Indian Overseas Bank vs. RCM Infrastructure Ltd.: Supreme Court Rules on SARFAESI and Insolvency Proceedings

The case of Indian Overseas Bank vs. RCM Infrastructure Ltd. revolved around the interplay between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Insolvency and Bankruptcy Code, 2016 (IBC). The Supreme Court had to determine whether the actions of the appellant bank, which proceeded with an asset sale under SARFAESI despite the initiation of the Corporate Insolvency Resolution Process (CIRP), were legally valid.

Background of the Case

The appellant, Indian Overseas Bank, had extended credit facilities to RCM Infrastructure Ltd. (the Corporate Debtor). However, the Corporate Debtor defaulted on its repayment obligations, leading the bank to classify the loan account as a Non-Performing Asset (NPA) on June 13, 2016. The bank then initiated recovery proceedings under the SARFAESI Act and took symbolic possession of the secured assets.

The bank conducted an E-auction of the secured assets, and a successful bid of Rs. 32.92 crore was accepted on December 13, 2018. However, before the final payment was received from the auction purchasers, the Corporate Debtor initiated voluntary insolvency proceedings under Section 10 of the IBC. The National Company Law Tribunal (NCLT) admitted the insolvency application on January 3, 2019, and imposed a moratorium under Section 14 of the IBC.

Despite the moratorium, the bank accepted the balance payment of Rs. 24.69 crore from the auction purchasers on March 8, 2019. The former Managing Director of RCM Infrastructure Ltd. challenged the sale before the NCLT, arguing that it violated the moratorium imposed under the IBC. The NCLT set aside the sale, and this decision was upheld by the National Company Law Appellate Tribunal (NCLAT) on March 26, 2021. The bank then appealed to the Supreme Court.

Arguments Presented

Appellant’s Arguments (Indian Overseas Bank)

The voluntary insolvency proceedings initiated by the Corporate Debtor were a malicious attempt to stall the SARFAESI process and should be considered invalid under Section 65 of the IBC.
The sale of secured assets was finalized on December 13, 2018, before the commencement of CIRP on January 3, 2019. Thus, the moratorium should not affect the transaction.
The successful auction purchasers had already paid 25% of the bid amount before the moratorium, and they were legally bound to pay the remaining amount.
Since liquidation proceedings had been initiated, secured creditors were entitled to realize their security interest under Section 52 of the IBC.
Section 14(1)(c) of the IBC, which imposes a moratorium on security enforcement, does not undo actions already completed under SARFAESI.

Respondent’s Arguments (RCM Infrastructure Ltd.)

The bank’s actions violated the moratorium imposed under Section 14(1)(c) of the IBC, which prohibits foreclosure, recovery, or enforcement of security interest during CIRP.
The sale of assets was not completed until March 8, 2019, when the full amount was received, which was after the initiation of CIRP.
The auction purchasers were never made a party to the NCLT proceedings, demonstrating the bank’s mala fide intentions.
Under the IBC, once CIRP is initiated, all creditors must submit their claims to the Resolution Professional, and the proceeds of the asset sale should be distributed according to the IBC framework.
The bank itself had submitted a claim for the full amount during CIRP, which contradicts its claim that the SARFAESI sale was valid.

Supreme Court’s Observations

The Supreme Court carefully examined the interaction between SARFAESI and the IBC. The Court made the following key observations:

Moratorium under Section 14 of the IBC prevails over SARFAESI: The Court emphasized that once CIRP is initiated, all recovery actions, including those under SARFAESI, must cease.
The sale was not complete before CIRP: The sale could only be considered completed when the full payment was received. Since the balance payment was received after CIRP initiation, the sale was invalid.
The IBC has overriding effect: Section 238 of the IBC states that the provisions of the Code override any other law, including SARFAESI.
Creditor claims should be handled within the IBC framework: Once CIRP starts, secured creditors must submit their claims to the Resolution Professional instead of enforcing security independently.
The bank’s actions were improper: Accepting payment after CIRP initiation directly violated the IBC’s moratorium provisions.

Key Excerpts from the Judgment

The Supreme Court stated:

“The provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

The Court further held:

“Once CIRP is initiated and a moratorium is in place, any action to foreclose, recover, or enforce security interest under SARFAESI is prohibited.”

Final Verdict

The Supreme Court upheld the decisions of the NCLT and NCLAT and dismissed the appeal by Indian Overseas Bank. The Court ruled:

The sale of secured assets during CIRP was invalid.
The bank should have submitted its claim through the IBC process rather than proceeding with an asset sale.
The auction purchasers had no valid title to the property.
The bank’s attempt to bypass the IBC framework was impermissible.

Outcome: The Supreme Court’s ruling reinforces the primacy of the IBC over SARFAESI, ensuring that creditors follow the insolvency framework once CIRP is initiated.

Petitioner Name: Indian Overseas Bank.
Respondent Name: M/S RCM Infrastructure Ltd. & Another.
Judgment By: Justice L. Nageswara Rao, Justice B.R. Gavai.
Place Of Incident: New Delhi.
Judgment Date: 18-05-2022.

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