[By Nimish Maheshwari]
The author is a student of National Law Institute Jodhpur
1.Introduction
One of the salient aspects that makes Insolvency and Bankruptcy Code (‘IBC’), 2016 stand out from the other debt recovery mechanisms is its overriding effect over any other law where there is overlap. For instance, the IBC takes precedence over The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’). Consequently, where there are proceedings under the SARFAESI Act and a Corporate Insolvency Resolution Process (‘CIRP’) has commenced under Sections 7, 9, or 10 of the IBC, imposition of the moratorium would lead to suspension of proceedings under SARFAESI.
In Rakesh Kumar Gupta v. Mahesh Bansal the court relied on Section 238 of IBC to hold that the pendency of proceedings under the Sarfaesi Act would not obstruct the courts from allowing an application under Section 7 of the IBC. This position has also been consistently upheld in relation to Section 13(4) of the SARFAESI also. It has been recognised that any action to foreclose, recover or enforce a security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act is prohibited due to the overriding power of Section 14(1)(c) of IBC.
For example, even where a bank, in exercise of its power under Section 13(4) of the SARFAESI Act, read with Rule 8 of the Security Interest (Enforcement) Rules, 2002 (‘Rules’) has taken symbolic possession of secured assets mortgaged exclusively with it and proceeded to auction those assets and receive bid amounts, the commencement of CIRP and the resulting moratorium would lead to halting of such SARFAESI proceedings.
In Indian Overseas Bank v. M/S R.C.M Infrastructure Ltd. and Anr., (‘Indian Overseas’) the Supreme Court (‘SC’) reaffirmed the settled legal position that once the CIRP is initiated under IBC, any parallel proceedings under the SARFAESI Act must be halted. In this case, a sale certificate has already been issued, and 25% of the bid amount has been paid by the auction purchaser under Section 13(8) of the SARFAESI Act. The court held that the moratorium imposed under Section 14 of the IBC would override such enforcement actions, thereby safeguarding the corporate debtor’s assets for the benefit of all creditors.
However, this clarity has recently been disrupted by recent developments of the National Company Law Appellate Tribunal (‘NCLAT’) in Nagpur Nagrik Sahakari Bank Ltd. and Ors. v. Mohanlal Ayyapan Pillai and Ors (‘Nagpur Nagrik Sahakari Bank’) & Pratibha industries v. Yes Bank Ltd. and Anr. (‘Pratibha Industries’). These rulings have carved out exceptions to the SC’s interpretation, introducing a degree of uncertainty into an otherwise well-settled area of law.
This article examines the conflicting judicial approaches to the interplay between Section 13(4) and 13(8) of the SARFAESI Act and Section 14 of the IBC. Part II explores what is the question of law that has arisen because of recent cases and what is the core contention. Part III is discussing the conflicting interpretations that have been employed by different cases and how that has led to an interpretative conundrum. It explores the underlying legal rationale for each position and identifies the specific points of divergence. Part IV concludes by providing with recommendation and way forward.
Question of law – The Core Contention
A significant legal conundrum has emerged at the intersection of the SARFAESI Act and IBC, particularly in cases where proceedings under both statutes appear to overlap.
Recently, NCLAT have interpreted Section 13(8) of the SARFAESI Act, to conclude that an auction conducted by a bank under the SARFAESI cannot be set aside if the sale notice had been issued prior to commencement of the CIRP. It held that the relationship between the parties i.e., the mortgagor-mortgagee, for redemption, exists only till the date of issuance of notice of sale of property.
The tribunal, relying on Celir LLP v Bafna Motors (Mumbai) Pvt. Ltd (‘Celir LLP’) decided that even if insolvency proceedings are initiated under the IBC and a moratorium is imposed, it would neither revive the mortgagor’s extinguished rights nor would the property form part of the corporate debtor’s asset pool.
In Celir LLP, the SC undertook a detailed analysis of the pre- and post-amendment versions of Section 13(8) and concluded that after the 2016 amendment, once the auction notice in accordance with Rule 8(6) and 9(1) of the Security Interest (Enforcement) Rules, 2002, is published and dues remain unpaid, the borrower’s redemption rights are extinguished. On this basis court decided that the sale of an asset even if after the initiation of CIRP is not in violation of Section 14(1)(c) of IBC because there was no relationship between the mortgagor and mortgagee. And no right of redemption exists between them because notice under Section 13(8) was issued much prior to the commencement of CIRP.
Court emphasised on the sanctity of public auctions, underscoring the judicial responsibility to protect such processes from unnecessary interference. It cautioned that any other interpretation of Section 13(8) would allow mischievous borrowers to disrupt the auction process. There would be multiple redemption offers from borrowers even after public auction notices, potentially frustrating the auction process and discouraging public participation, thereby defeating the purpose of the Act.
In the Pratibha Industries, and the recent Nagpur Nagrik Sahakari Bank case, the tribunal, held that if the property is sold in accordance with Section 13(8), the borrower’s right to redeem the property is extinguished. In both decisions, the court relied heavily on the ratio of Celir, wherein the central question was “what is the impact of the amended Section 13(8) of the Act on the borrower’s right of redemption in an auction conducted under the Act.”
Now the core issue that arises is that currently two interpretations are there on the same point of law. Putting simply, the question is that if an auction is conducted under Section 13(8) of SARFAESI & partial bid money has been received. But before the whole money is received, the insolvency proceedings have started and moratorium has been imposed; now which law will take precedence, SARFAESI or IBC. One understanding is saying that the IBC will prevail over SARFAESI, whereas other one is saying that SARFAESI will prevail over IBC.
