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Latest Judgments from SARFAESI Act 2002 and IBC

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The law of debt recovery is mostly based on two laws which are the Recovery of Debt and Bankruptcy Act, 1992 and the Securitization and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act 2002).

To further strengthen the financial system, the Parliament enacted the Insolvency & Bankruptcy Code, 2016 which gave a quick resolution of the payment of the debt in a systematic manner.

These three laws determine the judicial procedure for recovery of debts by the Bank and Financial institutions for recovering their losses due to non-payment by the debtors. The law of SARFAESI Act 2002 gives stringent powers to the Banks and Financial Institutions against the borrower. Whereas, the RDB Act provides the whole judicial proceeding before the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal.

This article describes some latest judgements and legal findings determined by different High Court in India, NCLT’s and of the Supreme Court of India.

Index


Also Read: The Latest Judgements on Disputes Related to Specific Performance of Contract.

Case 1: Bensan Exim Corporation vs The Presiding Officer

[Hon’ble Justice Mr M. Sathyanarayanan and Hon’ble Justice Mrs R Hemlatha in W.P No. 2754 of 2020 of the Madras High Court]

A delay in filing an appeal under Section 17 of the SARFAESI Act can be condoned by filing an application under Section 5 of the Limitation Act, 1969

In previous latest judgement series, it was pointed out in the case of 𝗔𝗸𝘀𝗵𝗮𝘁 𝗖𝗼𝗺𝗺𝗲𝗿𝗰𝗶𝗮𝗹𝘀 𝗣𝗿𝗶𝘃𝗮𝘁𝗲 𝗟𝘁𝗱. 𝗩𝘀 𝗞𝗮𝗹𝗽𝗮𝗻𝗮 𝗖𝗵𝗮𝗸𝗿𝗼𝗯𝗼𝗿𝘁𝘆 where, the applicability of the Limitation Act, 1969 for a condonation of delay where an appeal under Section 17 of the SARFAESI Act 2002 filed after the limitation period. Thereby the law was settled that a delay cannot be condoned after 45 days before the DRT and the Borrower has to be quick in filing an appeal.

But in this present case, an otherwise situation has been driven out whereby the condonation of delay can be granted by a learned DRT which negates the previously reported judgement. Therefore, let us look at the facts and merits of the case in such judgements.

Facts- The Writ Petition is filed against the order of the DRT-II Chennai, rejecting the application under Section 5 of the Limitation Act, 1969 for condonation of delay in filing the application under Section 17(1) of the SARFAESI Act 2002.

The demand notice for the recovery of debt is of Rs. 4,72,15,504/- as on 30.03.2016 and the secured creditor also issued a possession notice under Section 13(4) of the SARFAESI Act 2002 on 14.08.2019.

The petition challenging the possession notice filed an appeal SA No. 12943 of 2019 before the DRT-II Chennai. However, the application was filed with a delay of one day. The petitioners filed a Misc. Application for condonation of delay in the said appeal.

The Learned DRT, rejected the appeal citing the judgement of Central Bank of India, Asset Recovery Branch vs The Registrar DRAT, Chennai and others [WP 10053/2019 in Madras High Court], whereby if an appeal is not preferred within 45 days from the date of any measures taken under Section 13(4), then the appeal under Section 17 is not maintainable and accordingly be rejected.

Held- The Court referred to the judgement of Standard Chartered Bank vs MSTC Limited [Manu/SC/0073/2020], where the question arose as to condonation of delay in filing the Review Application and the Apex Court in the said judgment referring to its own judgement in International Asset Reconstruction Company of India Limited vs Official Liquidator of Aldrich Pharmaceuticals Limited and Ors [(2017) 16 SCC 137] found that an application filed before the Debts Recovery Tribunal under Section 5 of the Liquidation Act is maintainable.

In the said judgement it further referred to the judgement in Baleshwar Dayal Jaiswal vs Bank of India & others, wherein a similar question arose on the DRAT (Appellate Tribunal) for condoning the delay and it was held by the Apex Court that condonation of delay is applicable by virtue of Section 18(2) of the SARFAESI Act 2002 and Section 20(3) of the RDB Act. Thereby the provisions of Limitation Act are expressly incorporated under the special statutes as per the Section 29(2) of the Limitation Act.

