A Division Bench of Justice L. Nageswara Rao and Justice B.R. Gavai by observing that 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, dismissed the appeal instituted by the appellant- bank assailing 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 present appeal was preferred against the judgment dated March 26, 2021 passed by the National Company Law Appellate Tribunal wherein while pursuing the company appeal, dismissed the appeal instituted by the present appellant- Overseas Bank, which in turn was filed to assail the order dated July 15, 2020 passed by NCLT, whereby the NCLT allowed application preferred by the second respondent- former Managing Director of the first respondent- M/s RCM Infrastructure Ltd. and set aside sale of assets of the Corporate Debtor.
Facts in brief for adjudication of the present appeal were that the appellant Bank 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. As a result, 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 , in order to call upon the Corporate Debtor and its guarantors to repay the outstanding amount due to the appellant bank. 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. The same was done by virtue of power granted to it under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. Subsequently an e- auction notice was issued on September 27, 2018 by the appellant bank to recover the public money availed by the Corporate Debtor. In pursuance of the same a bidder was finalized 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. By an order dated January 3, 2019 the petition was accepted and consequently 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 form- C with the IRP, when it was apprised of the insolvency petition filed by the Corporate Debtor.
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 dated July 15, 2020, 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 dated March 26, 2021. Hence, the present appeal was preferred.
The Court, after hearing the submissions at length, deemed it fit to refer to Section (14) (1) (c) of the IBC. In view of the same, the Court 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.
It was also stated 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 Court noted.
Further the Court referred to Section 238 of the Code, with respect to the same the Court deduced 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. Reference in this respect was made to the judgments of this Court in the cases Innoventive Industries Limited v. ICICI Bank and Another , Principal Commissioner Income Tax v. Monnet Ispat and Energy Limited .
With respect to contention of the appellant that the sale deed was completed before the CIRP proceedings were initiated, the Court with respect to the same observed that the sale under the statutory scheme as contemplated under Rules 8 and 9 of the said Rules
would stand completed only on 8th March 2019, which was much after January 3, 2019. Thus the aforesaid contention cannot be accepted.
The contention of the appellant with respect to the filing of the petition with a mala fide intention by the Corporate Debtor, the Court stated that there was no merit in the same.
Thus, it was observed that in view of Section 14(1)(c) of the IBC, having 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.
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.
Case name: K. SRINIVASAPPA AND ORS. Vs. M. MALLAMMA & ORS.
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