The Supreme Court (“SC”) has in the judgement dated May 18, 2022 (“Judgement”), in the matter of Indian Overseas Bank v M/S RCM Infrastructure Limited and Another [Civil Appeal No. 4750 of 2021] held that once corporate insolvency resolution process (“CIRP”) is initiated, all actions under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) to foreclose, recover or enforce any security interest are prohibited.

Facts

In the instant case, an appeal was preferred before the SC challenging the judgment dated March 26, 2021 (“Impugned Order”) passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), thereby dismissing the appeal filed by the Indian Overseas Bank (“Appellant”). The appeal to the NCLAT was in turn filed challenging the order dated July 15, 2020 passed by the National Company Law Tribunal, Hyderabad Bench-1, Hyderabad (“NCLT”), by which the NCLT had allowed the application filed by the former managing director (“Respondent No. 2”) of M/s. RCM Infrastructure Limited (“Corporate Debtor”/ “Respondent No. 1”) and set aside the sale of the assets of the Corporate Debtor. Respondent No. 1 and Respondent No. 2 are collectively referred to as “Respondents”.

The Appellant had extended certain credit facilities to the Corporate Debtor. However, the Corporate Debtor failed to repay the dues and the loan account of the Corporate Debtor became irregular. On June 13, 2016, the loan account of the Corporate Debtor came to be classified as “Non-Performing Asset” (“NPA”). The Appellant issued a demand notice under Section 13(2) of the SARFAESI, calling upon the Corporate Debtor and its guarantors to repay the outstanding amount due to the Appellant. Since the Corporate Debtor failed to comply with the demand notice and repay the outstanding dues, the Appellant took symbolic possession of two secured assets mortgaged exclusively with it, in exercise of powers conferred on it under Section 13(4) of the SARFAESI, read with Rule 8 (Sale of immovable secured assets) of the Security Interest (Enforcement) Rules, 2002 (“Rules”). One of the said properties stood in the name of the Corporate Debtor and the other in the name of corporate guarantor. An e-auction notice came to be issued on September 27, 2018 by the Appellant to recover the public money availed by the Corporate Debtor.

On October 22, 2018, the Corporate Debtor filed a petition under Section 10 (Initiation of corporate insolvency resolution process by corporate applicant) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the NCLT. In the first e-auction held on November 6, 2018, no bids were received. In the second e-auction held on December 12, 2018, three persons became successful bidders by offering jointly a price of Rs.32.92 crores for both the secured assets. On December 13, 2018, the sale was confirmed in favour of the successful bidders in the public auction. The successful bidders deposited 25% of the bid amount, that is, Rs.8.23 crore including the earnest money deposit of the said amount and the Appellant issued a sale certificate to them. The auction purchasers were directed to pay the balance 75% of the bid amount within 15 days, that is, prior to December 28, 2018. The auction purchasers addressed a letter to the Appellant seeking handing over of peaceful and vacant possession of the secured assets and also prayed for extension of time to pay the balance 75% of the bid amount till March 8, 2019, which was accepted by the Appellant.

NCLT, by order dated January 3, 2019, admitted the petition filed by the ex-promoter of the Corporate Debtor, and consequently the CIRP of the Corporate Debtor commenced, and moratorium under Section 14 (Moratorium) of the IBC was notified and an Interim Resolution Professional (“IRP”) was also appointed.

The Appellant on January 21, 2019, filed its claim in Claim Form-C with the IRP, upon it coming to know about the admission of the insolvency petition filed by the Corporate Debtor. According to the Appellant, since the balance 75% of the bid amount was not yet received on the said date, it was not excluded from the claim filed before the IRP. During the pendency of the CIRP, the Appellant accepted the balance 75% of the bid amount, that is, Rs.24.69 crores on March 8, 2019. Upon receipt of the payment, the Appellant submitted its revised claim in Claim Form-C to the IRP on March 11, 2019. The Appellant also intimated the IRP about the successful sale of the said secured assets. The Respondent No. 2 thereafter filed an application praying before the learned NCLT to set aside the security realization during the CIRP period carried out by the Appellant or in the alternative to cancel the impugned transaction. By way of the order dated July 15, 2020, the learned NCLT passed an order thereby allowing the said application filed by the Respondent No. 2 and setting aside the sale of the property owned by the Corporate Debtor. Being aggrieved thereby, the Appellant filed an appeal before the NCLAT and the same was rejected by the Impugned Order. Being aggrieved by such order thereby, the present appeal was preferred by the Appellant to the Supreme Court.