The Court further referred to the judgement under International Asset Reconstruction Company of India Limited vs Official Liquidator of Aldrich Pharmaceuticals Limited and Ors., wherein it was held that

  1. Recovery of Debt & Bankruptcy Act, 1993 (RDB Act) is a special law which establishes a statutory Tribunal.
  2. The Legislature has provided the application of Limitation Act to original proceedings under Section 19 before the Tribunal only.
  3. In the appeal, the limitation period has been set for 45 days as per Section 20(3) of the RDB Act.
  4. Section 24 of the Act is limited for the proceedings under Section 19
  5. In case of an appeal against the order of Recovery Officer as per Section 30 of the Act, the extension of time was excluded.
  6. Therefore, the application of Section 5 read with Section 29(2) of the Limitation Act, 1963 in cases related to Appeal from the order of Recovery Officer as per Section 30(1) of the RDB Act, no condonation of delay is available.

These above points were referred to and followed in the Standard Charter Bank case and International Asset Reconstruction Company case.

Therefore, the Court on the perusal of the Baleshwar Dayal Jaiswal case and the International Asset reconstruction Company of India Limited case formulated the opinion of the Court that the Tribunal ought to have condoned the delay in filing the application under Section 17 of the Act.

Writers Note: – The judgement is flawed judgement and is bound to be set aside. The case preferred by the Hon’ble Justices to makes a flawed conclusion that Section 5 of the Limitation Act is applicable in an appeal filed under Section 17 of the SARFAESI Act 2002.

The referred judgement of Standard Chartered Bank case and the points placed in the judgement was with and in relation to the Recovery of Debt & Bankruptcy Act, 1993 not the SARFAESI Act 2002. In my previous article, the case 𝗔𝗸𝘀𝗵𝗮𝘁 𝗖𝗼𝗺𝗺𝗲𝗿𝗰𝗶𝗮𝗹𝘀 𝗣𝗿𝗶𝘃𝗮𝘁𝗲 𝗟𝘁𝗱. 𝗩𝘀 𝗞𝗮𝗹𝗽𝗮𝗻𝗮 𝗖𝗵𝗮𝗸𝗿𝗼𝗯𝗼𝗿𝘁𝘆 categorically maintains with the legal principles and mandates that Limitation Act is not applicable by an appeal under Section 17 of the SARFAESI Act.


Read: Why an action of recovery cannot be ensued in a sale of agricultural land.

Case 2: R.R Gopaljee vs Indian Overseas Bank & Ors.

[Bench: Mr Jarat Kumar Jain, Mr.Balvinder Singh & Mr Ashok Kumar Mishra in Company Appeal (AT) No. 748 of 2019 of the National Company Law Appellate Tribunal, New Delhi]

The Limitation period can be extended due to the acknowledgement of the debt by the Corporate Debtor after the declaration of default.

The appeal filed with a question of the date of acknowledgement of the debt by the Corporate Debtor. The Financial creditor as alleged by the appellant has conflicting dates in regard to the date of debt due thereby the Insolvency process before the Adjudicating Authority is barred by limitation.

Although, Section 18 and Section 19 of the Limitation Act 1961 ascertain when the date of default or the cause of action can be forward to a future date. By the operation of the two provisions, the Adjudicating Authority determined the extension of the date of default of the term loan. Therefore, challenging on this ground, the appellant filed this Appeal.

Facts- The Financial creditor, i.e. the Indian Overseas bank on the default of payment for the financial assistance declared the Corporate Debtor account as NPA (Non-Performing Asset) on 01.04.2015. The Financial Creditor again sent a legal notice on 15.03.2017 demanding payment of Rs 21.86 Crore.

The Corporate Debtor acknowledged the debt and obliged to settle it. After which, it offered a One Time Settlement on 13.04.2017, the financial creditor accepted the proposal. However, after an extension of time for the One-time Settlement (OTS) which was twice made by the Corporate Debtor, the Financial Creditor cancelled the OTS proposal.

The Financial creditor then filed an application under Section 7 of the I&B Code on 15.03.2019.  The Adjudicating Authority initiated the Corporate Insolvency Resolution Proceedings (CIRP), aggrieved by which the Corporate Debtor filed this Appeal.

