In CIVIL APPEAL NO.4750 OF 2021-SC- After CIRP is initiated, any action under SARFAESI Act to foreclose, recover or enforce any security interest is prohibited: Supreme Court Justices L. Nageswara Rao & B.R. Gavai [18-05-2022]

Read Judgment: INDIAN OVERSEAS BANK Vs. M/S RCM INFRASTRUCTURE LTD. AND ANOTHER 

Mansimran Kaur

New Delhi, May 19, 2022: The Supreme Court has held that Section 14(1)(c) of the IBC, having overriding effect over any other law, prohibits 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.

Dismissing the appeal instituted by the appellant-bank assailing the order of NCLAT wherein the order passed by the NCLT was upheld and the sale of assets of the Corporate Debtor was set aside, the Division Bench of Justice  L. Nageswara Rao and Justice B.R. Gavai held, “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 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.”

Facts in brief for adjudication of the present appeal were that the appellant   Bank   had   extended   certain   credit facilities to the Corporate Debtor(first respondent herein-M/s RCM Infrastructure Ltd. However, the Corporate Debtor failed to repay the dues and the loan amount dated June 13, 2016 was classified as “Non performing Asset”. Thereafter, the appellant bank issued a demand notice under Section 13 (2) of the Securitisation and   Reconstruction   of Financial Assets and Enforcement of Security Interest Act, 2002 to repay the outstanding amount.However, the Corporate Debtor failed to comply with the demand notice, thus the appellant took symbolic   possession   of   two   secured   assets   mortgaged exclusively with it. 

Subsequently an e- auction notice was issued and the final payment was received by the appellant with respect to the sale on March 8, 2019.  Amid these circumstances, the Corporate Debtor instituted a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 before the NCLT and the Corporate Insolvency Resolution Process of the Corporate Debtor commenced. A moratorium as provided under Section 14 of the IBC was notified and an Interim Resolution Professional. 

Thereafter, the appellant filed its claim in claim with the IRP. The prompter of the Corporate Debtor, thereafter filed an application in the pending company petition thereby praying to NCLT to set aside the security realization during the CIRP  period carried out by the appellant bank or in the alternative revoke the impugned transaction.  Through an order the NCLT allowed the said application and set aside the sale of the property owned by the Corporate Debtor.   Aggrieved by the same, the appellant filed an appeal before the NCLAT and the same was rejected by the impugned judgment. Hence, the present appeal was preferred.

The Court referred to Section (14) (1) (c) of the IBC and opined that after the CIRP is 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.

Further the Court referred to Section 238 of the Code and also to the judgments of this Court in Innoventive Industries Limited v. ICICI   Bank   and   Another , Principal   Commissioner   Income   Tax   v.   Monnet   Ispat   and   Energy   Limited and Ghanashyam Mishra and Sons Private Limited through the   Authorised   Signatory   v.   Edelweiss   Asset Reconstruction   Company   Limited   through   the   Director and Others. 

It was further opined by the Court that the appellant could not have continued the proceedings under the SARFAESI Act, once the CIRP was initiated and moratorium was ordered.  Thus, the Court refused to intervene with the concurrent orders passed by NCLT and NCLAT. Accordingly, the appeal was dismissed.