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2025 (6) TMI 197 - AT - IBCValidity of sale conducted by the Financial Creditor under the SARFAESI Act 2002 after the commencement of the Corporate Insolvency Resolution Process (CIRP) and during the moratorium period under Section 14(1)(c) of the Insolvency and Bankruptcy Code (IBC) - amendment to Section 13(8) of the SARFAESI Act - HELD THAT - In the present case Nagpur Nagrik Sahakari Bank Ltd. issued various public notice for auction and in pursuance of the auction notice issued on 17.11.2019 the successful bidder has submitted its bid on 02.12.2019. Successful bidder after receipt of sale confirmation made the payment on 17.12.2019. The submission which was relied by the Adjudicating Authority of the Suspended Director for allowing the application was that sale was not completed till 03.02.2020 and since CIRP was admitted on 21.01.2020 the sale is in violation of Section 14(1)(c) of the Code. This Tribunal in its judgment Pratibha Industries Limited 2025 (4) TMI 519 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH NEW DELHI has considered the effect of an amendment of Section 13(8) of the SARFAESI Act 2002 and this Tribunal in the above case had held that relationship between the parties i.e. mortgager and mortgagee for the purposes of redemption exist till date of issuance of notice of sale and in the present case notices for auction under Section 13(8) were issued much prior to commencement of the CIRP. Appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Sale Conducted Under SARFAESI Act During Moratorium under Section 14(1)(c) of IBC Relevant Legal Framework and Precedents: Section 14(1)(c) of the IBC imposes a moratorium prohibiting any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor in respect of its property once CIRP commences. The Supreme Court in Indian Overseas Bank v. RCM Infrastructure Ltd. held that any action under the SARFAESI Act to enforce security interest after initiation of CIRP is prohibited. Court's Interpretation and Reasoning: The Adjudicating Authority relied on the Indian Overseas Bank judgment to hold that the sale conducted by the Respondent under the SARFAESI Act post-CIRP initiation violated Section 14(1)(c) of the IBC and set aside the sale. The Tribunal, however, revisited this conclusion in light of subsequent authoritative pronouncements. Key Evidence and Findings: The sale was conducted on 02.12.2019, and the sale was confirmed on the same date. CIRP commenced on 21.01.2020. The Suspended Director challenged the sale, alleging violation of the moratorium. Application of Law to Facts: The Tribunal noted that the sale and confirmation occurred prior to the commencement of CIRP and moratorium. Therefore, the moratorium under Section 14(1)(c) could not invalidate the sale that was completed before CIRP initiation. Treatment of Competing Arguments: The Adjudicating Authority's reliance on Indian Overseas Bank was countered by the Tribunal's reliance on a more recent judgment (Pratibha Industries Limited), which clarified that the moratorium cannot be invoked to invalidate sales completed before CIRP commencement. Conclusions: The Tribunal held that the sale was not in violation of the moratorium under Section 14(1)(c) as it was completed prior to CIRP initiation and thus upheld the validity of the sale. Issue 2: Effect of Amendment to Section 13(8) of the SARFAESI Act on Borrower's Right of Redemption and Sanctity of Auction Sales Relevant Legal Framework and Precedents: Section 13(8) of the SARFAESI Act, as amended, extinguishes the borrower's right of redemption upon publication of the auction notice if the dues are not tendered in full before the notice. The Supreme Court in Celir LLP clarified that the borrower's right of redemption ceases on the date of auction notice publication, and courts must zealously protect the sanctity of auctions. Court's Interpretation and Reasoning: The Tribunal extensively relied on the Celir LLP judgment and the recent Pratibha Industries Limited decision to emphasize that the relationship between mortgagor and mortgagee for redemption purposes ends upon issuance of the auction notice. The courts must avoid interfering with auctions to maintain public confidence and participation. Key Evidence and Findings: The auction notice in the present case was issued on 17.11.2019, well before CIRP commencement. The successful bidder was declared on 02.12.2019 and payment was made on 17.12.2019. The Tribunal observed that the borrower's right to redeem was extinguished on the auction notice date. Application of Law to Facts: Since the auction notice was issued prior to CIRP and the sale was confirmed before CIRP commencement, the borrower's right to redeem had already ceased. Therefore, the subsequent CIRP initiation could not revive or affect this right or the validity of the sale. Treatment of Competing Arguments: The Adjudicating Authority's reliance on Indian Overseas Bank was distinguished on the basis that the Supreme Court in that case did not consider the amended Section 13(8). The Tribunal found the Pratibha Industries Limited ruling