[NCLAT] Affirms IBC's Overriding Effect Over SARFAESI and RDDBFI Acts in Insolvency Proceedings

Introduction

In the case of State Bank of India v. Abhijeet Ferrotech Ltd[i], the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) held that s. 7 proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) have an overriding effect on proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest. 2002 (‘SARFAESI Act’) and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDBFI Act’)  Act and the interplay between such legislations. The NCLAT examined the purpose and intent behind these legislations and concluded that the purpose of s.7 proceedings under the IBC are substantially different and operate independently.

Brief Facts

• The State Bank of India (‘Appellant’) had sanctioned a loan amounting to Rs. 99 crores to Abhijeet Ferrotech Ltd, the corporate debtor (‘CD’). However, the CD was declared a non-performing asset (‘NPA’). Consequently, the Appellant entered into a master restructuring agreement with the CD.

• Further, as the CD defaulted on loan repayment for more than 90 days, the Appellant demanded full repayment of the loan by providing 7 days to settle the account. The CD failed to pay, and the Appellant then initiated proceedings under s. 13(2) of the SARFAESI Act.

• On 11.09.2018, the Appellant filed an application under s. 19 of the RDDBFI Act against the CD. On 17.06.2022, the Debts Recovery Tribunal -II, Kolkata (‘DRT’) dismissed the Appellant’s application filed under s. 19 of RDDBFI Act. Aggrieved, the Appellant challenged the same before the Debts Recovery Appellate Tribunal (‘DRAT’). The DRAT allowed the Appellant’s appeal and set aside the DRT’s order. The CD challenged the DRAT’s order before the High Court of Calcutta, wherein an interim stay on DRAT’s order was granted.

• On 07.07.2021, the CD proposed a one-time settlement of the outstanding amount, which the Appellant rejected. On 01.08.2021, the Appellant initiated the corporate insolvency resolution process (‘CIRP’) under s. 7 of the IBC against the CD for defaulting on the loan.

• The National Company Law Tribunal (‘NCLT’) ruled in favour of the CD, observing that the issue under s. 7 of the IBC was directly and substantially the same as the one adjudicated in the DRT proceedings. The NCLT, relying on s. 10 of the Civil Procedure Code, 1908 (‘CPC’), rejected the s. 7 of the IBC application stating that the same issue should not be reagitated. The NCLT also held that once the issue has been decided against the Appellant in the DRT proceedings, the same cannot be reagitated in s. 7 of the IBC proceedings on the ground of judicial discipline and to avoid chaos and confusion.

• Aggrieved, the Appellant challenged the NCLT’s order before NCLAT.

Held

• The NCLAT observed that as per s. 238 of the IBC, the proceedings under IBC have an overriding effect over other proceedings. Therefore, even if s.10 of the CPC applies, the proceedings under IBC are maintainable. The NCLAT relied on the landmark rulings in the case of State Bank of India v. N.S. Engineering Projects Pvt. Ltd. and Navinchandra Steels Pvt. Ltd.[ii] v. SREI Equipment Finance Ltd.[iii] while reaching this conclusion.

• Further, NCLAT observed that the proceedings under s. 19 of the RDDBFI are for recovering the bank's dues, whereas s. 7 of the IBC provides for insolvency resolution to the CD. Thus, both proceedings are entirely different. Therefore, NCLAT observed that the proceedings under s. 19 of the RDDBFI Act cannot be a bar to initiating s. 7 proceedings.

• The NCLAT observed that the NCLT erred by relying upon s. 10 of the CPC, in this case, as s. 7 of the IBC application ought to proceed despite the pendency of proceedings under s. 19 of the RDDBFI Act.

• NCLAT accordingly restored s. 7 of the IBC application before the NCLT and directed them to dispose of the same in accordance with the law.

Conclusion

The NCLAT, in this decision, reaffirmed that IBC has overriding power over other laws under s. 238 of the IBC. Referring to several judgments of the Hon’ble Supreme Court and High Courts, the NCLAT observed that a petition under s. 7 is an independent proceeding, unaffected by proceedings pending in other courts under the SARFAESI Act and RDDBFI Act, which may be of a similar nature and adjudicating similar issues. The NCLAT found merit in the Appellant’s arguments that the aspect of debt and default, which are crucial for s. 7 of the IBC applications were not examined in detail by the NCLT, and the application was rejected on the basis of DRT proceedings. The NCLAT gave detailed reasons regarding the interplay between the IBC and proceedings under the SARFAESI Act and RDDBFI Act and, importantly, held that proceedings under the IBC have an overriding effect over such other proceedings.

Please find below the write-up on where the IBC overrides other laws:

1. Supremacy of IBC over Customs Act: Supreme Court’s Protective Shield for Corporate Debtors by Sanyam Aggarwal

2. NCLT Proceedings Prevail Over Enforcement Directorate Proceedings by Sanyam Aggarwal

3. Bombay High Court Clarifies the Interplay between IBC and PMLA in Asset Release Post CIRP by Srishty Jaura & Preethi Suresh

4. IBC overrides Electricity Act: Supreme Court Reinforces IBC’s Waterfall Mechanism by Sanyam Aggarwal

5. NCLAT Rules: Pendency of DRT Proceedings Does Not Hinder Action Under S. 7 of the IBC

6. IBC Prevails: ITAT Upholds IBC Over Income Tax Act in Liquidation Cases by Sanyam Aggarwal

End Notes

[i] (2024) ibclaw.in 428 NCLAT.

[ii] (2022) ibclaw.in 631 NCLT.

[iii] (2021) 4 SCC 435.

Authored by Adhijeet Neogy of Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.