IBC prevails over SARFAESI

An infrastructure company has successfully thwarted attempts by its lender bank to seize and auction off secured assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), by swiftly filing for bankruptcy under the Insolvency and Bankruptcy Code (IBC), before the sale under SARFAESI is concluded. The players in this drama are RCM Infrastructure Ltd and the Indian Overseas Bank (IOB).

When RCM failed to pay back its debt, IOB took possession of two secured assets and put them on auction under the SARFAESI Act. The first round of auction attracted no bids, but in the second, a bid was received (for ₹32.92 crore, against the reserve price of ₹16.34 crore), and the bank confirmed the sale on December 13, 2018. The successful bidder duly deposited 25 per cent of the bid amount.

RCM’s move

Acting swiftly, RCM filed an application under Section 10 of the IBC. The Adjudicating Authority admitted the application on January 3, 2019, even though IOB opposed the admission, and imposed a moratorium under Section 14 of the IBC (essentially freezing any transactions involving the assets.) IOB, however, accepted the other 75 per cent of the bid amount on January 8, 2019 – after the moratorium was imposed.

Thus, the sale is confirmed, part payment received. Before the rest of the payment is made, the moratorium is brought in. IOB said the assets have been sold; RCM said, no. The matter moved to the National Company Law Appellate Tribunal (NCLT). Two issues were placed on the table of the Tribunal: (1) whether after imposition of moratorium any transaction done with respect to the assets of the Corporate Debtor/Corporate Applicant deemed to be valid or not; (2) whether provisions of IBC prevail over other laws?

Tribunal’s judgment

The Tribunal recently gave out its judgment, in favour of RCM. It said that Section 238 of the IBC, says: “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.” The Tribunal cited its own judgment in an earlier case of Encore Asset Reconstruction Company Vs Charu Sandeep Desai, where it had said that Section 238 shall prevail over any provisions of the SARFAESI, if there was any inconsistency between IBC and SARFAESI.

“We are of the view that imposition of moratorium as per Section 14 of IBC is to protect the interest of the Corporate Debtor by protecting the assets of the Corporate Debtor for the sole objective to maximising the value of assets,” it said. It also stressed that the sale of assets during the moratorium was “against the spirit” of Section 14 of IBC.

Now, why should the IBC prevail over any other existing legislation? The judgment answers this question, citing a Supreme Court decision in the case of Arcelor Mittal (India) Ltd Vs Satish Kumar Gupta, where the apex court noted that “the primary focus of the legislation (IBC) is to ensure revival and continuance of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.”

The IBC, therefore, is intended to put the debtor back on its feet, not merely to enable recovery of the dues by the creditors.