2025 (4) TMI 629 - HC - IBC

Supreme Court Upholds SARFAESI Recovery Proceedings Against Sole Proprietorship, Denies Interim Moratorium for Personal Guarantors

RAMESH KOTHARI Versus STATE OF MADHYA PRADESH AND OTHERS

SC dismissed writ petition challenging recovery proceedings under SARFAESI Act. Court held that IBC, 2016 does not recognize sole proprietorship firms as ... Seeking direction to the respondents to consider the representation regarding the pending petition under the Insolvency and Bankruptcy Code, 2016 - Whether the petitioner could apply for an interim moratorium under Section 94 of the IBC, 2016, considering the definition of 'debtor' within the context of sole proprietorship firms? - HELD THAT:- Section 94 of IBC, 2016 gives remedy to ‘debtor’ only to either apply personally or through a resolution professional (RP) to the Adjudicating Authority for initiating the insolvency resolution process. Section 3(8) of IBC, 2016 defines “corporate debtor” which means a corporate person who owes a debt to any person and “corporate person” is defined in sub-section (7) of Section 3, it means a company under the Companies Act, 2013, a limited liability partnership under the Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability under any law. Therefore, in this definition the proprietorship firm is not included. The M/s Rainbow Sales and M/s Kothari Enterprises are sole partnership firms, thus, in respect of these two firms, no application under Section 94 is liable to be entertained even at the instance of the present petitioner. Even otherwise, now stage of consideration of the representation is over. The Additional District Magistrate has already passed an order hence, become a functus officio. The Tehsildar who has issued a notice does not enjoy any adjudication power to consider the objection / representation of the petitioner. Petition dismissed. ISSUES PRESENTED and CONSIDEREDThe primary legal issue considered in this judgment was whether the petitioner, as a personal guarantor to sole proprietorship firms, could invoke the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) to halt recovery proceedings initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Specifically, the Court examined: Whether the petitioner could apply for an interim moratorium under Section 94 of the IBC, 2016, considering the definition of 'debtor' within the context of sole proprietorship firms. Whether the actions taken by the Additional District Magistrate and Tehsildar in the recovery process were valid, given the petitioner's representation under the IBC, 2016.ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedentsThe Court evaluated the applicability of Section 94 of the IBC, 2016, which allows a 'debtor' to apply for initiating the insolvency resolution process. Section 96(1)(b)(i) of the IBC provides for an interim moratorium upon filing such an application. The definition of 'corporate debtor' under Section 3(8) of the IBC was also considered, which refers to corporate entities, excluding sole proprietorships.Court's interpretation and reasoningThe Court interpreted the term 'debtor' as defined in the IBC, 2016, clarifying that it does not extend to sole proprietorship firms. The Court emphasized that the definition of 'corporate debtor' explicitly pertains to incorporated entities such as companies and limited liability partnerships, thus excluding sole proprietorships like M/s Rainbow Sales and M/s Kothari Enterprises. Consequently, the petitioner, as a personal guarantor for these firms, could not seek relief under Section 94 of the IBC.Key evidence and findingsThe Court noted that the petitioner had approached the National Company Law Tribunal (NCLT) under Section 94 of the IBC, 2016, seeking an interim moratorium to protect the mortgaged property from recovery proceedings. However, the Court found that the petitioner did not qualify as a 'debtor' under the IBC, 2016, due to the nature of the firms involved.Application of law to factsThe Court applied the legal definitions and provisions of the IBC, 2016, to the facts of the case, concluding that the petitioner, as a guarantor to sole proprietorship firms, was not entitled to invoke the interim moratorium under the IBC. The Court also noted that the recovery proceedings under the SARFAESI Act had already advanced, with the Additional District Magistrate having issued orders for possession.Treatment of competing argumentsThe petitioner argued that the definition of 'debtor' should be interpreted broadly to include individuals associated with sole proprietorship firms. However, the Court rejected this argument, holding that the statutory definitions within the IBC, 2016, were clear and did not encompass sole proprietorships within the scope of 'corporate debtor'.ConclusionsThe Court concluded that the petitioner's application under Section 94 of the IBC, 2016, was not maintainable. Consequently, the interim moratorium could not be invoked to stay the recovery proceedings under the SARFAESI Act. The Court dismissed the writ petition as misconceived.SIGNIFICANT HOLDINGSThe Court established the principle that the definition of 'debtor' under the IBC, 2016, does not extend to sole proprietorship firms. The judgment clarified that individuals associated with such firms, including personal guarantors, cannot seek relief under Section 94 of the IBC.Preserve verbatim quotes of crucial legal reasoningThe Court stated: 'Section 94 of IBC, 2016 gives remedy to 'debtor' only to either apply personally or through a resolution professional (RP) to the Adjudicating Authority for initiating the insolvency resolution process... Therefore, in this definition the proprietorship firm is not included.'Core principles established The IBC, 2016, is applicable to corporate entities and does not cover sole proprietorship firms under its definition of 'debtor'. Personal guarantors to sole proprietorship firms cannot invoke the interim moratorium provisions of the IBC, 2016.Final determinations on each issueThe Court determined that the petitioner's attempt to invoke the IBC, 2016, was not legally sustainable, and the writ petition was dismissed. The recovery proceedings under the SARFAESI Act were allowed to proceed as per the orders already issued by the Additional District Magistrate.