Court Overturns DRT's Order, Protecting Auction Sale and Validating Bank's Recovery Measures
In a landmark judgment, the Telangana High Court has upheld the validity of proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) against personal guarantors, even when a Corporate Insolvency Resolution Process (CIRP) is initiated against the corporate debtor under the Insolvency and Bankruptcy Code (IBC). The judgment came in response to the writ petitions filed by Union Bank of India and Mr. Bandla Ganesh Babu, challenging the orders of the Debts Recovery Tribunal-II, Hyderabad, and the Debts Recovery Appellate Tribunal, Kolkata.
The case, Union Bank of India v. Bandla Ganesh Babu, revolved around the recovery proceedings initiated by Union Bank of India against personal guarantors of M/s. Parameswara Poultry Farm Pvt. Ltd., a corporate debtor undergoing CIRP. The DRT had previously directed the bank to refund the auction amount to the auction purchaser, declaring the SARFAESI measures void due to overlapping proceedings under the IBC.
The High Court, led by Justices Moushumi Bhattacharya and Gadi Praveen Kumar, clarified that the mere issuance of a Demand Notice under Rule 7(1) of the IBC Rules, 2019, does not trigger an interim moratorium under Section 96 of IBC unless an application under Section 95 is filed before the National Company Law Tribunal (NCLT). The judgment reinforces the bank's rights to proceed independently under the SARFAESI Act for recovery against personal guarantors, highlighting the distinct processes and legal frameworks governing corporate debtors and personal guarantors.
The court emphasized the sanctity of public auctions and upheld the validity of the auction process conducted by the bank, aligning with statutory safeguards under Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002. The judgment reiterates the principle that recovery against personal guarantors can proceed independently of the CIRP, ensuring secured creditors can enforce their rights without hindrance.
The High Court's decision reaffirms the separation between insolvency proceedings under the IBC and recovery measures under the SARFAESI Act, providing clarity on the jurisdictional boundaries of debt recovery tribunals. The judgment is expected to have significant implications for future cases involving recovery proceedings against personal guarantors in the context of corporate insolvency.
Bottom line:-
SARFAESI Act and Insolvency and Bankruptcy Code (IBC) - Proceedings under SARFAESI Act for recovery against personal guarantors are maintainable independently even when Corporate Insolvency Resolution Process (CIRP) is initiated against the corporate debtor under the IBC - Demand Notice under Rule 7(1) of the IBC Rules, 2019 does not trigger interim moratorium under Section 96 of IBC unless an application under Section 95 is filed before the NCLT.
Statutory provision(s): SARFAESI Act, 2002 Sections 13(4), 17; Insolvency and Bankruptcy Code, 2016 Sections 60, 95, 96, 238; Security Interest (Enforcement) Rules, 2002 Rules 8, 9.
Union Bank of India v. Bandla Ganesh Babu, (Telangana)(DB) : Law Finder Doc id # 2938608