Issue

Whether proceedings under the SARFAESI can be continued against the Corporate Debtor once CIRP is admitted and moratorium is ordered.

Arguments

Contentions raised by the Appellant:

It was argued that the very initiation of the voluntary insolvency proceedings under Section 10 of the IBC was with mala fide intent and as such, hit by Section 65 (Fraudulent or malicious initiation of proceedings) of the IBC. It was submitted that the demand notice was challenged by the Corporate Debtor by filing an application before the learned Debt Recovery Tribunal-II, Hyderabad (“DRT”). However, no stay was granted by the DRT in the said application. On the contrary, an order was passed on October 29, 2018 by the learned DRT, whereby confirmation of sale was stayed, subject to deposit of Rs.12 crores by the Corporate Debtor. The Corporate Debtor failed to do so. After that, with mala fide intent, instead of making payment, a petition came to be filed under Section 10 of the IBC by the Corporate Debtor for the sole purpose of stalling the sale. Though the issue with regard to Section 65 of the IBC was subsequently raised by the Appellant, neither the learned NCLT nor the learned NCLAT had considered the same.

It was argued that since the moratorium under Section 14 of the IBC had ceased to subsist after the order directing liquidation was passed under Section 52 (Secured creditor in liquidation proceedings) of the IBC, the secured creditors were allowed to realise their security interest. It was therefore submitted that there was no bar on the Appellant to realise its money. In view of the provision of Section 54 (Dissolution of corporate debtor) of the IBC, the sale was complete after the Appellant had received 25% of the bid amount and the said was confirmed. Relying on Vidhyadhar v. Manikrao and Another [(1999) 3 SCC 573], and B. Arvind Kumar v. Govt. of India and Others [(2007) 5 SCC 745] it was argued that merely because a part of the sale consideration was received subsequently, it could not affect the sale. Section 14(1)(c) of the IBC interdicts any action to foreclose, recover or enforce any security interest including any action under SARFAESI. However, it does not undo actions which have already stood completed.

Contentions raised by the Respondents:

The Respondents argued that the title of the secured assets cannot be conveyed to the auction purchasers merely upon confirmation of sale even before receiving full sale consideration. It was submitted that the title would be passed over only after receipt of the full consideration and issuance of sale certificate. Further, it was submitted that the contentions are totally contrary in view of various provisions of the SARFAESI, the Rules as well as Sections 14(1)(c), 31(1) and 238 of the IBC. Section 13(8) of the SARFAESI itself provides a right of redemption of secured assets to the owner/debtor. Upon approval of the Resolution Plan (“RP”), in view of Section 31(1) of the IBC, all the debts stand legally resolved and the same is binding on all parties including the Corporate Debtor, its employees, members, creditors, and all governmental dues and the successful resolution applicant would be entitled to start on a clean slate. Further, the jural relationship of creditor-debtor would get altered/severed under a new contract upon approval of a new RP. It was submitted that as a consequence, the security created under the old contract would stand released by operation of law and the relationship would be governed by the terms of the approved plan and the mortgage created under the old contract would get extinguished/novated.

It was submitted that in any case, in view of Section 238 (Provisions of the IBC to override other laws) of the IBC, the provisions contained therein will override all other laws for the time being in force and the provisions of the IBC would also prevail over any other instrument having effect by virtue of any other law. The continuation of any proceeding including the proceeding under the SARFAESI is totally illegal in view of Section 14(1)(c) of the IBC. It was, therefore, submitted that the continuation of any action under the SARFAESI by the Appellant and the receipt of the balance sale consideration was violative of Section 14(1)(c) of the IBC. The amount payable by the Corporate Debtor to the other financial creditors is much more than the amount received by the Appellant during the pendency of the CIRP.

