ARTICLE
30 May 2022

Supreme Court Holds That Enforcement Of Security Interest Is Not Permissible During Moratorium Period Under IBC

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In the said case, 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 and was declared NPA.
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In Indian Overseas Bank v. M/s RCM Infrastructure Ltd. and Another,1 the Supreme Court reiterated that in terms of Section 14(1)(c) and Section 238 of the Code, 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 not permissible.

In the said case, 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 and was declared NPA. Consequently, the bank proceeded to enforce and realize the security interest in accordance with the provisions of SARFAESI Act. An E­auction notice was issued on 27th September 2018 by the appellant Bank. In the meantime, on 22nd October 2018, the Corporate Debtor filed a petition being CP(IB) No. 601/10/HDB/2018 under Section 10 of the Code before the NCLT. In the first E­auction held on 6th November, 2018, no bids were received and a second E­auction notice was issued on 27th November 2018, which was scheduled to be held on 12th December 2018.

The successful bidders jointly offered a price of Rs.32.92 crore for the secured assets. On 13th December 2018, the sale was confirmed in favour of the successful bidders/auction purchasers in the public auction. The successful bidders deposited 25% of the bid amount, i.e., Rs.8.23 crore including the earnest money deposit of the said amount and the appellant Bank issued a sale certificate to them. The auction purchasers were directed to pay the balance 75% of the bid amount within 15 days, i.e., prior to 28th December 2018. However, the auction purchasers sought for an extension to pay the balance 75% of the bid amount till 8th March 2019. This was acceded to by the appellant Bank and it extended the period till 8th March 2019 for payment of the balance 75% of the bid amount.

The NCLT, vide order dated 3rd January 2019, admitted the petition filed by the ex­promoter of the Corporate Debtor. On initiation of CIRP process, the appellant Bank on 21st January 2019, filed its claim in Form­C with the IRP for the balance 75% of the bid amount. During the pendency of the CIRP, the appellant Bank however accepted the balance 75% of the bid amount, i.e., Rs.24.69 crore on 8th March, 2019. Upon receipt of the payment, the appellant Bank submitted its revised claim in Claim Form­C to the IRP on 11th March 2019. The promoter of the Corporate Debtor filed an application being I.A. No.832/2020, thereby praying for setting aside of the security realization during the CIRP period carried out by the appellant Bank or in the alternative to cancel the impugned transaction. The NCLT vide order dated 15th July 2020 allowed the aforesaid application and set aside the sale of the property. Being aggrieved thereby, the appellant Bank filed an appeal being Company Appeal (AT) (Insolvency) No. 736 of 2020 before the NCLAT, the same was rejected by order dated 26thMarch, 2021. Being aggrieved thereby, the appeal was filed before the Supreme Court.

The NCLT, vide order dated 7th February 2022, ordered for liquidation of the corporate debtor. The appellant bank inter alia contended that the CIRP was initiated only to stall the SARFAESI proceedings. It was further contended that in view of Section 54 of the Code, the sale was complete after the appellant Bank had received 25% of the bid amount and merely because a part of the sale consideration was received subsequently, it could not affect the sale. It was also contended that since the moratorium under Section 14 ceased to subsist after the passing of the order of liquidation and the secured creditors were allowed to realise their security interest. As such, there was no bar on the appellant Bank to realise its money. It was lastly submitted that Section 14(1)(c) of the Code 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.

The Supreme Court rejected the aforesaid contentions of the Appellant Bank and held 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 i.e., when the balance amount was accepted by the Appellant Bank. As this date was much after 3rd January 2019, i.e., the date on which CIRP commenced and moratorium was ordered, it could not be accepted that the sale was complete upon receipt of the part payment. It was further held that the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered in view of the provisions of Section 14(1)(c) of the Code, which have overriding effect over any other law. Thus, held that 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.

Conclusion

The finding of the Supreme Court is correct in the present case that the acceptance of partial amount would not lead to a conclusive sale by the bank (secured creditor) and the sale could be held to be conclusive only upon acceptance of the balance bid amount and moratorium would be applicable to such a transaction. However, there is a word of caution that we would like to mention here. In many cases, there can be a hidden intention of the borrower to frustrate the legitimate recovery measures taken by the banks or other secured creditors. Filing of Application under Section 10 of IBC to initiate insolvency resolution process and make moratorium applicable so that the recovery of secured creditors through sale of secured assets of the Corporate Debtor can be frustrated is a serious matter. If the sole intention is to frustrate the recovery process and not otherwise to seek resolution of the Corporate Debtor, such act on the part of the Ex-promoters or Directors of the Borrower Company should be condemned by the Courts. After all, any remedy available in law should not be used as a tool to frustrate the recovery process initiated by the secured creditors especially when bids to sale secured assets were already accepted. The Promoters or Directors of the Corporate Debtor should not conceal such facts from the NCLT during hearing of petitions filed under Section 10 of IBC.

Footnotes

1. Civil Appeal no. 4750 OF 2021

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