2021 (4) TMI 207 - AT - IBC

Tribunal Confirms Sale of Corporate Debtor's Assets Invalid During Moratorium Under IBC, Emphasizes IBC's Overriding Effect.

The Tribunal upheld the Adjudicating Authority's decision, declaring the sale of the Corporate Debtor's assets during the moratorium period invalid under ... Moratorium under Section 14 of IBC - Overriding effect of Section 238 of IBC - Validity of sale/realisation of security during CIRP - Prohibition on enforcement actions under SARFAESI during moratorium - Completion of sale dependent on full payment and issuance of sale certificateMoratorium under Section 14 of IBC - Validity of sale/realisation of security during CIRP - Completion of sale dependent on full payment and issuance of sale certificate - Whether the sale/realisation of the Corporate Debtor's assets which was concluded by receipt of balance sale consideration after commencement of CIRP is valid. - HELD THAT: - The Tribunal held that mere receipt of 25% of the sale proceeds prior to the commencement of CIRP did not conclude the sale where the balance 75% was received after the insolvency commencement date. As on the date of moratorium the assets continued to stand in the name of the Corporate Debtor in revenue records; the sale was therefore incomplete when CIRP commenced. Receipt of the balance sale consideration after imposition of moratorium was held to be impermissible and illegal. The Appellant's filing of a revised claim during the moratorium was also inconsistent with the protection afforded by Section 14. On these factual and legal bases the Adjudicating Authority was correct in setting aside the sale transaction. [Paras 22, 25, 28, 34]Sale concluded by receipt of balance consideration after commencement of CIRP is invalid; the Adjudicating Authority rightly set aside the sale.Overriding effect of Section 238 of IBC - Prohibition on enforcement actions under SARFAESI during moratorium - Whether the provisions of the IBC prevail over actions under other laws (including SARFAESI Act) during CIRP and moratorium. - HELD THAT: - Relying on Supreme Court authority, the Tribunal reiterated that Section 238 gives the IBC an overriding effect over inconsistent provisions of other laws. Section 14's moratorium specifically prohibits any action to foreclose, recover or enforce a security interest, including actions under the SARFAESI Act, during the insolvency period. Consequently, enforcement or realisation of security that occurs in breach of the moratorium is voidable and cannot be sustained. The Tribunal also noted earlier Tribunal and Supreme Court decisions holding that alienation of corporate assets during CIRP jeopardises stakeholders and is impermissible. [Paras 22, 29, 31, 34]IBC prevails over inconsistent provisions of other laws and actions under SARFAESI during moratorium are prohibited; the sale effected in breach of moratorium cannot be sustained.Final Conclusion: The appeal is dismissed. The Tribunal upholds the Adjudicating Authority's order setting aside the sale of the Corporate Debtor's assets because the sale was not completed before commencement of CIRP and its completion (receipt of balance consideration and related acts) after imposition of moratorium was contrary to Section 14 and to the overriding effect of Section 238 of the IBC. 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.Issue-wise Detailed Analysis:1. Validity of transactions involving the assets of the Corporate Debtor during the moratorium period:The core issue was whether the sale of the Corporate Debtor's assets during the moratorium period was valid. The Appellant Bank auctioned the Corporate Debtor's assets before the commencement of the Corporate Insolvency Resolution Process (CIRP) but received the balance payment and issued the sale certificate after the moratorium began. The Appellant argued that the sale was confirmed before the CIRP, thus should be considered valid.The Respondent contended that the sale was incomplete as the full payment was received after the moratorium commenced. The moratorium under Section 14 of the IBC prohibits any transactions involving the Corporate Debtor's assets once the CIRP starts. The Respondent further argued that the sale was invalid as the assets remained in the Corporate Debtor's name in revenue records.The Tribunal concluded that mere receipt of 25% of the sale proceeds did not complete the sale. The full payment was necessary before the moratorium. Since the balance 75% was paid after the moratorium, the sale was incomplete and invalid. The Tribunal emphasized that the assets still belonged to the Corporate Debtor at the time of the moratorium, and any transaction during this period violated Section 14 of the IBC.2. Whether the provisions of the Insolvency and Bankruptcy Code (IBC) prevail over other laws:The Appellant relied on the SARFAESI Act, arguing that the sale process initiated under this act should be considered valid. However, the Respondent and the Tribunal highlighted that the IBC has an overriding effect over other laws, including the SARFAESI Act, as per Section 238 of the IBC.The Tribunal cited various judgments, including 'Anand Rao Korada, Resolution Professional Vs. Varsha Fabrics (P) Ltd. and Others,' to reinforce that once the CIRP commences, the IBC provisions take precedence. The moratorium aims to protect the Corporate Debtor’s assets and ensure their maximization for the benefit of all stakeholders.The Tribunal also referenced the Supreme Court's judgment in 'Duncans Industries Limited Vs. A.J. Agrochem,' which underscored that the IBC is a complete code in itself and has an overriding effect over other laws. The primary focus of the IBC is to ensure the revival and continuation of the Corporate Debtor by protecting its assets during the resolution process.Conclusion:The Tribunal upheld the Adjudicating Authority’s decision to set aside the sale of the Corporate Debtor's assets. It ruled that the sale during the moratorium was invalid and violated the provisions of Section 14 of the IBC. The Tribunal affirmed that the IBC has an overriding effect over other laws, including the SARFAESI Act, ensuring the protection and maximization of the Corporate Debtor's assets during the CIRP. The appeal was dismissed, and no costs were awarded.