2020 (6) TMI 688 - AT - Insolvency and Bankruptcy

Tribunal Upholds Insolvency Application Over SARFAESI Act Defense

The Tribunal dismissed the Appeal against the admission of an Application under section 7 of the Insolvency and Bankruptcy Code 2016 by Punjab National ... Maintainability of Section 7 Insolvency and Bankruptcy Code application despite concurrent SARFAESI and DRT proceedings - overriding effect of the Insolvency and Bankruptcy Code under Section 238 - moratorium under the Insolvency and Bankruptcy Code and its effect on parallel recovery proceedings - requirement of service and principles of natural justice in admission of Section 7 applications - effect of existence/value of secured assets on maintainability of an application under Section 7Maintainability of Section 7 Insolvency and Bankruptcy Code application despite concurrent SARFAESI and DRT proceedings - overriding effect of the Insolvency and Bankruptcy Code under Section 238 - moratorium under the Insolvency and Bankruptcy Code and its effect on parallel recovery proceedings - Whether pendency of proceedings under the SARFAESI Act or the DRT Act bars admission of an application by a financial creditor under Section 7 of the IBC. - HELD THAT: - The Tribunal upheld that pendency of actions under the SARFAESI Act or proceedings before the Debt Recovery Tribunal is not a bar to filing or admitting an application under Section 7 where the Section 7 application is complete. The Code contains an express moratorium which operates to suspend parallel recovery proceedings, and Section 238 gives the IBC an overriding effect over inconsistent provisions of other laws. Reliance on previous authority concerning the SARFAESI Act does not support the contention that resort to SARFAESI or DRT remedies precludes initiation of insolvency proceedings under the later-enacted IBC. Consequently, earlier or concurrent enforcement steps under SARFAESI or DRT do not render a Section 7 petition non-maintainable. [Paras 8, 9]Pendency of SARFAESI or DRT proceedings does not bar admission of a Section 7 IBC application; IBC's moratorium and overriding provision (Section 238) render Section 7 maintainable.Requirement of service and principles of natural justice in admission of Section 7 applications - Whether the Corporate Debtor was not duly served with notice of the Section 7 proceedings and whether non-service vitiates the admission. - HELD THAT: - The Adjudicating Authority recorded, on the record, that notices were served and affidavits filed showing service, including postal acknowledgements. The Tribunal examined the documents relied upon by the financial creditor and found no reason to doubt that service had been effected. Although the appellant contended that directors should have been separately served, no specific prejudice or legal basis for remand was pointed out to justify reopening the question of service. In those circumstances the Tribunal declined to interfere with the finding of service and observed there was no case shown to merit remand. [Paras 7]Service was held to be adequate on the record before the Adjudicating Authority; lack of separate service on directors did not justify remand or vitiate admission.Effect of existence/value of secured assets on maintainability of an application under Section 7 - Whether the alleged sufficiency in value of securities held by the bank precluded filing or admission of the Section 7 application. - HELD THAT: - The appellant alleged that the securities available exceeded the claim and thus the Section 7 application ought not to have been admitted. The Tribunal noted that no convincing case was made to show that the debt was not due or that the account was not in default; the appellant did not demonstrate a legal bar arising solely from the existence of security. The Tribunal treated the Section 7 application as aimed at resolution and held that the mere existence or asserted adequacy of security does not, on the materials before it, preclude the filing or admission of a Section 7 petition. [Paras 3, 7]Assertion that securities exceed the claim does not, on the record before the Tribunal, bar admission of the Section 7 application; no merit in the contention as presented.Final Conclusion: The appeal was dismissed. The Tribunal held that the Section 7 application was maintainable despite SARFAESI/DRT proceedings, service on the Corporate Debtor was adequate on the record and no ground for remand was shown, and the contention regarding sufficiency of security did not vitiate admission. Issues:Admission of Application under section 7 of Insolvency and Bankruptcy Code 2016 without proper service to Corporate Debtor; Bank's resort to SARFAESI Act and recovery proceedings affecting the validity of the Application; Violation of principles of natural justice due to incomplete service; Applicability of judgments in similar cases; Value of securities held by the Bank compared to the outstanding claim; Defense against the Section 7 application based on actions under SARFAESI Act and DRT proceedings; Interpretation of Section 238 of IBC regarding overriding effect on other laws.Analysis:1. The Appeal was filed against the admission of an Application under section 7 of the Insolvency and Bankruptcy Code 2016 by the Financial Creditor, Punjab National Bank, against the Corporate Debtor. The Appellant argued that the Corporate Debtor was not duly served with the notice of the Application, and the Bank had already initiated proceedings under the SARFAESI Act and recovery of debts due to Banks and Financial Institutions Act, which should have barred the Application under IBC.2. The Appellant relied on the judgment in 'Pegasus Assets Reconstruction Pvt. Ltd. vs. Haryana Concast Ltd.,' emphasizing that SARFAESI proceedings do not preclude the filing of an Application under IBC. The Counsel highlighted the intention of Parliament expressed in Section 13 of the SARFAESI Act, allowing secured creditors to enforce their security interest without court intervention until the sale of secured assets.3. The Appellant argued that the value of securities held by the Bank exceeded the outstanding claim, which should have prevented the admission of the Application under section 7. The Counsel also pointed out the alleged lack of proper service to the Corporate Debtor, citing an order from the Adjudicating Authority.4. In response, the Bank's Counsel demonstrated various efforts made to serve the Corporate Debtor, including involvement of Postal Department authorities and proof of delivery to the registered office. The Bank also cited a judgment in 'Aditya Kumar Jajodia Vs. Srei Infrastructure Finance Ltd.,' stating that actions under SARFAESI or DRT proceedings do not bar an Application under section 7 of IBC.5. The Adjudicating Authority confirmed the service of notice to the Corporate Debtor, and the Appellant's argument regarding incomplete service was dismissed. The judgment in 'Pegasus Assets' was contextualized in relation to SARFAESI Act and earlier Companies Act, emphasizing the overriding effect of IBC provisions on other laws under Section 238.6. The defense raised by the Appellant based on actions under SARFAESI Act and DRT proceedings was refuted, citing the judgment in 'M/s. Unigreen Global Private Limited v. Punjab National Bank & Anr.,' which clarified that such actions do not prevent the filing of an Application under section 7 of IBC. Section 238 of IBC was highlighted to emphasize the Code's overriding effect on other laws, including SARFAESI Act and DRT Act.7. The Tribunal concluded that the pendency of actions under SARFAESI Act or recovery proceedings does not obstruct the filing of an Application under section 7 of IBC, as the primary aim is corporate resolution. The Appeal was dismissed, emphasizing the applicability of IBC provisions over conflicting laws and rejecting the Appellant's arguments.