The Appellant alleged that the application is defective because the date of default is not disclosed and it is crucial to determine the period of limitation. The demand notice under Section 13(2) of the SARFAESI Act 2002 mentions the date of NPA on 30.06.2015, whereas an Additional Affidavit filed with the application discloses the NPA date as 01.04.2015.

Held- The Appellate Court observed and agreed with the date of NPA as being 30.06.2015. The Application under S.7 of I&B Code is filed on 15.03.2019 after three years from the date of default.

The question of acknowledgement of the debt by the Corporate debtor as per Section 18 of the Limitation Act, whereby the date of default can be forwarded to a future date as referred by the Appellate Tribunal in Sh G Eswara Rao vs Stressed Assets Stabilisation fund [Company Appeal (At) (Ins) No. 1097 of 2019]

Application of Section 18 and 19 of the Limitation Act, 1963

The Court referred to the judgement in the case of J.C Budhraja vs Chairman, Orissa Mining Corporation Ltd. [(2009) 2 SCC 444] where it held that the Section 18 of the Limitation Act deals with the effect of acknowledgement in writing. The provision further determines a fresh period of limitation where a limitation period for suit or application has lapsed and an acknowledgement of liability is made in writing by the party against whom such right is claimed. The fresh limitation period shall be computed from the date of the acknowledgement is signed.

In case of acknowledgement, the debt merely renews as per Section 19 of the Limitation Act. The plea of acknowledgement must indicate the existence of the jural relationship between the parties such as that of debtor and creditor. The statement must admit the jural relationship. Such a relation can be established by the nature of admission and need not be expressed in words. The admission in question in words can reasonably infer that the person making the admission intended to refer to a subsisting liability as at the date of the statement.

Therefore, it is settled that a written acknowledgement of liability must involve an admission of a subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability.

In this case, the acknowledgement is relied on from the reply to the demand notice dated 27.03.2017, the OTS proposal dated 13.04.2017 and subsequent correspondence between the Appellant and Respondent.

The reply to the demand notice dated 27.03.2017 admitted the financial liability and stated in settling the dispute, therefore, subsisting the jural relationship between the parties and a conscious affirmation of the continuing relationship.

Further, the Corporate Debtor initiated an OTS proposal on 13.04.2017 which was extended again on 03.07.2017 and on 28.08.2017. The Corporate Debtor declared that it shall pay the entire OTS amount of Rs 17 Crores within 30 days from the date of communication of this sanction. However, the Corporate Debtor failed to pay the amount even after the lapse of a determined period.

The admission by the Corporate Debtor of the subsisting liability proved that he acknowledged the debt from three years i.e, before the expiration of the prescribed period for a suit or application.

Thus, the Appellate Court did not interfere with the finding of the Adjudicating Authority as per Section 7 of I&B code and held that the application was well within its limitation period.


Also Read: Who Has The First Priority After The Sale Of A Secured Asset In An Auction Sale.

Case 3: Sunil S. Kakkad vs Atrium Infocomm Pvt Ltd. & Anr

[Mr. Jarat Kumar Jain, Mr Balvinder Singh and Mr V.P Singh in Company Appeal(AT)(Insolvency) No 194 of 2020 of the National Company Law Appellate Tribunal, New Delhi]

The Adjudicating Authority nor the Appellate Authority in an Insolvency case has the jurisdiction to reverse the Commercial Wisdom of the financial creditors.

In an Insolvency case, the Committed of Creditors has the utmost power for conducting the insolvency process. The primary beneficiary of the insolvency process is with the committee of creditors (COC). The I&B Code has given the committee of creditors in accepting and rejection of the resolution plan with the assent to 66% of the creditors in the committee.

The question thus, arises can having such power with the COC within the scope of the Adjudicating Authority can give power to the COC in rejecting the proposals of the Corporate Debtor and conduct an arbitrary liquidation process, which will be against the sole intent of the Act.

The Appellant, in this case, alleged that the COC without giving an opportunity to the Corporate Debtor in the resolution of corporate debt without any merits passed an order by the Adjudicating Authority for the liquidation of the Corporate Debtor.  

