Writ petition dismissed as IBC resolution plan under Section 31 cannot bind third-party bank's SARFAESI enforcement rights

The HC dismissed the petitioner's writ petition seeking to restrain the respondent bank from proceeding under SARFAESI Act against mortgaged property. The petitioner claimed protection based on a resolution plan approved for corporate debtor under IBC, arguing their joint development agreement with the debtor barred bank enforcement. The court held that resolution plans under Section 31 IBC bind only the corporate debtor and its stakeholders, not third parties. The bank, not being party to the resolution plan, retained independent rights to enforce security interests under SARFAESI. The court granted limited interim relief conditioned on petitioner depositing specified amounts in related DRT proceedings.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the resolution plan approved under the Insolvency and Bankruptcy Code (IBC) in respect of a corporate debtor (M/s. Heera Constructions Pvt. Ltd.) binds third parties, specifically the petitioner who claims a joint development agreement with the corporate debtor, thereby barring the respondent bank from proceeding against the petitioner's mortgaged property under the SARFAESI Act;

(b) Whether the respondent bank, which is not a party to the resolution plan, is precluded from initiating or continuing enforcement proceedings against the petitioner's mortgaged property based on the resolution plan sanctioned for the corporate debtor;

(c) The applicability and scope of the Supreme Court's decision in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. with respect to the binding nature of resolution plans and the extinguishment of claims not included therein;

(d) Whether the petitioner is entitled to any interim relief or extension of time to comply with conditions imposed in related proceedings before the Debts Recovery Tribunal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Binding Effect of Resolution Plan on Third Parties and Bank's Right under SARFAESI Act

Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016 (IBC), particularly Section 31, governs the approval and binding effect of resolution plans. Section 31(1) provides that once a resolution plan is approved by the Adjudicating Authority (National Company Law Tribunal), it shall be binding on the corporate debtor and its employees, members, creditors, including government authorities, guarantors, and other stakeholders. The SARFAESI Act, 2002, empowers secured creditors like banks to enforce security interests, including proceeding against mortgaged properties, without the intervention of courts.

The Supreme Court judgment in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. clarified the scope of Section 31, holding that claims not part of the resolution plan stand extinguished and no proceedings can be initiated or continued in respect of such claims against the corporate debtor and its stakeholders. The 2019 amendment to Section 31 was held clarificatory and declaratory, effective retrospectively.

Court's interpretation and reasoning: The Court examined whether the petitioner, who is not a party to the resolution plan but claims a joint development agreement with the corporate debtor, can invoke the binding effect of the resolution plan to restrain the respondent bank from proceeding against the mortgaged property.

The Court observed that the binding effect of the resolution plan under Section 31 applies to claims vis-`a-vis the corporate debtor and its stakeholders. The petitioner, being a third party to the resolution plan, cannot claim protection thereunder. The Court emphasized that the resolution plan binds the corporate debtor and its creditors but does not bind third parties who are not part of the insolvency proceedings.

The Court further noted that the respondent bank is not a party to the resolution plan and is entitled to enforce its security interest under the SARFAESI Act independently. The fact that the joint development agreement between the petitioner and the corporate debtor is mentioned in the resolution plan does not bar the bank's enforcement proceedings against the mortgaged property.

Key evidence and findings: The petitioner's claim rested on the existence of a joint development agreement with the corporate debtor and the inclusion of this agreement in the resolution plan. The respondent bank's position was that it was not a party to the resolution plan and that the mortgaged property was security for the petitioner's loan, entitling the bank to proceed under SARFAESI.

Application of law to facts: Applying the Supreme Court's ruling, the Court found that the petitioner's rights under the joint development agreement do not translate into immunity from enforcement proceedings by the bank. The resolution plan's binding effect does not extend to the petitioner as a third party, nor does it extinguish the bank's secured creditor rights.

Treatment of competing arguments: The petitioner relied heavily on the Supreme Court's decision in Ghanashyam Mishra and Sons Pvt. Ltd. to argue that the resolution plan's approval bars any proceedings outside its scope. The Court distinguished this by clarifying that the bar applies only to claims against the corporate debtor and its stakeholders, not to third parties like the petitioner. The bank's argument that it is entitled to proceed under SARFAESI as a secured creditor was accepted.

Conclusions: The Court concluded that the petitioner is not entitled to any relief restraining the bank's proceedings under the SARFAESI Act. The resolution plan does not preclude the bank from enforcing its security interest against the mortgaged property.

Issue (d): Interim relief and extension of time for deposit in related proceedings

Relevant legal framework: The Court considered the petitioner's request for time to deposit amounts directed as a condition for stay in a securitization appeal pending before the Debts Recovery Tribunal-II, Ernakulam.

Court's interpretation and reasoning: The Court found the petitioner's request reasonable and directed that the interim order in the related appeal would continue to operate provided the petitioner deposits Rs. 25 lakhs on or before 07-02-2025 and a further Rs. 25 lakhs on or before 14-02-2025.

Application of law to facts: The Court exercised its discretion to balance the interests of the parties, allowing the petitioner to enjoy interim relief subject to timely payment.

Conclusions: The petitioner was granted limited interim relief conditioned on the deposit of specified amounts within stipulated timelines.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning is preserved verbatim as follows:

"95. In the result, we answer the questions framed by us as under:

(i) That once a resolution plan is duly approved by the Adjudicating Authority under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan; (emphasis supplied)"

The core principles established include:

(a) The binding effect of a resolution plan approved under Section 31 of the IBC is limited to the corporate debtor and its stakeholders, and does not extend to third parties who are not part of the insolvency proceedings;

(b) Claims not included in the resolution plan against the corporate debtor stand extinguished, and no proceedings can be initiated or continued in respect of such claims;

(c) The SARFAESI Act empowers secured creditors to enforce security interests independently, and such rights are not automatically barred by resolution plans to which they are not parties;

(d) Third parties claiming agreements with the corporate debtor cannot invoke the resolution plan to restrain enforcement proceedings by secured creditors;

(e) Courts may grant interim relief conditioned on compliance with payment directions in related recovery proceedings.

Final determinations on each issue are:

(i) The petitioner cannot restrain the respondent bank from proceeding under the SARFAESI Act against the mortgaged property on the basis of the resolution plan sanctioned for M/s. Heera Constructions Pvt. Ltd.;

(ii) The resolution plan does not bind the respondent bank, which is not a party to the insolvency proceedings;

(iii) The petitioner's writ petition is dismissed;

(iv) The petitioner is granted conditional interim relief in related proceedings subject to timely deposit of specified sums.

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