Effect of moratorium during corporate insolvency on SARFAESI proceedings

The Law

Under Section 14 of the the Insolvency and Bankruptcy Code, 2016 (in short, the “IBC”), the Adjudicating Authority (the NCLT) has to declare moratorium once the Corporate Insolvency Resolution Process (”CIRP”) is initiated. The declaration of moratorium is the necessary consequence of initiation of CIRP.

During the moratorium, any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act, 2002 is prohibited.

Section 238 of the IBC provides that the provision of IBC would prevail over other laws in case of any inconsistency.

Rule 9 of the Security Interest (Enforcement) Rules, 2002 lays down that the sale under SARFAESI Act would be complete when the authorised officer issues the certificate of sale of property in favour of the auction purchaser. The entire payment has to be made by the auction purchaser before the issuance of certificate of sale.

The Case Law

Even though it is evident that SARFAESI proceedings cannot continue during the moratorium under the IBC, however, a case arose wherein the auction of the property was done by the Bank before the declaration of moratorium. The Bank argued that the sale was confirmed when the auction purchaser made part-payment of the bid amount. [Refer Indian Overseas Bank vs. RCM Infrastructure Ltd. & Anr., 2022 LiveLaw (SC) 496 ]

The Supreme Court observed that the IBC is a complete code in itself and in view of Section 238 of the IBC, the provisions of IBC would prevail over other laws. The court further observed that the sale gets completed only when the complete payment is made and the sale certificate is issued. Accordingly, the two-judge bench of the Supreme Court concurred with the decision of the NCLT to set aside the sale of the properties of the corporate debtor.

Concluding Remarks

The declaration of moratorium is crucial to ensure successful resolution through CIRP. The courts have also interpreted the definition of moratorium in such a manner so as to ensure that the intent of the provision is not frustrated.

However, it is important to note that the moratorium is applicable only to the corporate debtor and not to natural persons like directors, key management personnels, etc. and such natural persons continue to remain liable in accordance with the law of the land.

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