2023 (11) TMI 834 - HC - Insolvency and Bankruptcy

IBC 2016 does not override SARFAESI Act 2002 for recovery proceedings against personal guarantors

The Kerala HC dismissed a petition seeking to declare IBC 2016 provisions override SARFAESI Act 2002 regarding recovery from personal guarantors. The ... Provision of IBC are overriding the provisions of SARFAESI or not - Recovery from the Personal Guarantor of a corporate debtor - Seeking to declare that the provisions of the Insolvency and Bankruptcy Code, 2016 shall have overriding effect over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - HELD THAT:- When an application is filed under Section 94, an interim moratorium shall commence on the date of the application in respect to all the debts and shall cease to have effect on the date of admission of such application. Once an application for Insolvency Resolution Process is admitted, Section 101 will come into play and a moratorium will commence in relation to all the debts and shall cease to have effect at the end of the period of 180 days beginning with the date of admission of the application or on the date the adjudicating authority passes an order on the repayment plan under Section 114, whichever is earlier. Section 101 provides that during the moratorium period, any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed. For an interim or final moratorium under Section 96 to come into force, the application filed by the debtor should be complete in all respects and without any procedural defects. In the case of the petitioner herein, the petitioner has only uploaded Ext.P4 application, which by itself cannot be treated as filing of an application as contemplated by Section 96. Unless there is any repugnancy between the provisions of the IBC 2016 and the provisions of the Act, 2002, there is no question of IBC 2016 overriding the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in totality - the petitioner is not entitled to urge the overriding effect of IBC 2016 based on the facts of the case for yet another reason. As far as the proceedings under the Act, 2002 initiated by the Bank, the petitioner has been proceeded against in his capacity as guarantor to the financial advance by the LLP. The securitisation proceedings against personal guarantors of corporate debtors can continue under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Therefore, initiation of a Section 94 (IBC 2016) proceedings by a Partner of an LLP in his capacity as a guarantor, cannot be averted to the proceedings initiated by the Bank against the petitioner, but in his capacity as a guarantor, under the Act, 2002. Petition dismissed. Issues Involved:1. Overriding effect of Insolvency and Bankruptcy Code, 2016 over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.2. Validity of proceedings initiated under the Securitisation Act amidst pending insolvency resolution process.3. Applicability of interim moratorium under Section 96 of IBC 2016.4. Applicability of protective provisions of IBC 2016 to personal guarantors of corporate debtors.Summary:Issue 1: Overriding Effect of IBC 2016 over SARFAESI Act, 2002The petitioner sought a declaration that the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC 2016) shall have overriding effect over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The petitioner argued that since insolvency resolution and bankruptcy for individuals and partnership firms came into force from 15.11.2019, steps pursuant to securitisation proceedings under the SARFAESI Act cannot legally proceed.Issue 2: Validity of Proceedings under SARFAESI Act amidst Pending Insolvency Resolution ProcessThe petitioner initiated insolvency resolution process under Section 94 of the IBC 2016 before the National Company Law Tribunal (NCLT), which accepted the application and assigned a Diary Number. The petitioner contended that any action to foreclose, recover, or enforce any security interest under the SARFAESI Act shall be deemed to have been stayed as per Section 96(b) of the IBC 2016, upon filing the application before the NCLT.Issue 3: Applicability of Interim Moratorium under Section 96 of IBC 2016The court noted that Section 96 of the IBC 2016 provides for an interim moratorium commencing on the date of the application and ceasing on the date of admission of such application. However, the court emphasized that for an interim moratorium to come into force, the application must be complete and devoid of procedural defects. In this case, the NCLT had not treated the petitioner's application as valid by assigning a regular case number. Therefore, the interim moratorium under Section 96(1)(b)(i) could not come into operation.Issue 4: Applicability of Protective Provisions of IBC 2016 to Personal Guarantors of Corporate DebtorsThe court referred to the judgment in State Bank of India v. Ramakrishnan [(2018) 17 SCC 394], where the Apex Court held that the protective provisions of IBC 2016 are not applicable to personal guarantors of corporate debtors. The court concluded that the securitisation proceedings against personal guarantors of corporate debtors can continue under the SARFAESI Act. Therefore, the initiation of Section 94 (IBC 2016) proceedings by the petitioner, a partner of an LLP in his capacity as a guarantor, cannot avert the proceedings initiated by the Bank under the SARFAESI Act.Conclusion:The writ petition was dismissed, with the court ruling that the petitioner is not entitled to contend that the respondents cannot proceed with the securitisation proceedings. The IBC 2016 does not override the SARFAESI Act in totality, and the protective provisions of IBC 2016 do not apply to personal guarantors of corporate debtors.