CIB, the court observed:

After the initiation of CIRP, there is a moratorium on any action to seize, recover or enforce any security interest created by the debtor company in its assets, including any action under the SARFAESI Act. It is clear that once the CIRP is commenced, there is a complete prohibition on any action to seize, recover or enforce any security created by the debtor company in respect of its assets. The words “including any action under the SARFAESI Act” are significant. The legislative intent is clear that after the initiation of the CIRP, all actions, including any action under the SARFAESI Act to seize, recover or enforce any security, are prohibited.

Referring to the relevant dates, the panel noted that the sale under the statutory regime as envisaged by Articles 8 and 9 of the said regulations would not be concluded until March 8, 2019. Admittedly, this date falls well after January 3, 2019, c that is, the date CIRP began and the moratorium was ordered, the court said. While dismissing the appeal, the bench observed:

Having regard to the provisions of Section 14(1)(c) of the IBC, which take precedence over any other law, any action to seize, recover or enforce any security created by the Debtor Company in respect of its property, including any any action under the SARFAESI law is prohibited. We are of the view that the appellant Bank could not have continued the procedure under the SARFAESI law once the CIRP was initiated and the moratorium was ordered.

Case details

Indian Overseas Bank v RCM Infrastructure Ltd | 2022 LiveLaw (SC) 496 | CA 4750 FROM 2021 | May 18, 2022

Coram: L. Nageswara Rao and BR Gavai

Counsel: SG Tushar Mehta for the appellant, Sr. Adv KV Viswanathan and Adv Aditya Verma for the respondents, Sr. Adv CS Vidyanathan for the plaintiffs

Summaries

Insolvency and Bankruptcy Code, 2016; Section 14, 238 – Securitization and Reconstitution of Financial Assets and Enforcement of Security Act 2002 After the initiation of the CIRP, all actions, including any action under the SARFAESI Act to seize, recover or enforce any security, are prohibited. (Paragraphs 24, 35)

Insolvency and Bankruptcy Code, 2016; Section 238 – The IBC is a complete Code in itself – The provisions of the IBC would prevail notwithstanding any inconsistency contained in any other law currently in effect. (Paragraphs 25-27)

Security Interests (Enforcement) Rules, 2002; Rules 8.9 – The sale will only be complete when the purchaser makes full payment and the authorized officer, exercising the power of sale, issues a certificate of sale of the building in favor of the purchaser in the form set out in Annex V of said regulation. – The sales certificate does not require registration, and the sales process is completed when the sales certificate is issued. (Paragraphs 32 and 33)

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