The Supreme Court in Indian Overseas Bank v. RCM Infrastructure Ltd observed that proceedings under the SARFAESI Act cannot be continued once the CIRP (Corporate Insolvency Resolution Process) is initiated, and the moratorium is ordered.
The case, in brief, is that the Indian Overseas Bank had extended certain credit facilities to the Corporate Debtor. Eventually, SARFAESI proceedings were initiated against, and the Bank took symbolic possession of two secured assets mortgaged exclusively with it in the exercise of powers conferred on it under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. An E-auction notice came to be issued by the Bank to recover the public money availed by the Corporate Debtor. At this stage, the Corporate Debtor filed a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 before NCLT. NCLT, on 3rd January 2019, admitted the petition and a moratorium was also notified. But even thereafter, the Bank continued the auction proceedings and accepted the balance 75% of the bid amount and completed the sale. NCLT, allowing the application filed by the Corporate Debtor, passed an order setting aside the sale. NCLAT dismissed the appeal filed by the Bank and therefore it approached the Apex Court.
On the contrary, the Bank submitted that the promoters of the Corporate Debtor have indulged in forum shopping with malicious intent and as such, the learned NCLT ought not to have granted relief in their favour. It is submitted that the applicants were bona fide purchasers and put into possession and therefore should not be disturbed. It is submitted that the Corporate Debtor’s right in respect of the mortgaged property is the right of redemption under Section 60 of the Transfer of Property Act, 1882. It was stated that under Section 13(8) of the SARFAESI Act, as amended in 2016, the right of redemption is lost on the issuance of public notice of auction or tender.
The Counsel for the Bank also relied upon paragraph (21) of the Insolvency Law Committee Report, wherein it was observed that the rights and priorities of creditors established prior to insolvency under commercial laws should be upheld to preserve the legitimate expectations of creditors and encourage greater predictability in the commercial relationship.
After hearing the exhaustive submissions of both sides, the Court observed that “It is thus clear that after the CIRP is initiated, there is a 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 is clear that once the CIRP is commenced, there is a 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.”
The Court further referred to Section 238 of the IBC which states that the provisions of the IBC shall have an 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 was categorically observed 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. We are of the view that the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered.”