Conflicting Interpretation
To properly appreciate the legal conundrum concerning the interplay between the SARFAESI Act and the IBC, it is essential to critically analyse the reasoning adopted in each case.
Going through the practical problems of both the situation one can understand that both the decisions are correct as per the reasoning that they have relied upon. In Indian Overseas SC held that the Section 238 of IBC which is non obstante clause which clearly mentions that IBC will have precedence over all other legislations and this position has been supported by various case laws also. Accordingly, the court ruled that no sale of property under SARFAESI can be continued post the commencement of CIRP. Court also emphasized on the point that issuance of sale certificate is not deemed complete until the final payment is made and the ownership is actually transferred. Herein the court majorly focused on IBC precedence without focusing on SARFAESI and without any mention of right of redemption under Section 13(8). Thus, while decision aligns with IBC jurisprudence, it is in a sense an incomplete decision for failing to engage in detailed interpretative analysis of the SARFAESI provisions.
On the other hand, Celir LLP was decided out of the IBC context and entirely focused on the interpretation of Section 13(8) of the SARFAESI. The judgment undertook a comparative analysis of Section 13(8) of the SARFAESI Act in its pre- and post-2016 amendment form. The Court concluded that the 2016 amendment had substantively altered the right of redemption, holding that such right stands extinguished once an auction notice is issued under Rule 8(6) and dues remain unpaid. The court’s main argument and focus was on saving the sanctity of auctions as many cases were brought to the court wherein, even after the completion of auction, the borrowers were claiming their right of redemption. Thus, the court gave its decision in this context.
However, the main issue started when Celir reasoning has been imported in the insolvency proceedings, as evidenced in the Pratibha case. The NCLAT relied on Celir to hold that once the right of redemption is extinguished under Section 13(8), the mortgage property no longer forms part of the asset pool of the corporate debtor, thus the moratorium under Section 14 of IBC doesn’t apply. This creates a precedent where certain SARFAESI proceedings, if they reach an advanced stage prior to CIRP, can override the moratorium provision.
This creates a dual interpretative scenario. On one hand, the SC in Indian overseas emphasises the primacy of IBC post-CIRP without adequately addressing the extinguishment of rights under SARFAESI. On the other hand, the Celir LLP based approach, while authoritative on SARFAESI’s internal mechanics, does not fully engage with the impact of insolvency proceedings and the imposition of moratorium under the IBC. Therefore, the former can be seen as per incuriam for its lack of attention to SARFAESI’s provisions, while the latter is inapposite when applied mechanically to cases involving insolvency, as it was not decided in that context.
Furthermore, decisions of the NCLAT, such as in Pratibha Industries and Nagpur Nagrik Sahakari Bank cannot override or displace binding SC precedent, particularly where the conflict is not conclusively resolved. Moreover, the decision in Celir LLP doesn’t engage with the same factual matrix involving the initiation of CIRP proceedings and imposition of moratorium.
And another decision i.e. Celir is not completely covering the same factual matrix involving the initiation of CIRP proceedings and imposition of moratorium. And the NCLAT decisions on this point can’t be equated with the SC decision. Thus, these judgments cannot definitively conclude the legal dispute, especially where rival interpretations arise from coordinate benches and where the Supreme Court itself has not passed a comprehensive judgment harmonizing both statutory frameworks.
Therefore, there is an urgent need for authoritative clarification by the Supreme Court, that is, on the applicability and interpretation of Section 13(8) of the SARFAESI Act in the context of an ongoing CIRP and moratorium under the IBC. This clarification needs to harmonize the goals of both legislations, providing creditor recovery and resolution of insolvency, without jeopardizing the integrity of judicial and auction proceedings.
Recommendations/Way Forward
It is asserted that SC should unambiguously affirm the primacy of SARFAESI Section 13(8) once an auction notice has been validly issued in compliance with Rules 8(6) and 9(1) of the rules and auction been conducted, irrespective of whether full consideration is still due. By virtue of the 2016 amendment to Section 13(8), the borrower’s right of redemption must be regarded as finally extinguished at that stage, so that any subsequent initiation of CIRP can’t reverse the SARFAESI sale.
Additionally, the court should soundly deter debtors from abusing Section 10 of IBC to frustrate SARFAESI recoveries by making it clear that mala-fide invocation of voluntary CIRP with a view to avoid SARFAESI enforcement will amount to fraudulent initiation of insolvency proceedings within the meaning of Section 65 of the IBC. This is important because debtors, anticipating that its assets will be seized by bank and thus excluded from the asset pool for distribution, maliciously files voluntary insolvency under Section 10 of IBC to trigger moratorium. A declaratory statement on this matter will deter forum-shopping and guarantee that the moratorium will be a shield for true restructuring, rather than a sword for delaying strategies.
In these principles, the court should mandate that authorities must regard to pertinent contextual safeguard while deciding i.e. whether the auctioned asset has been duly registered in transferee’s name post-auction, precise stage of SARFAESI proceedings, exact bid money received, etc. Such fact- based approach will ensure that the object and purpose of both statutes are maintained.
Finally, SC should harmonise non-obstante override in Section 238 of IBC with the SARFAESI Act’s amended Section 13(8), giving a consolidated interpretation clarifying the respective scopes and interplay of each regime.