Interplay between Moratorium under IBC and issuance of Sale Certificate under SARFAESI Act – By Amir Bavani and Ayushi Verma

Interplay between Moratorium under IBC and issuance of Sale Certificate under SARFAESI Act

Authored by:
Amir Bavani, Founder, AB Legal
Ayushi Verma, Associate, AB Legal

As soon as the application of Corporate Insolvency Resolution Process (CIRP) is admitted under Section 7, 9 or 10 of the Insolvency and Bankruptcy Code (IBC/Code), a moratorium in terms of Section 14 of the Code is to be declared by the Adjudicating Authority and a public announcement under Section 13 is made declaring the commencement of CIRP qua Corporate Debtor  along with the last date for submission of claims and other important details. Endeavour of the instant article is to highlight few aspects related to moratorium and issuance of sale certificate for the processes initiated prior to CIRP, while the CIRP qua Corporate Debtor is ongoing.

Moratorium  refers to the period, during which, any institution of fresh suits or proceedings is prohibited by law and the existing suits and proceedings are stayed. The main idea of the moratorium is to facilitate the continuation of business operations, without any further interruptions. The period of moratorium shall continue till the completion of the CIRP , if the Adjudicating Authority approves the resolution plan and the same is ready to be implemented, or till the Adjudicating Authority orders for liquidation of the insolvent entity. Hence the order of moratorium shall cease to exist, on the date such approval or order is made. The Hon’ble Supreme Court, in the matter of P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021) ibclaw.in 24 SC [1]., held that the provisions of the moratorium are very wide, since the institutions, judgments, suits, including arbitration, all are stayed by the court order.

With the advent of IBC and due to the concept of moratorium there have been many instances where the Banks/ Financial Institutions have already taken recourse under available remedial mechanisms thereafter before such an action could fetch fruitful results for the lenders, moratorium is put in place whereby leaving the lenders as well as the Insolvency Professional so appointed by Adjudicating Authorities in a confused state of mind. There have been situations where the lenders have already taken recourse by way of an auction sale of the property of the borrower and before such a sale could conclude, CIRP qua the Corporate Debtor is initiated thereby putting the moratorium in motion.

To understand it more meaningfully, it is worth extrapolating that Rule 7 of the Security Interest (Enforcement) Rules, 2002, which broadly talks about the Issuance of Sale Certificate. While it is very well established that the sale certificate is the prima facie evidence of title of the purchaser, it is pertinent to note that the title would be passed over only after: i) receipt of the full consideration; and ii) issuance of Sale Certificate.

Section 14(1) of IBC clearly provides that subject to provisions of sub sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting, inter alia 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act, 2002’). It means that once CIRP is initiated, any action under the SARFAESI Act, 2022 to foreclose, recover, or enforce any security interest created by Corporate Debtor will be prohibited.

Further in view of Section 238 of the IBC, the provisions contained under the Code will override all other laws for the time being in force and the provisions of IBC would also prevail over any other instrument having effect by virtue of any other law. The Hon’ble Supreme Court of India, in the matter of Anand Rao Korada, Resolution Professional v. Varsha Fabrics Private Limited and Others [2019] ibclaw.in 04 SC[2], held that,

“7. Section 238 gives an overriding effect to the IBC over all other laws. The provisions of the IBC vest exclusive jurisdiction on the NCLT and the NCLAT to deal with all issues pertaining to the insolvency process of a corporate debtor, and the mode and manner of disposal of its assets.”

Further in the said matter itself, Supreme Court held that,

“6. …Section 14 provides that on the insolvency commencement date, the Adjudicating Authority shall by order, declare a moratorium prohibiting the institution of suits, or continuation of pending suits or “proceedings” against the corporate debtor, including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or any other authority.”

Therefore, continuation of any proceeding under the SARFAESI Act, 2002 would be held illegal in view of Section 14(1)(c) of the IBC as the same is violative to the provisions of the Code. Further, one must bear in mind the intent of the Code which is that all the Financial Creditors be entitled to a share in the amount received upon realization of the assets of the Corporate Debtor.

The moratorium under Section 14, as per Insolvency and Bankruptcy Code Bill, 2015, is intended to keep the Corporate Debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the Company may continue as a going concern while the creditors take a view on resolution of default.

Moreover, it has been constantly held by the Courts that the IBC is a complete Code in itself and in view of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force. A reference can be drawn from Innoventive Industries Limited v. ICICI Bank and Another [2017] ibclaw.in 02 SC[3].

In B. Arvind Kumar v. Government of India and Others[4], it was held by the Hon’ble Supreme Court that a sale certificate is issued to a purchaser only when the sale becomes absolute. It was further held that when the auction purchaser derives title on confirmation of sale in his favour and a sale certificate is issued evidencing such sale and title, no further deed of transfer from the court is contemplated or required.

Especially in the cases where the action of the Bank/ Financial Institutions arises out of a statutory sale like sale under the provision of SARFAESI Act, it would be governed by Rule 7 of the Security Interest (Enforcement) Rules, 2002. The sale would be complete only when the auction purchaser makes the entire payment and the authorized officer, exercising the power of sale, shall issue a certificate of sale of the property in the favor of the purchaser in the Form given in Appendix V to the said Rules. In the matter of Shakeena and Another v. Bank of India and Others (2019) ibclaw.in 133 SC[5], the Hon’ble Supreme Court held that,

16…we, therefore, have no incertitude to hold that the sale which took place on 19.12.2005 has become final when it is confirmed in favour of the auction purchaser and the auction purchaser is vested with rights in relation to the property purchased in auction on issuance of the sale certificate and he has become the absolute owner of the property.”

The same was reiterated in the matter of S. Karthik and Others v. N. Subhash Chand Jain and Others (2021) ibclaw.in 162 SC[6], wherein the Supreme Court held that,

“83. It is further relevant to note that, this Court in the case of Dwarika Prasad (supra) and in the case of Shakeena (supra) held that the right to redemption stands extinguished on the sale certificate getting registered.”

In view of the provisions of Section 14(1)(c) of the IBC, which has 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. Therefore, the proceedings under the SARFAESI Act cannot be continued once the CIRP has been initiated and the moratorium has been issued. The said aspect was clearly held by the Hon’ble Supreme Court in the matter of Indian Overseas Bank v. M/s RCM Infrastructure Ltd. and Anr. (2022) ibclaw.in 39 SC[7], wherein the Hon’ble Court held that,

35. 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.”

Hence, it is safe to state that the moratorium would apply on the sale of assets/ properties belonging to the Corporate Debtor which took place prior to the commencement of CIRP, under the SARFAESI Act, for which full and final payment is yet to be made by the purchaser and/ or the handover of the possession is yet to effectuated and/or the Sale Certificate is yet to be issued while the CIRP qua Corporate Debtor is declared/ ongoing.

 

Reference:

[1] (2021) ibclaw.in 24 SC

[2] [2019] ibclaw.in 04 SC

[3] [2017] ibclaw.in 02 SC

[4] (2007) 5 SCC 745

[5] (2019) ibclaw.in 133 SC

[6] (2021) ibclaw.in 162 SC

[7] (2022) ibclaw.in 39 SC

 

 

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