The Kerala High Court (“Kerala HC”), by its judgment pronounced on November 17, 2023, in the matter of Jeny Thankachan v. Union of India and Others [WP(C) No. 31502 of 2023], has held that the mere uploading of an application cannot be taken as filing of an application under Section 96 (Interim Moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The filing of an application is legal and acceptable only when it is filed without any defects, satisfying the statutory procedural requirements of filing and when the adjudicating authority numbers the application. The Kerala HC further held that unless there is any repugnancy between the provisions of IBC and the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), there is no question of IBC overriding the provisions of the SARFAESI Act in totality.

Facts

Jeny Thankachan (“Petitioner”) is a sleeping partner of Hawking Technologies India LLP (“Respondent No. 3”/ “Corporate Debtor”). The Corporate Debtor obtained a bank loan of an amount of INR 65,10,000/- from IndusInd Bank Limited (“Respondent No. 4”) for which the Petitioner was a guarantor. The Corporate Debtor defaulted in repayment of the loan and the account of the partnership was rendered non-performing asset on October 31, 2022. Thereafter, Respondent No. 4 initiated proceedings under Section 13 (Enforcement of security interest) of the SARFAESI Act and issued a notice to the Corporate Debtor and the Petitioner (being a guarantor).

Respondent No. 4 approached the Chief Judicial Magistrate under Section 14(1) (Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset) of the SARFAESI Act. The Chief Judicial Magistrate passed an order dated May 5, 2023 appointing an Advocate Commissioner to assist Respondent No. 4 to take possession of the schedule property. The Petitioner, at this stage, filed an application dated August 21, 2023 for initiating insolvency resolution process under Section 94 (Application by debtor to initiate insolvency resolution process) of IBC before the National Company Law Tribunal, Kochi (“Respondent No. 2”/ “NCLT”). On August 23, 2023, NCLT assigned diary number 1386/2023 to the application submitted by the Petitioner.

The present petition by the Petitioner is to obtain a stay on the proceedings initiated by Respondent No. 4 and the Chief Judicial Magistrate under the SARFAESI Act and to seek a declaration, as to the effect, that provisions of IBC shall have an overriding effect over the provisions of SARFAESI Act.

Issue

Whether the filing of an application under Section 94 of IBC would by itself trigger a stay on the proceedings initiated by Respondent No. 4 and the Chief Judicial Magistrate under the SARFAESI Act as contemplated under Section 96(1)(b)(i) of IBC.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that action to foreclose, recover or enforce any security interest under the SARFAESI Act shall be deemed to have been stayed by virtue of Section 96(b) of IBC upon the Petitioner filing an application under Section 94 of IBC. Placing reliance on Section 238 (Provisions of this Code to override other laws) of IBC and Government order dated November 15, 2019, by which the provisions in relation to personal guarantors to corporate debtors have come into force, the Petitioner contended that the provisions of IBC shall have overriding effect over the SARFAESI Act and as such the proceedings under SARFAESI Act should be stayed.

The Petitioner further submitted that the loan agreement has not been executed between the Petitioner, and Respondent No. 4, but between the Corporate Debtor and Respondent No. 4, and since the property proceeded against by Respondent No. 4 is a joint family property of the Petitioner, of which half the share is not liable to be proceeded against pursuant to order dated May 5, 2023.

Contentions of the Respondent:

Respondent No. 4 while applying the ratio laid in the case of State Bank of India v. B. Ramakrishnan [2018 17 SCC 394] (“Ramakrishnan Case”), wherein it was held that moratorium under Section 14 (Moratorium) of IBC, on admission of insolvency petition would not be extended to personal guarantor of the corporate debtor, contended that interim moratorium under Section 96 of IBC would not be applicable to the Petitioner in the present case, who is the personal guarantor of the Corporate Debtor. Respondent No. 4 further asserted that since the application filed by the Petitioner under Section 94 of IBC was not assigned a regular case number by the NCLT, the provisions under Section 96 of IBC did not even apply to the Corporate Debtor.

Observations of the Kerala HC

The Kerala HC observed the difference in the provisions of moratorium in case of corporate insolvency resolution process and in cases relating to individuals and partnership firms. An order of declaration of moratorium by the adjudicating authority is necessary in the former, while the latter operates automatically by operation of law. The Kerala HC observed that Sections 96 and 101 (Moratorium) of IBC need to be construed strictly, since legal actions and proceedings initiated by the creditor against the debtor are stayed, and consequently, creditors are left disabled and disentitled.

The Kerala HC further discussed the overriding nature of IBC over the SARFAESI Act. It opined that Section 238 of IBC cannot be applied in the case of SARFAESI Act, since IBC and SARFAESI Act operate in different areas of law. Further, on this point, the Kerala HC discerned that unless there is any repugnancy between the provisions of IBC and the SARFAESI Act, there is no question of IBC overriding the provisions of the SARFAESI Act in totality. The Kerala HC relied upon judgment pronounced in the matter of Ramakrishnan Case and reiterated that since protective provisions of IBC do not extend to personal guarantor of corporate debtor, the securitization proceedings against personal guarantors of corporate debtors can continue under the SARFAESI Act.

Decision of the Kerala HC

The Kerala HC held that since the Petitioner’s application is not duly numbered by the NCLT, the Petitioner’s contention that the Respondents cannot proceed with the securitisation proceedings under the SARFAESI Act and interim moratorium under Section 96 of IBC is in force, is rejected.

VA View:

The present judgment of the Kerala HC is a significant judicial pronouncement in the realm of insolvency law.

The Kerala HC has held that the personal guarantors of corporate debtors cannot use the provisions of IBC as a shield to escape from the claims of creditors. Section 96 of IBC must be construed strictly, since the operation of interim and final moratorium under Sections 96 and 101 of IBC have serious repercussions, that is to say legal actions and proceedings pending against the debtor are stayed and the creditors of the debtor are not able to initiate any legal proceeding in respect of any debt. The Kerala HC further clarified that an application will be deemed proper only when it is filed without any defects and by satisfying the statutory procedural requirements of filing and when the adjudicating authority numbers the application.

The Kerala HC has further clarified that even though Section 238 of IBC provides for an overriding effect over other laws, it cannot oust the operation of the SARFAESI Act in totality in absence of any repugnancy between the provisions of IBC and the SARFAESI Act.

For any query, please write to Mr. Bomi Daruwala at [email protected]

DOWNLOAD NEWSLETTER