more applicable and authoritative. Conclusions: The Tribunal concluded that the sale conducted under the SARFAESI Act was valid as the borrower's redemption right had expired prior to CIRP, and the auction's sanctity must be preserved. Issue 3: Timing of Auction Notice and Sale Confirmation Relative to CIRP Commencement Relevant Legal Framework and Precedents: The timing of auction notice issuance and sale confirmation relative to CIRP commencement is critical in determining the applicability of the moratorium under Section 14(1)(c) of the IBC. The Pratibha Industries Limited judgment clarified that if auction notices are issued before CIRP commencement, the sale is not barred by the moratorium. Court's Interpretation and Reasoning: The Tribunal analyzed the timeline and observed that the auction notice was issued on 17.11.2019, sale confirmed on 02.12.2019, and payment completed on 17.12.2019, all preceding CIRP commencement on 21.01.2020. Therefore, the moratorium could not apply retroactively to invalidate the sale. Key Evidence and Findings: The chronological facts of auction notice, sale confirmation, payment, and CIRP initiation were critical in the Tribunal's reasoning. Application of Law to Facts: The Tribunal applied the legal principle that moratorium under Section 14(1)(c) prohibits enforcement actions only after CIRP commencement, not those completed before. Treatment of Competing Arguments: The Adjudicating Authority's view that the sale was incomplete till 03.02.2020 was rejected by the Tribunal, which found the sale was effectively completed prior to CIRP. Conclusions: The Tribunal held that the timing of the auction and sale confirmation precluded the applicability of the moratorium, thus validating the sale. Issue 4: Sustainability of Adjudicating Authority's Order Setting Aside Sale Relevant Legal Framework and Precedents: The Adjudicating Authority set aside the sale on the ground of violation of Section 14(1)(c) of the IBC, relying on Indian Overseas Bank. The Tribunal considered the more recent and authoritative Pratibha Industries Limited judgment which interpreted the amended SARFAESI Act provisions and their interplay with the IBC moratorium. Court's Interpretation and Reasoning: The Tribunal found that the Adjudicating Authority erred in setting aside the sale because it did not consider the effect of the amended Section 13(8) of the SARFAESI Act and the timing of the auction notice and sale confirmation. Key Evidence and Findings: The Tribunal noted the absence of any interim order from the Debt Recovery Tribunal (DRT) by the Respondent and the fact that the sale was confirmed before CIRP commencement. Application of Law to Facts: The Tribunal applied the law as laid down in Pratibha Industries Limited to hold that the sale was valid and the Adjudicating Authority's order could not be sustained. Treatment of Competing Arguments: The Tribunal rejected the Respondent's challenge based on moratorium violation, emphasizing the importance of auction sanctity and the extinguishment of redemption rights upon auction notice issuance. Conclusions: The Tribunal allowed the appeals and set aside the impugned order of the Adjudicating Authority, thereby upholding the sale. 3. SIGNIFICANT HOLDINGS "In view of the aforesaid discussion, we hold that as per the amended section 13(8) of the Act, once the borrower fails to tender the entire amount of dues with all costs and charges to the secured creditor before the publication of auction notice, his right of redemption of mortgage shall stand extinguished / waived on the date of publication of the auction notice in the newspaper in accordance with Rule 8 of the 2002 Rules." "Thus what is discernible from above is that it is the duty of the courts to zealously protect the sanctity of any auction conducted. The courts ought to be loath in interfering with auctions, otherwise it would frustrate the very object and purpose behind auctions and deter public confidence and participation in the same." "Any other interpretation of the amended section 13(8) will lead to a situation where multiple redemption offers would be encouraged by a mischievous borrower, the members of the public would be dissuaded and discouraged from participating in the auction process and the overall sanctity of the auction process would be frustrated thereby defeating the very purpose of the Act. Thus, it is in the larger public interest to maintain the sanctity of the auction process under the Act." "The order impugned passed by Adjudicating Authority allowing the I.A. of the Suspended Director cannot be sustained in view of the law laid down by this Tribunal in Pratibha Industries Limited (supra)." Core principles established include:
Final determinations on each issue are that the sale conducted by the Financial Creditor under the SARFAESI Act was valid and not in violation of the moratorium under the IBC, the borrower's redemption rights were extinguished upon auction notice publication, and the impugned order setting aside the sale is set aside. Both appeals are allowed accordingly.
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