2021 (3) TMI 1378 - AT - Insolvency and Bankruptcy

Tribunal Upholds IBC Over SARFAESI: Sale During Moratorium Invalid

The Tribunal upheld the NCLT's decision to set aside the sale of the Corporate Debtor's assets during the moratorium period. It affirmed that the ... Prohibition with respect to the sale of assets of Corporate Applicant during moratorium period - whether after imposition of moratorium any transaction done with respect to the assets of the Corporate Debtor/Corporate Applicant deemed to be valid or not? - priority of IBC over other laws - HELD THAT:- It is also on record that by filing revised claim in Form-C on 11.02.2019 before the RP by the Appellant, the Appellant clearly violates the order of moratorium. The Appellant Bank lost sight of the fact that IBC is a complete Code itself and Section 238 of IBC has overriding effect over all other laws including SARFAESI Act, 2002. The Hon’ble Supreme Court in Anand Rao Korada, Resolution Professional Vs. Varsha Fabrics (P) Ltd. and Others [2019 (11) TMI 1280 - SUPREME COURT]held that Section 14 IBC 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. Further, the Hon’ble Supreme held that Section 238 IBC give an overriding effect to the IBC over all other laws - The Hon’ble Supreme Court in Anand Rao Korada, Resolution Professional Vs. Varsha Fabrics (P) Ltd. and Others clearly held that once the proceeding under IBC had commenced and an order declaring moratorium was passed by NCLT, on 04.06.2019, the High Court was not justified in passing the order dated 14.08.2019 and 05.09.2019 for carrying out auction of the assets of the Respondent i.e., Corporate Debtor before the NCLT. The imposition of moratorium as per Section 14 of IBC is to protect the interest of the Corporate Debtor by protecting the assets of the Corporate Debtor for the sole objective to maximisation the value of assets. This Tribunal in the matter of Encore Asset Reconstruction Company Pvt. Ltd. Vs. Charu Sandeep Desai and Others [2019 (8) TMI 529 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] also held that Section 238 of IBC will prevail over any of the provisions of the SURFAESI Act, 2002 if it is inconsistent with any of the provisions of IBC. From the judgment of the Hon’ble Supreme Court it is clear that when the Adjudicating Authority commences the CIRP proceeding and imposes moratorium, no proceeding shall be continued or commenced and not to carry out any auction of the assets of the Corporate Debtor. Therefore, in the facts of the present case and upon deliberating the issues as framed in paragraph 22 it is held that: 1) When the moratorium was imposed by the learned Adjudicating Authority, receipt of the balance sale consideration is illegal and the learned Adjudicating Authority rightly set aside the sale transaction. 2) Further Section 238 of IBC, have overriding effect over other laws as held by the Hon’ble Apex Court, and this Tribunal in Encore Asset Reconstruction Company Ltd. The stand of the Appellant that the Respondent No. 2 should have availed remedy under SARFAESI Act, 2002 is uncalled for - In the present case, the sale was not completed and it is evident that balance sale amount was received after imposition of moratorium. The Assets of the Corporate Debtor/Applicant forms part of valuation. Learned Adjudicating Authority has rightly set aside the sale of assets of the Corporate Applicant - the sale of assets of the Corporate Applicant during moratorium is against the spirit of Section 14 of IBC - there are no infirmity in the order passed by the learned Adjudicating Authority. Appeal dismissed. Issues Involved:1. Validity of transactions involving the assets of the Corporate Debtor during the moratorium period.2. Whether the provisions of the Insolvency and Bankruptcy Code (IBC) prevail over other laws, specifically the SARFAESI Act, 2002.Issue-wise Detailed Analysis:1. Validity of transactions involving the assets of the Corporate Debtor during the moratorium period:The Appellant, a Financial Creditor, challenged the order by the National Company Law Tribunal (NCLT), Hyderabad, which set aside the sale of the Corporate Debtor's assets. The Appellant argued that the auction and sale of the assets were conducted before the commencement of the Corporate Insolvency Resolution Process (CIRP) and thus should be considered valid. The auction was held on 12.12.2018, and the sale was confirmed on 13.12.2018, with 25% of the bid amount received on the same day. The balance 75% was paid on 08.03.2019, after the CIRP commenced on 03.01.2019.The Respondents contended that the sale was incomplete as the full payment and issuance of the sale certificate occurred after the moratorium under Section 14 of IBC was imposed. The moratorium prohibits any transfer, encumbrance, or alienation of the Corporate Debtor's assets. The NCLT held that continuing the sale process after the commencement of CIRP violated the moratorium, and thus, the sale was set aside.The Tribunal affirmed that the moratorium aims to protect the assets of the Corporate Debtor and maximize their value for the benefit of all stakeholders. It stated that the sale was not concluded as the full payment was received during the moratorium period, and the assets remained in the name of the Corporate Debtor in revenue records. Therefore, the sale was deemed invalid.2. Whether the provisions of the Insolvency and Bankruptcy Code (IBC) prevail over other laws, specifically the SARFAESI Act, 2002:The Appellant argued that the sale process initiated under the SARFAESI Act should not be affected by the moratorium under IBC. However, the Tribunal emphasized that IBC is a complete code in itself, and Section 238 of IBC has an overriding effect over other laws, including the SARFAESI Act. This means that any action under SARFAESI Act during the moratorium period is invalid.The Tribunal cited several judgments, including the Supreme Court's rulings in 'Anand Rao Korada, Resolution Professional Vs. Varsha Fabrics (P) Ltd. and Others' and 'Duncans Industries Limited Vs. A.J. Agrochem,' which reinforced the principle that IBC provisions prevail over other laws. The Tribunal also referred to its own decision in 'Encore Asset Reconstruction Company Pvt. Ltd. Vs. Charu Sandeep Desai and Others,' which held that Section 238 of IBC overrides any inconsistent provisions of the SARFAESI Act.The Tribunal concluded that the moratorium under Section 14 of IBC prohibits any transaction involving the Corporate Debtor's assets, including actions under the SARFAESI Act. Therefore, the receipt of the balance sale consideration during the moratorium was illegal, and the sale transaction was rightly set aside by the NCLT.Conclusion:The Tribunal dismissed the appeal, affirming that the sale of the Corporate Debtor's assets during the moratorium period was invalid and that the provisions of IBC have an overriding effect over other laws, including the SARFAESI Act. The order of the NCLT setting aside the sale was upheld, and the appeal was found to be devoid of merit.