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

1. SC EXPLAINS EXTENSION OF IBC SECTION 14 BAR TO ACTION UNDER SARFAESI 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 of 2021] HELD THAT Bar under section 14 IBC extends to any action of enforcement of any security interest created by the corporate debtor, including any action under the SARFAESI Act,2002. BRIEF FACTS 1. In the instant case, the Appellant Bank (before the Hon’ble Court) had extended certain credit facilities to the Corporate Debtor. 2. 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 on 13.06.2016. 3. 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. 4. Thereafter, an e-auction notice came to be issued on 27.09.2018 by the Bank to recover the public money availed by the Corporate Debtor. 5. 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 resolution process. 6. 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 SARFAESI proceedings. 7. 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. 8. 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, there is complete prohibition for any action to foreclose, recover or enforce any security interest created

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 are prohibited.” 9. 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 in force.” 10. 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. 11. 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 is prohibited.” DECISION OF SUPREME COURT 12. 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 Para/Page No. a) After the CIRP is initiated, there is moratorium for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor (CD) in respect of its property including any action under the SARFAESI Act. b) Once the CIRP is commenced, there is complete prohibition for any action to foreclose, recover or enforce any security interest created by the CD in respect of its property. Moratorium under section 14 – legislative intent 1. 24/17 c) 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 are prohibited The Insolvency and Bankruptcy Code, 2016 (Code/IBC) is a complete Code in itself and in view of the provisions of section 238, the provisions of the Code would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Section 238 – override other laws. 2. 27/18

3. 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 CD in respect of its property including any action under the SARFAESI Act, is prohibited. The Bank cannot continue the proceedings under the SARFAESI Act once the CIRP was initiated, and the moratorium was ordered. Security realization during the CIRP period 3. 35/23 4. Conclusion 34/23

4. SECTION 14 OF IBC,2016– (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (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; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. Explanation.—For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;] (2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. (2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified. 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 consultation with any financial sector regulator or any other authority;] (b) a surety in a contract of guarantee to a corporate debtor. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. Section 238: Provisions of this Code to override other laws. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

5. CONCLUSION: the provisions of Section 14(1)(c ) clearly provides that subject to provisions of sub-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 be prohibited. 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 subject matter.