The High Court of Bombay, at Mumbai (“High Court”) has, by judgment pronounced on July 20, 2023, in the matter of Mr. Latif Yusuf Manikkoth v. The Board of Directors of the Bank of Baroda and Others [Writ Petition (L) No. 9116 of 2023], inter alia, held that Section 14 (Moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not create any bar or moratorium on initiation or continuation of action taken under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”) when the secured asset is owned by personal guarantor and not by principal borrower/ corporate debtor.

Facts

Alaska Creations Private Limited (“Principal Borrower”), a company engaged in the business of export of readymade garments and footwear, had availed loan facilities from Bank of Baroda (“BoB/ Respondent”) and Mr. Latif Yusuf Manikkoth (“Petitioner”), being the guarantor, had created charge in respect Waghbakriwala Building (“Secured Asset”) owned by him in favour of BoB. Subsequently, the Principal Borrower defaulted in repayment of loan amount to BoB which declared the loan amount as a non-performing Asset (“NPA”) on March 31, 2019. Thereafter, BoB recalled the entire loan amount by issuing demand notice dated April 25, 2019 under Section 13(2) (Enforcement of security interest) of the SARFAESI Act. Thereafter, upon non-payment of the loan amount despite issuance of said demand notice, BoB took symbolic possession of the Secured Asset on September 23, 2019 in terms of Section 13(4) of the SARFAESI Act. However, as peaceful and vacant possession of the Secured Asset was not handed over, BoB filed an application before the Chief Metropolitan Magistrate under Section 14 (Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset) of the SARFAESI Act. The Chief Metropolitan Magistrate appointed the Assistant Registrar (Cash), Fort, Mumbai as Court Commissioner to take possession of the Secured Asset. In view of the aforementioned, the Assistant Registrar issued a notice to a senior inspector of police to provide security for taking forceful possession of the Secured Asset from the Petitioner.

In the interim, Kiwi International, which was a supplier of footwear to the Principal Borrower, had initiated proceeding under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC against the Principal Borrower as an operational creditor. In view thereof, the National Company Law Tribunal, Mumbai (“NCLT”) by order dated September 11, 2019 had admitted the Principal Borrower into Corporate Insolvency Resolution Process (“CIRP”) and declared moratorium under Section 14 of the IBC.

In light of the above-mentioned circumstances, the Petitioner and the Principal Borrower indulged into filing of multiple proceedings before different courts and fora. More particularly, the Petitioner and Principal Borrower filed a civil suit before the Bombay City Civil Court against Kiwi International. Further, the Petitioner and Principal Borrower filed a writ petition challenging the above-mentioned notices issued under Section 13(2) and Section 13(4) of the SARFAESI Act.

The Petitioner and Principal Borrower challenged the aforementioned order passed by the Chief Metropolitan Magistrate by filing a securitization application no. SA/92/2022 before the Debt Recovery Tribunal, Mumbai (“DRT”) along with an application seeking interim relief. By way of order dated July 15, 2022, application for interim relief was disposed of by DRT, whereas securitization application No. SA/92/2022 is reserved for orders.

Further, the Petitioner/ Principal Borrower filed writ petition no. WP/644/2023 which was disposed of by the division bench of the High Court on February 13, 2023. Notably, the prayers/ reliefs sought to be granted in writ petition no. WP/644/2023 were more or less identical to the present writ petition. Thereafter, the Petitioner filed an interim application in the aforesaid disposed of writ petition no. WP/644/2023, which was disposed of by way of order dated February 23, 2023.

Issue

• Whether Section 14 of IBC creates any bar or moratorium on initiation or continuation of action taken under the provisions of SARFAESI Act when the secured asset is owned by personal guarantor and not by principal borrower/ corporate debtor
• Whether High Court ought to entertain writ petition filed by principal borrower or guarantor when legal remedy is already provided under the relevant provisions of the SARFAESI Act.

Arguments

Contentions raised by Petitioner:

The Petitioner submitted that the Principal Borrower is a micro, small and medium enterprise (“MSME”) within the meaning of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”). Further, Section 9 (Measures for promotion and development) of the MSMED Act provides that the Central Government may, from time to time, for the purposes of facilitating the promotion and development and enhancing the competitiveness of MSMEs, particularly of the micro and small enterprises, specify by notification, such programmes, guidelines or instructions, as it may deem fit. Pursuant thereto, a Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises was notified by the Ministry of Micro, Small and Medium Enterprises, Government of India which provides for a detailed mechanism for restructuring and corrective action plan in respect of MSMEs. However, no such opportunity for restructuring under the above-mentioned framework was granted to the Principal Borrower. The Petitioner submitted that the MSMED Act is a subsequent legislation as compared to the SARFAESI Act and should therefore prevail over the provisions of the SARFAESI Act. Also, it was submitted by the Petitioner that SARFAESI Act is a one-sided legislation which tilts in favour of banks and financial institutions, whereas MSMED Act has been enacted as a means of reviving and supporting MSMEs.

It was further contended by the Petitioner that the Principal Borrower had sought one-time restructuring of the credit facilities from BoB, which was not granted. It was further submitted that the business of Principal Borrower was severely hampered due to introduction of goods and services tax, demonetization and Covid-19 pandemic.

