Supreme Court Clarifies Moratorium Under IBC: Indian Overseas Bank vs. RCM Infrastructure Ltd. (2022)

Introduction

Date of the Judgment: May 18, 2022

Citation: (2022) INSC 509

Judges: L. Nageswara Rao J. and B.R. Gavai J.

Can a bank continue with the sale of a company’s assets under the SARFAESI Act, after the company has initiated the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC)? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the extent of the moratorium imposed under the IBC. This case revolves around the conflict between the SARFAESI Act, which allows banks to recover dues by selling assets, and the IBC, which aims to resolve a company’s debts through a structured process. The court had to determine whether a sale initiated under the SARFAESI Act is complete upon confirmation or only after full payment and issuance of a sale certificate, especially when the CIRP has commenced before the full payment. The judgment was delivered by a two-judge bench comprising Justice L. Nageswara Rao and Justice B.R. Gavai, with Justice B.R. Gavai authoring the opinion.

Case Background

The Indian Overseas Bank (the appellant) had provided credit facilities to M/s RCM Infrastructure Ltd. (the corporate debtor). When the corporate debtor failed to repay the dues, the loan account was classified as a Non-Performing Asset (NPA) on June 13, 2016. Subsequently, the bank issued a demand notice under Section 13(2) of the SARFAESI Act, asking the corporate debtor and its guarantors to repay the outstanding amount.

As the corporate debtor failed to comply, the bank took symbolic possession of two secured assets mortgaged exclusively with it, one in the name of the corporate debtor and the other in the name of the corporate guarantor. An e-auction notice was issued on September 27, 2018, to recover the dues.

Meanwhile, on October 22, 2018, the corporate debtor filed a petition under Section 10 of the IBC before the National Company Law Tribunal (NCLT). The first e-auction on November 6, 2018, received no bids. A second e-auction notice was issued on November 27, 2018, scheduled for December 12, 2018. In the second e-auction, three persons jointly bid Rs. 32.92 crore for both assets. The sale was confirmed on December 13, 2018, and the successful bidders deposited 25% of the bid amount (Rs. 8.23 crore), including the Earnest Money Deposit.

The auction purchasers were directed to pay the balance 75% by December 28, 2018. They requested an extension until March 8, 2019, which the bank accepted on December 29, 2018. The NCLT admitted the corporate debtor’s insolvency petition on January 3, 2019, initiating the CIRP and imposing a moratorium under Section 14 of the IBC. The bank filed its claim with the Interim Resolution Professional (IRP) on January 21, 2019. The bank received the balance 75% of the bid amount (Rs. 24.69 crore) on March 8, 2019, and submitted a revised claim to the IRP on March 11, 2019.

The ex-promoter of the corporate debtor then filed an application to set aside the security realization during the CIRP. The NCLT allowed the application and set aside the sale. The bank’s appeal to the National Company Law Appellate Tribunal (NCLAT) was dismissed, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Hyderabad Bench-1, allowed the application filed by the former Managing Director of the corporate debtor, setting aside the sale of the assets. The NCLT held that the sale was not complete until full payment was received and a sale certificate was issued.

The Indian Overseas Bank, being aggrieved by the order of the NCLT, filed an appeal before the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi. The NCLAT upheld the decision of the NCLT and dismissed the appeal filed by the bank. The NCLAT also held that the sale was not complete until full payment was received and a sale certificate was issued.

The bank then appealed to the Supreme Court of India, challenging the NCLAT’s judgment.

Legal Framework

The case primarily revolves around the interpretation of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC), which imposes a moratorium on actions to recover or enforce security interests once the Corporate Insolvency Resolution Process (CIRP) has commenced. Specifically, Section 14(1)(c) states:

“14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:
(a) …
(b) …
(c) 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 (54 of 2002);”

The court also considered Section 238 of the IBC, which gives the IBC overriding effect over other laws:

“238. Provisions of this Code to override other laws.—The provisions of this Code shall have 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.”

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) allows banks to recover their dues by selling the secured assets of defaulting borrowers. The Security Interest (Enforcement) Rules, 2002, particularly Rules 8 and 9, govern the process of sale of secured assets. The court also considered Section 54 of the Transfer of Property Act, 1882, which deals with the sale of immovable property.

Arguments

Appellant Bank’s Arguments:

• The appellant bank argued that the initiation of voluntary insolvency proceedings under Section 10 of the IBC by the ex-promoter of the corporate debtor was with mala fide intent and was hit by Section 65 of the IBC. They contended that the CIRP was initiated solely to stall the SARFAESI proceedings.
• The bank submitted that the sale was complete upon confirmation on December 13, 2018, when 25% of the bid amount was received, and the subsequent admission of the insolvency petition on January 3, 2019, should not affect the sale.
• They relied on Section 54 of the Transfer of Property Act, 1882, and judgments of the Supreme Court in Vidhyadhar v. Manikrao and Another, B. Arvind Kumar v. Govt. of India and Others, and Kaliaperumal v. Rajagopal and Another to argue that the sale was complete on confirmation, even if full payment was not received immediately.
• The bank argued that Section 14(1)(c) of the IBC only interdicts actions to foreclose, recover, or enforce security interests but does not undo actions that have already been completed.
• The bank contended that since the moratorium under Section 14 of the IBC had ceased after the liquidation order under Section 52, the secured creditors were allowed to realize their security interest.