Facts- A Corporate Insolvency Resolution Process was against the Corporate debtor whereby it was pending for receiving claims from the Committee of Creditors (COC). After three meetings of the COC which passed a resolution that the Corporate Debtor Company is not working for the past 5 years, therefore, decided to liquidate the Company.

The COC passed the resolution with 100% approval which allowed the Adjudicating authority to pass the impugned order.

The Appellant alleged that the Insolvency Resolution Professional (Resp No.2) was unable to perform any of the necessary steps under the CIRP, i.e to prepare Information Memorandum, evaluation matrix, evaluation of the assets etc. The IRP as alleged completely overlooked the process of Expression of Interest (EOI).

The Appellant pointed out that, one of the prospective Resolution Applicant in a meeting dated 09/09/2019 showed his willingness to submit an EOI. The Appellant also alleged that the Adjudicating Authority failed to conduct the CIRP in the prescribed timeline for the Corporate Debtor which is the prime objective of the Code. The order for liquidation under Section 33 of the Act was passed ex-parte without giving change to the Appellant.

The Appellants contended that liquidation is the last resort and it cannot and should not be passed without following due process of Resolution of the Corporate Debtor. It is alleged that impugned order is passed in gross violation of the Principles of Natural Justice.

Held- The Court held that, the I&B Code specifically provides that “the Committee of Creditors may take the decision to liquidate the Corporate Debtor, any time after its constitution under sub-section (1) of Section 21 and before the confirmation of the Resolution Plan, including at any time before the preparation of the information memorandum.”

Also, as appears from the minutes of the second COC meeting, wherein it stated that the IRP apprised COC that EOI for Resolution Plan, evaluation matrix and eligibility criteria had been documented. In COC meeting held on 01/10/2019, approval of EOI was invited for a Resolution Plan, fixing eligibility criteria for the Resolution Applicant and fixing a date for submission of Resolution plan.

However, the meeting resolved that the company is not working since last five years and there is no possibility/hope for a resolution plan, therefore, it is decided to liquidate the corporate debtor, i.e. Atrium Infocomm Private Limited. The decision promulgated the application for liquidation before the Adjudicating Authority.

The court observed the explanation to the section 33(2) of the I&B Code,2016 which gives full power to the COC to order for liquidation at any stage of the CIRP but before the confirmation of the Resolution Plan. Therefore, COC has the power to order for liquidation at any stage of CIRP but before confirmation of the Resolution Plan.

As referred in the judgement of the Hon’ble SC in K.Sashidhar vs Indian Overseas Bank [(2019) 12 SCC 150] which explains the statutory limitation for Appellate Authority (NCLAT) under Section 61(3) of the Act against any enquiry conducted by the Adjudicating Authority under Section 30 & 31 of the I&B Code. Thereby, the Appellate Authority is limited to matters -other than an enquiry into the autonomy or commercial wisdom of the dissenting financial creditors. Thus, statutory authorities under the I&B Code (NCLT &NCLAT) have limited jurisdiction to act as a court of equity to exercise its plenary powers.

Therefore, the adjudicating authority nor the appellate authority has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors.

The Court further explains, that the law mandates a majority of 66% of the members of the Committee of Creditors for the approval of the Resolution plan as well as for the liquidation of the Corporate Debtor. Through this, the legislative intent is to uphold the opinion of the minority dissenting financial creditors. For if more than 44% of the specified percent of creditors prevail, no resolution shall have an outcome. Thus, a small percent of voting share of financial creditors to disapprove a proposed resolution plan if entails it is deemed rejection.

The legislative scope of enquiry has been against the decision of approval of resolution plan by COC can be interfered as per Section 30 and 31 by the Adjudicating Authority and under Section 32 read with Section 61(3) by the Appellate Authority (NCLT). No provision by the legislature empowers or authorize to reverse the commercial decision of COC much less of the dissenting financial creditors for not supporting the proposed resolution plan.

The legislative intent demands the commercial or business decision of the financial creditors are not open to any judicial review by the adjudicating authority or the appellate authority.

Therefore, COC decision to liquidate Corporate Debtor without any steps for Resolution is a decision on commercial wisdom is non-justiciable and the impugned order is a legitimate decision as per the law laid by the K. Shashidhar case by the Hon’ble SC.


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