NCLT Mumbai Bench Rules Interim Moratorium Under IBC Prevents Sale of Personal Guarantors' Property Under SARFAESI Act

NCLT Mumbai Bench Rules Interim Moratorium Under IBC Prevents Sale of Personal Guarantors' Property Under SARFAESI Act

The Mumbai bench of the National Company Law Tribunal (NCLT), comprising Mr. Charanjeet Singh Gulati (Member Technical) and Justice Lakshmi Gurung (Member Judicial), recently ruled that once a petition under Section 95 of the Insolvency and Bankruptcy Code (IBC) is filed, the interim moratorium under Section 96 is automatically triggered. This moratorium prohibits any sale of a personal guarantor's property by the financial creditor under the SARFAESI Act, even if a sale auction notice was issued prior to the moratorium's commencement.

The application was filed by Raghavendra Joshi, the personal guarantor of M/s Deogiri Infrastructure Pvt. Ltd. (the corporate debtor), seeking to set aside the sale of his property under the SARFAESI Act. State Bank of India (SBI), the financial creditor, had granted a loan of Rs. 1500 lakhs to the corporate debtor, secured by a personal guarantee from Raghavendra Joshi and his wife.

When the corporate debtor defaulted, SBI initiated recovery proceedings, including issuing a notice under Section 13(2) of the SARFAESI Act in 2019. Despite taking symbolic possession of the properties in January 2020, SBI proceeded to sell the properties under the SARFAESI Act to a third-party buyer, Mr. Besi Kuzimanil Mathu, on May 10, 2022.

However, on April 26, 2022, SBI filed a petition under Section 95 of the IBC against the personal guarantor. As a result, a Resolution Professional (RP) was appointed in June 2022, triggering an interim moratorium under Section 96 of the IBC. Raghavendra Joshi contended that the sale of the property by SBI on May 10, 2022, violated this moratorium, which prevents any legal action or proceeding against the debtor during its subsistence.

SBI argued that the jurisdiction to challenge the sale lay with the Debt Recovery Tribunal (DRT), not the NCLT, as the sale took place under the SARFAESI Act. SBI also claimed that the rights vested in the bank upon symbolic possession could not be overridden by the IBC and that the applicant should have informed the bank of the IBC petition to prevent the sale.

The buyer, Mr. Mathu, argued that the SARFAESI proceedings were not affected by the interim moratorium under Section 96 of the IBC. He maintained that SBI had the right to proceed with the sale once it had taken symbolic possession of the property, as per Section  13(4) of the SARFAESI Act.

The NCLT began by examining whether it had jurisdiction to hear the case. The tribunal noted that under Section 60(2) of the IBC, if the corporate debtor's insolvency proceedings are pending before the NCLT, any applications related to the personal guarantor's insolvency must also be filed before the same bench. Since the corporate debtor's insolvency proceedings were already underway before the NCLT Mumbai, the tribunal ruled that it had jurisdiction to adjudicate the matter.

The tribunal analyzed whether the sale of the property was valid, given the interim moratorium in effect. It referred to Section 96 of the IBC, which provides that once a petition under Section 95 is filed, all legal proceedings related to any debt are stayed during the moratorium period.

The interim moratorium commenced on April 26, 2022, and the sale occurred on May 10, 2022, which was after the moratorium had been triggered. The NCLT found that the sale by SBI violated the provisions of Section 96, as the moratorium prohibited any legal action, including the sale of the personal guarantor's property. The tribunal also referred to the judgment of the Delhi High Court in Sanjay Dhingra v. IDBI Bank Ltd., which confirmed that the provisions of the IBC override any conflicting provisions in other laws, including the SARFAESI Act.

The tribunal concluded that the sale of the property on May 10, 2022, by SBI to the third party was in violation of the interim moratorium under Section 96 of the IBC and, therefore, invalid. As a result, the NCLT allowed the application, setting aside the sale.