2024 (10) TMI 728 - AT - IBC

NCLAT allows SARFAESI auction to proceed despite Section 96 IBC moratorium on personal guarantor

NCLAT dismissed appeal seeking restraint on SARFAESI auction proceedings. Appellant, a partner in dissolved partnership firm, claimed interim moratorium ... Applicability of interim moratorium under Section 96 of the Insolvency and Bankruptcy Code (IBC) - sale of partnership firm assets - Seeking restraint on the Respondent in the conduct of auction of sale notices dated 15.12.2023 under SARFAESI Act - whether in the backdrop of Section 95 proceedings under IBC having been initiated against the Appellant in his personal capacity as a personal guarantor, can the Respondent be barred from conducting sale of the ‘subject property’, belonging to a partnership firm (under dissolution), in which the Appellant is a partner, on grounds of operation of moratorium under Section 96 of the IBC in respect of personal guarantee of the Appellant? HELD THAT:- In the present case, admittedly, White Line Enterprises had filed C.P.(IB)No.10/ND/2024 invoking Section 95 of the IBC against RKC for standing as a personal guarantor for repayment of operational debt owed by M/s Sahil Home Loomtex Pvt Ltd. following which resolution process had commenced. Clearly, therefore, it is the personal guarantee of the Appellant against which the Section 95 has been invoked and not against the property of the partnership firm. The use of the expression “all the debts” and “any debt” are phrases with a very wide amplitude and it clearly covers debts other than the debt basis which moratorium has commenced. Though encompassing in nature, the moratorium relates only to the specific debt and not to the debtor. In addition, we notice the use of the phraseology of “creditors of the debtor” in Section 96(1)(b)(ii) which obviously refers to other creditors of the debtor apart from the creditor on whose application interim moratorium has commenced. Thus, the interim moratorium under Section 96(1)(b)(ii) creates a prohibition on the other creditors of the debtor from initiating any legal action in respect of the debt for which Section 95 has been initiated. In the present facts of the case, the moratorium imposed under Section 96 of IBC would apply only to the security interest created by the Appellant under the personal guarantee in his capacity as a personal guarantor with respect to default of operational debt qua White Line Enterprises. Merely because the Appellant claims to be an erstwhile partner of partnership firm-Sheetal Exports whose dissolution has been purportedly triggered by the Appellant, the interim moratorium would not cover the subject property against which SARFAESI proceedings have been initiated by the Respondent - It is well settled that Section 238 of IBC bestows on IBC the priority over other laws. Section 238 of IBC provides that the provisions of the IBC 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. In the present case, interim moratorium has come into play only with respect to the personal guarantee of the Appellant as personal guarantor and not of the partnership firm, we find no good grounds for the Adjudicating Authority to have entertained the application of the Appellant to withdraw the notice issued under Rule 8(6) of Security Interest (Enforcement Rules) and restrain the Respondent from taking further action on these notices with respect to subject property having been put to auction. There are no cogent grounds to interfere with the impugned order - appeal dismissed. Issues Involved:1. Applicability of interim moratorium under Section 96 of the Insolvency and Bankruptcy Code (IBC) to the sale of partnership firm assets.2. Conflict between IBC provisions and the Partnership Act regarding asset distribution post-dissolution.3. Rights of secured creditors under the SARFAESI Act in relation to partnership firm assets.4. Allegations of forum shopping and abuse of legal process by the Appellant.Issue-wise Detailed Analysis:1. Applicability of Interim Moratorium under Section 96 of IBC:The primary issue was whether the interim moratorium under Section 96 of the IBC, initiated against the Appellant as a personal guarantor, could bar the Respondent from conducting a sale of the partnership firm's assets. The tribunal noted that the interim moratorium under Section 96 is intended to operate in respect of a debt, not against a debtor. The moratorium applies to the personal guarantee given by the Appellant for the operational debt owed to White Line Enterprises and does not extend to the partnership firm's assets, which were not part of the Section 95 proceedings. The tribunal relied on the Supreme Court's interpretation in the Jiwrajka judgment, emphasizing that the interim moratorium restrains legal actions against the debt, not the debtor's unrelated assets.2. Conflict Between IBC and Partnership Act:The Appellant argued that upon dissolution of the partnership firm, liabilities shifted to the partners, invoking Section 45 of the Partnership Act. However, the tribunal clarified that the IBC, being a special legislation, prevails over the Partnership Act due to Section 238 of IBC. Nonetheless, the tribunal found that the interim moratorium under IBC did not apply to the partnership firm's assets, as the Section 95 application pertained to the Appellant's personal guarantee, not the firm's liabilities. The tribunal concluded that the provisions of Section 178 of IBC, which prioritize partnership firm debts, do not override the specific context of the interim moratorium under Section 96.3. Rights of Secured Creditors under SARFAESI Act:The Respondent, as a secured creditor, argued that it was entitled to proceed with the sale of the partnership firm's assets under the SARFAESI Act. The tribunal agreed, noting that the assets in question were owned by the partnership firm, M/s Sheena Exports, and not by the Appellant personally. The tribunal cited the Bajoria judgment, which held that partners do not have individual rights to the firm's assets. Consequently, the Respondent's actions under the SARFAESI Act were deemed lawful, as they targeted the firm's assets, not the Appellant's personal property.4. Allegations of Forum Shopping and Legal Process Abuse:The Respondent accused the Appellant of forum shopping, highlighting that the Appellant had filed applications in multiple forums, including the Debt Recovery Tribunal (DRT), challenging the sale notices. The tribunal observed that the Appellant's actions appeared to be an attempt to circumvent the legal process, as the stay application in the DRT had already been dismissed. The tribunal emphasized that the appropriate remedy for the Appellant lay in appealing the DRT's decision, not in seeking intervention from the National Company Law Tribunal (NCLT).Conclusion:The tribunal concluded that the interim moratorium under Section 96 of IBC did not apply to the partnership firm's assets, as the Section 95 proceedings were against the Appellant's personal guarantee. The Respondent's actions under the SARFAESI Act were upheld, and the appeal was dismissed for lack of merit. The tribunal found no grounds to interfere with the Adjudicating Authority's order, emphasizing that the IBC's non-obstante clause did not extend the moratorium to the partnership firm's assets. The appeal was set aside with no order as to costs.