Under the provisions of the IBC, all the financial creditors would be entitled to a share in the amount received upon realization of the assets of the Corporate Debtor and the Appellant cannot keep it in entirety. Section 65 of the IBC expressly provides for the mechanism and the remedy for addressing frivolous or malicious proceedings initiated under the SARFAESI. However, the Appellant chose not to take recourse to such proceedings. It was contended that as such, the allegations of mala fide were incorrect.

Observations of the Supreme Court

The SC observed 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. 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 to foreclose, recover or enforce any security interest are prohibited. The SC observed that the provisions of the IBC 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. It has been consistently held by the SC that the IBC is a complete code in itself and 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.

Insofar as the judgment of the SC in the case of Vidhyadhar (supra) was concerned, the SC observed that it was held that even if the full price of the property has not been paid, the transaction of the sale will take effect and the title would pass on that transaction, the SC had further held that the real test is the intention of the parties. It was held that the parties must intend to transfer ownership of the property and that they must also intend that the price would be paid either in praesenti or in future. The SC however noted that in the said case, the defendant had not only executed the sale deed in favour of the plaintiff but had presented it for registration, admitted its execution before the Sub-Registrar before whom the remaining part of the sale consideration was paid and thereafter, the document was registered.

In the case of B. Arvind Kumar (supra), the property in question was a suit property and was sold in a public auction. The sale was confirmed by the District Judge, Civil and Military Station, Bangalore. What was held by the SC is that when a property is sold by public auction in pursuance of the order of the court and the bid is accepted and the sale is confirmed by the court in favour of the purchaser, the sale becomes absolute and the title vests in the purchaser. It was held that a sale certificate is issued to the purchaser only when the sale becomes absolute. It was held that when the auction purchaser derives title on confirmation of sale in his favour and a sale certificate is issued evidencing such sale and title, no further deed of transfer from the court is contemplated or required. Additionally, in the said case, the SC found that the sale certificate itself was registered.

The SC clarified that the instant case arises out of a statutory sale. The sale would be governed by Rules 8 and 9 (Time of sale, issues of sale certificate and delivery of possession, etc.) of the Rules. The sale would be complete only when the auction purchaser makes the entire payment and the authorised officer, exercising the power of sale, issues a certificate of sale of the property in favour of the purchaser in the form given in Appendix V to the Rules. The SC noted that in the present case, the balance amount was accepted by the Appellant on March 8, 2019. The sale under the statutory scheme as contemplated under Rules 8 and 9 of the Rules would stand completed only on March 8, 2019.

The SC noted that this date fell much after January 3, 2019, on which date the CIRP commenced and moratorium was ordered. The SC was unable to accept the argument on behalf of the Appellant that the sale was complete upon receipt of the part payment. The SC concluded that 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 the Supreme Court

The SC held that the Appellant could not have continued the proceedings under the SARFAESI once the CIRP was initiated and the moratorium was ordered. Further it rejected the contention of the Appellant that the petition filed by the Corporate Debtor was mala fide.

VA View:

Through this Judgement, the SC determined on the issue of applicability of provisions under Section 14 of the IBC to a proceeding initiated in terms of the SARFAESI, in particular, auction sale. It confirmed that bar under Section 14 of the IBC extends to any action of enforcement of any security interest created by the corporate debtor, including any action under the SARFAESI.

Through this Judgment the SC has clarified the rationale behind the IBC as a legislation, which favours the resolution process of corporate debtors, over securing interest of individual claimants. The SC reiterated the legislative intent of the IBC that after the CIRP is initiated, all actions including any action under the SARFAESI to foreclose, recover or enforce any security interest are prohibited.

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

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