Respondents’ Arguments:

• The respondents argued that the title of the secured assets cannot be conveyed to the auction purchasers merely upon confirmation of sale but only after receiving full sale consideration and issuing a sale certificate. They relied on the judgment of the Supreme Court in Hindon Forge Private Limited and Another v. State of Uttar Pradesh through District Magistrate, Ghaziabad and Another.
• They submitted that Section 13(8) of the SARFAESI Act provides a right of redemption of secured assets to the owner/debtor. They cited the judgment of the Supreme Court in S. Karthik and Others v. N. Subhash Chand Jain and Others.
• The respondents argued that upon approval of the Resolution Plan (RP) under Section 31(1) of the IBC, all debts stand legally resolved, and the security created under the old contract would be extinguished. They relied on the judgment of the Supreme Court in Anand Rao Korada, Resolution Professional v. Varsha Fabrics Private Limited and Others.
• They contended that the continuation of any proceedings, including those under the SARFAESI Act, is illegal under Section 14(1)(c) of the IBC. They argued that the receipt of the balance sale consideration by the bank was a violation of Section 14(1)(c).
• The respondents submitted that the allegations of mala fide intent were made to prejudice the court and that the corporate debtor had disclosed all details in the petition filed under Section 10 of the IBC.
• They also argued that the bank had submitted its claim in Claim Form-C on January 21, 2019, which included the full value of the assets, and thus, the bank was estopped from contending that the amount of Rs. 8.23 crore could not be included in the amount available for CIRP.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the sale of assets under the SARFAESI Act is complete upon confirmation of sale or upon full payment and issuance of a sale certificate.
2. Whether the continuation of proceedings under the SARFAESI Act after the commencement of CIRP is valid in view of the moratorium under Section 14(1)(c) of the IBC.
3. Whether the initiation of CIRP by the Corporate Debtor was with mala fide intent.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

On the issue of completion of sale:

• Vidhyadhar v. Manikrao and Another (1999) 3 SCC 573 (Supreme Court of India): The court discussed the intention of the parties in a sale transaction, stating that the real test is whether the parties intended to transfer ownership and whether the price would be paid in the present or future.
• B. Arvind Kumar v. Govt. of India and Others (2007) 5 SCC 745 (Supreme Court of India): The court held that in a public auction, the sale becomes absolute, and title vests in the purchaser upon confirmation of sale by the court and issuance of a sale certificate.
• Kaliaperumal v. Rajagopal and Another (2009) 4 SCC 193 (Supreme Court of India): The court emphasized that the intention of the parties is paramount in determining when ownership of property is transferred.
• Shakeena and Another v. Bank of India and Others 2019 SCC OnLine SC 1059 (Supreme Court of India): The court held that a sale certificate issued under the SARFAESI Act does not require registration and that the sale is complete on issuance of the sale certificate.
• S. Karthik and Others v. N. Subhash Chand Jain and Others 2020 SCC OnLine SC 787 (Supreme Court of India): The court followed the ruling in Shakeena’s case and reiterated that the sale process is complete upon issuance of the sale certificate.

On the issue of the overriding effect of IBC:

• Innoventive Industries Limited v. ICICI Bank and Another (2018) 1 SCC 407 (Supreme Court of India): The court held that the IBC is a complete code in itself and its provisions have an overriding effect over other laws.
• Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited (2018) 18 SCC 786 (Supreme Court of India): The court reiterated that the IBC has an overriding effect over other laws due to the provisions of Section 238 of the IBC.
• Ghanashyam Mishra and Sons Private Limited through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director and Others (2021) 9 SCC 657 (Supreme Court of India): The court reaffirmed that the IBC has an overriding effect over other laws.

On the right of redemption:

• Hindon Forge Private Limited and Another v. State of Uttar Pradesh through District Magistrate, Ghaziabad and Another (2019) 2 SCC 198 (Supreme Court of India): The court discussed the process of transfer of title under the SARFAESI Act.

Legal Provisions Considered:

• Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC): Moratorium on actions to recover or enforce security interests.
• Section 238 of the IBC: Overriding effect of the IBC over other laws.
• Section 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): Demand notice and taking possession of secured assets.
• Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002: Procedure for sale of secured assets.
• Section 54 of the Transfer of Property Act, 1882: Sale of immovable property.

