SC Explains extension of IBC section 14 Bar to action under SARFAESI

1. SC EXPLAINS EXTENSION OF IBC SECTION14 BAR TO ACTION UNDERSARFAESI https://taxguru.in/corporate-law/sc-explains-extension-ibc-section-14-bar-action-sarfaesi.html Indian Overseas Bank Vs. M/s RCM Infrastructure Ltd. and another Supreme Court of India [Civil Appeal No. 4750 of2021] HELD THATBar under section 14 IBC extends to any action of enforcement of any security interest created by the corporate debtor, including any action under the SARFAESIAct,2002. BRIEFFACTS In the instant case, the Appellant Bank (before the Hon’ble Court) had extended certain credit facilities to the CorporateDebtor. However, consequent upon Corporate Debtor’s inability to repay the dues, the loan account of the Corporate Debtor was declared as a Non-Performing Asset/ NPA on13.06.2016. Subsequently, the Appellant Bank, initiated proceedings in terms of Section 13 of the SARFAESI Act, culminating in the Bank’s taking over of the symbolic possession of two secured assets of the Corporate Debtor. Thereafter, an e-auction notice came to be issued on 27.09.2018 by the Bank to recover the public money availed by the CorporateDebtor. In the meantime, the Corporate Debtor filed a petition under Section 10 IBC before the Hon’ble Adjudicating Authority on 22.10.2018, which was admitted by the Hon’ble Tribunal on 03.01.2019, co- terminus with the notification of a moratorium as per Section 14 of the Code. Notably, in the period prior to said admission, pursuant to the bid issued by the Appellant, successful bidder deposited part sale consideration amount, followed by the remaining 75% (Seventy Five percent) thereof, subsequent to Appellant filing its claim in the Corporate Debtor’s ongoing resolutionprocess. Thereafter, while the Banker, on receipt of the entire sale consideration amount, filed its revised claims, former Managing Director of the Corporate Debtor filed an application for setting aside of action sale, carried out pursuant to the Appellant’s SARFAESIproceedings. Pertinently, the said action sale was set aside by the Hon’ble Tribunal and even the appeal thereagainst was dismissed by the Hon’ble Appellate Tribunal by impugned order/judgment. While dealing with the issue, the Hon’ble outrightly noted the provisions under Section 14 IBC, in particular, that under sub-section (1)(c) thereof to observe, “it is clear that once the CIRP is commenced, thereiscompleteprohibitionforanyactiontoforeclose,recoverorenforceanysecurityinterestcreated

2. 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 areprohibited.” At the same time, while referring to several of its previous decisions, the Hon’ble Court observed, “in view of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being inforce.” While further considering the objection regarding the conclusion of sale proceedings, the Hon’ble Court reiterated the significance of intention of parties and the provisions under Rules 8 and 9 of the Security Interest (Enforcement) Rules,2002. In fact, while considering the terms of the said provisions/ Rules, the Hon’ble Court noted, “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…” Accordingly, while dismissing the present appeal, holding that the auction-sale in the instant case was concluded post issuance of moratorium, the Apex Court affirmed, “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 isprohibited.” DECISION OF SUPREMECOURT The Hon’ble Supreme Court considered whether a Bank can continue the proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) once the Corporate Insolvency Resolution Process (CIRP) is initiated and moratorium is ordered. The Hon’ble SC made some important findings and observations as under– Sr.No. Subject/Issue Ruling After the CIRP is initiated, there is moratorium for any act foreclose, recover or enforce any security interest created by the Cor Debtor (CD) in respect of its property including any action und SARFAESIAct. OncetheCIRPiscommenced,thereiscompleteprohibitionfo Moratoriumundersection14–actiontoforeclose,recoverorenforceanysecurityinterestcreated 1. legislativeintent CD in respect of itsproperty. c) The words “including any action under the SARFAESI Act significant. The legislative intent is clear that after the CIRP is initiat actions including any action under the SARFAESI Act to foreclose, or enforce any security interest areprohibited The Insolvency and Bankruptcy Code, 2016 (Code/IBC) is acomplete Section238–overrideother initselfandinviewoftheprovisionsofsection238,theprovisions 2. laws. Code would prevail notwithstanding anything inconsistent the contained in any other law for the time being inforce.

3. Theprovisionsofsection14(1)(c)oftheIBC,whichhaveoverriding Security realization during the over any other law, any action to foreclose, recover or enforce anyse 3. CIRPperiod interest created by the CD in respect of its property including any under the SARFAESI Act, isprohibited. TheBankcannotcontinuetheproceedingsundertheSARFAESIAc 4. Conclusion the CIRP was initiated, and the moratorium wasordered.

4. SECTION 14 OF IBC,2016– • Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Auth moratorium for prohibiting all of the following,namely:— • the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execu or order in any court of law, tribunal, arbitration panel or otherauthority; • transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal rightor • any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its pr under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002; • the recovery of any property by an owner or lessor where such property is occupied by or in the possession of theco • Explanation.—For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Government, local authority, sectoral regulator or any other authority constituted under any other law for the time suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment ofcur or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right duringthe • (2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated orsusp moratoriumperiod. • (2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except wher not paid dues arising from such supply during the moratorium period or in such circumstances as may bespecified. • 2(3) The provisions of sub-section (1) shall not apply to— • 3[(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultati regulator or any otherauthority;] • (b) a surety in a contract of guarantee to a corporatedebtor. • (4) The order of moratorium shall have effect from the date of such order till the completion of the corporateinsolvency • Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Autho plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the mo effect from the date of such approval or liquidation order, as the case maybe. • Section 238: Provisions of this Code to override otherlaws. • The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other la or any instrument having effect by virtue of any suchlaw.

5. CONCLUSION:theprovisionsofSection14(1)(c)clearlyprovidesthatsubjecttoprovisionsofsub-sectionsCONCLUSION:theprovisionsofSection14(1)(c)clearlyprovidesthatsubjecttoprovisionsofsub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (c) 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It means that once CIRP initiated any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to foreclose ,recover or enforce any security interest created by Corporate Debtor will beprohibited. DISCLAIMER:the case law presented here is only for sharing information and knowledge with the readers. The views are personal and same should not be considered as professional advice. In case of necessity do consult with professionals for more understanding and clarity on subjectmatter.