Section 94 Of IBC Cannot Be Used To Hinder Recovery Process Under SARFAESI Act: NCLAT New Delhi

Background

The Corporate Debtor had defaulted a loan amount of Rs. 52.32 Cr. from the Bank of India. The appellant had provided a personal guarantee and mortgaged his residential property as security. Corporate Debtor was declared NPA in 2011, and SARFAESI proceedings were initiated by the Bank of India. A demand notice was issued under Section 13(2) of the SARFAESI Act and the Bank took the symbolic possession of the assets.

Subsequently, the Bank assigned the loan and the securities to the Edelweiss Asset Reconstruction Company Ltd. (Respondent No.-1). Respondent No. 1 filed petition under Section 7 of the IBC, seeking initiation of the CIRP of the Corporate Debtor. However, the appellant argued that it has defaulted as a personal guarantor and is entitled to the statutory remedy of Section 94 IBC.

The appellant then initiated proceedings under Section 94 of the IBC and submitted a repayment plan. The respondent No. 1 filed the intervention and argued that appellant has initiated Section 94 proceedings for the sake of getting the benefit of the moratorium in order to hinder the recovery process. The Adjudicating Authority allowed the intervention application and dismissed the Section 94 petition. Against the decision, appeal under Section 61 of the IBC has been preferred before the NCLAT, New Delhi.

Contention of the Parties

The appellant contended that the mere initiation of proceedings under the SARFAESI Act cannot lead to the conclusion that the petition under Section 94 was filed to defraud creditors. Relying on the NCLAT's judgment in the case of Getz Cables Pvt. Ltd. v. State Bank of India and Anr., the appellant argued that the right given under Section 94 of the IBC is a statutory right which cannot be denied because of the sole reason that SARFAESI proceedings were initiated previously.

Denying to the contentions of the appellant, the respondent submitted that in the last ten years the appellant has initiated multiple legal proceedings for the purpose of delaying the recovery of outstanding loan amount. The respondent argued that the Section 9 petition was filed for the purpose of invoking moratorium to hinder the recovery proceedings.

Observations of the NCLAT

The tribunal observed that the appellant filed Section 94 petition within weeks after the issuance of possession notice under the SARFAESI, this reflects the intent to abuse the moratorium provision.

While discussing the Getz Cable judgment supra, the tribunal observed that it is a settled proposition of the law that the right given under Section 94 of the IBC cannot be taken away solely because of the fact that SARFAESI proceedings have been initiated previously. However, the same judgment also laid down that the Adjudicating Authority must examine the specific facts of each case to determine its applicability.

The tribunal lastly observed, the Section 94 petition was filed with an intent to take advantage of the moratorium to hinder the recovery process, and dismissed the appeal.

Case Title: Syed Sirajis Salikin Khadri v. Edelweiss Asset Reconstruction Co. Ltd. & Anr.

Case Number: Company Appeal (AT) (Insolvency) No. 455 of 2025

For Appellant: Mr. Krishnendu Dutta, Sr. Advocate.

For Respondent: Mr. Rohit Gupta, Ms. Aakashi Lodha, Advocates for R1.

Bench: Justice Ashok Bhushan (Chairperson), Barun Mitra (Member-Technical), and Arun Baroka (Member-Technical)

Judgment Date: 25/04/2025