Authorities Table:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court distinguished the judgments in Vidhyadhar v. Manikrao [CITATION], B. Arvind Kumar v. Govt. of India [CITATION], and Kaliaperumal v. Rajagopal [CITATION], stating that these cases were not applicable to a statutory sale under the SARFAESI Act.
• The Court followed the judgment in Shakeena and Another v. Bank of India and Others [CITATION], holding that the sale process is complete on issuance of the sale certificate.
• The Court relied on Innoventive Industries Limited v. ICICI Bank and Another [CITATION], Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited [CITATION], and Ghanashyam Mishra and Sons Private Limited through the Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director and Others [CITATION] to reiterate that the IBC has an overriding effect over other laws.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the statutory provisions of the IBC, particularly Section 14(1)(c), and the procedural requirements under the SARFAESI Act and its associated rules. The Court emphasized the overriding effect of the IBC, ensuring that the moratorium is strictly adhered to. The court also focused on the completion of the sale process under the SARFAESI Act, which is not merely upon confirmation but upon full payment and issuance of a sale certificate. The court’also considered the rights of the corporate debtor to have a fair opportunity to resolve its debts under the IBC framework.

Ratio of Fact to Law:

The judgment has a significant legal component, focusing on the interpretation and application of Section 14(1)(c) of the IBC and the interplay between the SARFAESI Act and the IBC. However, the specific facts of the case, particularly the timing of the sale confirmation, the payment of the balance amount, and the commencement of the CIRP, were crucial in the court’s decision. Therefore, while the legal interpretation is central, the factual matrix was equally important.

Legal Implications

The Supreme Court’s judgment in Indian Overseas Bank vs. RCM Infrastructure Ltd. has significant legal implications:

• Clarity on Moratorium: The judgment provides clarity on the scope of the moratorium under Section 14(1)(c) of the IBC. It establishes that any action to recover or enforce security interest, including actions under the SARFAESI Act, must cease upon the commencement of the CIRP.
• Completion of Sale: The judgment clarifies that a sale under the SARFAESI Act is not complete upon confirmation of sale but only upon full payment and issuance of a sale certificate. This is crucial for determining whether a sale is complete before the commencement of the CIRP.
• Overriding Effect of IBC: The judgment reaffirms the overriding effect of the IBC over other laws, ensuring that the IBC’s framework for insolvency resolution takes precedence.
• Protection of Corporate Debtors: The judgment protects corporate debtors by preventing creditors from circumventing the moratorium by taking actions under the SARFAESI Act once the CIRP has commenced.
• Implications for Banks and Financial Institutions: Banks and financial institutions must be cautious while proceeding under the SARFAESI Act, especially when insolvency proceedings are imminent. They need to ensure that the sale process is fully completed (including full payment and issuance of sale certificate) before the CIRP commences.

Flowchart

Sentiment Analysis

The Supreme Court’s judgment in Indian Overseas Bank vs. RCM Infrastructure Ltd. is viewed as a balanced and legally sound decision that upholds the objectives of the Insolvency and Bankruptcy Code, 2016. The judgment provides much-needed clarity on the interplay between the SARFAESI Act and the IBC, particularly concerning the moratorium under Section 14(1)(c).

Positive Aspects:

• Clarity on Moratorium: The judgment clearly defines the scope of the moratorium under Section 14(1)(c), preventing any ambiguity in its application.
• Protection of Corporate Debtors: The judgment safeguards the interests of corporate debtors by ensuring that creditors cannot circumvent the moratorium through actions under the SARFAESI Act once the CIRP has commenced.
• Upholding the IBC: The judgment reinforces the overriding effect of the IBC, ensuring that its framework for insolvency resolution is given precedence over other laws.
• Legal Consistency: The judgment is consistent with the overall objective of the IBC, which is to provide a structured and fair process for resolving corporate insolvency.

Negative Aspects:

• Potential Impact on Creditors: The judgment may be perceived as a setback for banks and financial institutions, as it restricts their ability to recover dues through the SARFAESI Act once the CIRP has commenced.
• Procedural Delays: The judgment may lead to procedural delays in the recovery process, as banks will now have to ensure that the sale process is fully completed before the CIRP commences, which may not always be possible.

Overall Sentiment:

The overall sentiment of the judgment is positive from the perspective of the IBC’s objectives and corporate debtors. However, it may be perceived as neutral to slightly negative by banks and financial institutions. The judgment is a significant step in clarifying the legal landscape of insolvency resolution in India.

Conclusion

The Supreme Court’s judgment in Indian Overseas Bank vs. RCM Infrastructure Ltd. is a landmark decision that clarifies the interplay between the SARFAESI Act and the IBC. The court held that a sale under the SARFAESI Act is complete only upon full payment and issuance of a sale certificate, and the moratorium under Section 14(1)(c) of the IBC prohibits any action to enforce security interest once the CIRP has commenced. This judgment reinforces the overriding effect of the IBC and ensures that the moratorium is strictly adhered to, thereby protecting the interests of corporate debtors. While it may pose challenges for banks and financial institutions, it provides much-needed clarity on the legal framework for insolvency resolution in India.