Contentions raised by Respondent:

It was submitted that the present writ petition is devoid of merits and ought to be dismissed in light of the fact that the Petitioner had already filed a securitization application before the DRT, which is now reserved for orders.

It was further contended that the Petitioner had suppressed material facts while approaching the High Court. In particular, the Respondent drew the attention of the High Court to the letters of guarantee dated July 2, 2010 and February 1, 2013, by way of which the Petitioner had guaranteed the due payment of credit facility sanctioned to the Principal Borrower. Further, the Respondent drew the attention of the High Court to the fact that upon default in repayment of loan, the Petitioner and the Principal Borrower indulged into the mala fide practice of forum shopping by filing multiplicity of proceedings before various courts, tribunals and fora.

Observations of the High Court

High Court observed that the Petitioner and the Principal Borrower had filed multiple proceedings before various courts arising out of the same subject matter. In particular, the High Court observed that the Petitioner had filed a securitization application before the DRT which is now reserved for orders.

Further, High Court observed that it is not in dispute that the Principal Borrower had availed credit facilities from BoB, the Petitioner had stood as guarantor and had created charge over the Secured Asset owned by the Petitioner and thereafter the Principal Borrower defaulted in repayment of the loan facilities leading to declaration of the loan account of the Principal Borrower as NPA and subsequent actions under the provisions of the SARFAESI Act.

Thereafter, the High Court delved into the issue of whether it is appropriate for a high court to entertain writ petition filed by principal borrower or guarantor when legal remedy is already provided under the relevant provisions of the SARFAESI Act. In this regard, the High Court referred to and relied upon the judicial pronouncement of the Supreme Court in the matter of Authorized Officer, State Bank of Travancore and Others v. Matthew K.C. [(2018) 3 SCC 85] dated January 30, 2018, whereby it has been held that the SARFAESI Act is a complete code by itself, providing for expeditious recovery of dues arising out of loans granted by financial institutions, the remedy of appeal by the aggrieved under Section 17 (Application against measures to recover secured debts) of the SARFAESI Act before the DRT, followed by a right to appeal before the appellate tribunal under Section 18 (Appeal to Appellate Tribunal) of the SARFAESI Act. High Court ought not to entertain writ petitions in view of the adequate alternate statutory remedies available to the principal borrowers and the guarantors. Thereafter, the High Court also analyzed the recent judicial pronouncement of the Supreme Court dated January 12, 2022 in the matter of Phoenix ARC Private Limited v. Vishwa Bharti Vidhya Mandir and Others [Civil Appeal Nos. 257-259] which reiterates that in view of efficacious statutory remedy available to the principal borrowers and guarantors under Section 17 of the SARFAESI Act, High Courts ought to refrain from entertaining writ petitions on such subject-matters.

Thereafter, the High Court delved into analysis of the legal issue as to whether Section 14 of the IBC creates any bar or moratorium on initiation or continuation of action taken under the provisions of the SARFAESI Act when the secured asset is owned by personal guarantor and not by principal borrower/ corporate debtor. In this regard, the High Court referred to and relied upon the judicial pronouncement of the Supreme Court dated August 14, 2018 in the matter of State Bank of India v. V. Ramakrishnan and Another [(2018) 17 SCC 394] whereby it has been held that there is no bar on initiation or continuation of proceedings initiated under the provisions of the SARFAESI Act qua the guarantor even if the principal borrower company is undergoing CIRP and enjoys the protection of moratorium under Section 14 of the IBC.

Decision of the High Court

In view of the above-mentioned observations, the High Court held that a secured creditor is entitled to pursue recovery proceedings against secured asset owned by a guarantor even if the principal borrower is placed under moratorium and that the protection of moratorium exists only in favour of the principal borrower and does not extend to the personal guarantor. Hence, the High Court held that the present writ petition including the prayer sought by the Petitioner pertaining to restructuring under the framework of MSMED Act cannot be entertained and there are no merits in the present writ petition and therefore dismissed the same.

VA View:

The present judgment of High Court is a significant judicial pronouncement for multiple reasons.

Firstly, the High Court clearly holds that a secured creditor is entitled to pursue recovery proceedings against secured asset owned by a guarantor even if the principal borrower is placed under moratorium. The protection of moratorium exists only in favour of the principal borrower and does not extend to the personal guarantor. Hence, if a lender intends to pursue action under SARFAESI Act in respect of a secured asset owned by the guarantor, the same is very much permissible in law and not hit by moratorium.

Further, the High Court refused to entertain the plea taken by the Petitioner that the Principal Borrower being an MSME ought to have been resolved under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises. This is a bold and significant decision, despite the technical contention raised by the Petitioner that the MSMED Act enacted in the year 2006 is a more recent legislation as compared by the SARFAESI Act enacted in the year 2002. The High Court has given a clear indication that principles of statutes and their interpretation cannot be mis-utilized by the defaulters with the mala fide intention of running away from their legal obligation to repay the debt.

Lastly, the judgment is a classic example of the fact that invoking the writ jurisdiction of High Court despite existence of alternate and efficacious statutory remedy available to the principal borrowers and guarantors under Section 17 of the SARFAESI Act or indulging into the practice of forum shopping by filing multiplicity of legal proceedings before various courts and tribunals will not help the mala fide cause of the defaulters and such practices will not lead to any relief from the High Court.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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