Primacy of IBC over SARFAESI
The Insolvency and Bankruptcy Code, 2016 was enacted with the purpose of consolidating laws relating to reorganization and insolvency and to conclude the process in a time bound manner. Entities under this code can initiate insolvency proceedings against the corporate debtor to recover their debt by way of resolution plan or liquidation.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (hereinafter referred to as “SARFAESI Act”) was enacted in the year 2002 with the purpose of allowing financial institution to recover loans by way of auction of properties of the defaulters. It provides for secured creditors to take possession of the property against which loan was provided. Debt Recovery Tribunals were created to deal with the increasing problem of Non-Performing Assets.
While SARFAESI Act protects the interests of financial institutions by enforcing security interests, IBC protects all kinds of creditors through a waterfall mechanism which lays down a hierarchy in which payment distribution would take place.
Once Corporate Insolvency Resolution Process has commenced, there is a prohibition for any action to recover or enforce any security interest created by the Corporate Debtor in respect of its property, including any action taken under the SARFAESI Act. Proceedings initiated under SARFAESI Act cannot continue once CIRP is initiated.
Ld. NCLAT, in Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeep Desai[1], noting that SARFAESI Act, 2002 is an existing law, held that Section 238 of the Insolvency and Bankruptcy Code, 2016 will prevail over any of the provisions of the SARFAESI Act if it is inconsistent with any of the provisions of the IBC.
Hon’ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., reinforced that when IBC is in conflict with any other prevailing law, it would override other laws. It was held that Section 238 of IBC overrides provisions of Electricity Act as well despite both of them contain non-obstante clauses. The provision provides that when proceedings are initiated under IBC, it assumes priority over other laws.
In recent judicial interpretations, Courts have discussed the interplay between IBC and SARFAESI Act. These rulings establish IBCs precedence and the impact of moratorium on bank’s attempts to recover amount from secured assets.
In the case of Indian Overseas Bank v M/S RCM Infrastructure Limited and Another[2], the Hon’ble Supreme Court affirmed that bar under Section 14 of the code extends to the enforcement of any security created by the Corporate Debtor under SARFAESI Act. The proceedings under SARFAESI would continue only if the sale stage has reached before the moratorium is imposed.
Recently, it was held by Ld. NCLAT, in Indiabulls Asset Reconstruction Company Ltd. v. Pawan Kapoor[3] that once interim moratorium is in effect due to insolvency proceedings against a personal guarantor, bank cannot proceed against the property mortgaged by the personal guarantor under SARFAESI Act. In this case, the Appellant had filed proceedings under section 13(4) of SARFAESI Act and subsequently took symbolic possession of the mortgage property. Thereafter, an application was filed under section 95 of IBC to initiate proceedings against the personal guarantor. Ld. NCLAT relied on a judgment passed by the Hon’ble Delhi High Court[4] wherein it was held that bank cannot proceed further under SARFAESI Act, in view of interim moratorium due to insolvency proceedings pending against personal guarantor. Only when such interim moratorium is lifted, the bank can proceed against under SARFAESI Act.
Moratorium under Section 96 of IBC is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes are initiated.
However, it is also observed by various Courts that personal guarantors cannot use proceedings under IBC to escape from the claims lined up against them.
Author: Yashvi Aswani, Senior Associate
[1] 2019 SCC OnLine NCLAT 284
[2] [Civil Appeal No. 4750 of 2021],
[3] Company Appeal (AT)(Insolvency) No.192/2021
[4] Sanjay Dhingra Vs IDBI Bank Ltd & Ors [WP(C) No.8131/2020 and CM Appl 26390/2020]