Author: Anisha Parveen, Jamia Hamdard, New Delhi
To the Point
This case clarifies that indeed when bankruptcy proceedings are pending against the top borrower under the Insolvency and Bankruptcy Code( IBC), the bank can singly initiate recovery proceedings under the SARFAESI Act against the sponsors. The court emphasized that sponsors cannot avoid liability simply because bankruptcy is underway against the borrower.
Use of Legal Jargon
SARFAESI Act, 2002 Enables secured creditors to apply their security interests without court intervention. Commercial Bankruptcy Resolution Process( CIRP) Proceedings to resolve bankruptcy of a company. patron A person who promises to repay the loan if the borrower defaults. Section 60( 2) of IBC Jurisdiction of NCLT in bankruptcy cases related to commercial debtors and their sponsors. Section 238 of IBC Gives the IBC booting effect over clashing laws. Debt Recovery Tribunal( DRT) Specialized bench for loan recovery controversies. Writ solicitation under Composition 226 indigenous remedy for violation of rights. Emblematic Possession Legal control of property without physical possession.
The Proof
Section 13( 2) & Section 13( 4) of SARFAESI Act, 2002 Allow banks to issue recovery notices and take possession of secured means. Section 60( 2) of IBC, 2016 Requires bankruptcy operations relating to sponsors to be filed before NCLT if the top borrower’s CIRP is ongoing. Section 238 of IBC, 2016 Establishes the overriding authority of IBC in case of clashing laws. Supreme Court Interpretation SARFAESI proceedings can continue against sponsors singly of IBC proceedings against the borrower. Section 17 of SARFAESI Act Provides an appeal medium via Debt Recovery Tribunal( DRT).
Abstract
This case revolves around whether the bank can continue SARFAESI proceedings against sponsors when bankruptcy proceedings against the top borrower are active. The High Court held that the arrears of sponsors are independent and resemblant to the commercial debtor’s bankruptcy proceedings. The court also emphasized that filing writ desires in similar cases is not justifiable due to the vacuity of an indispensable remedy under the SARFAESI Act.
Case Laws
State Bank of India v. V. Ramakrishnan( 2018) 17 SCC 394 Held that doldrums under Section 14 of the IBC does not cover sponsors.
Lalit Kumar Jain v. Union of India declared that blessing of a resolution plan does not discharge the patron’s liability.
Phoenix ARC Pvt. Ltd. V. Vishwa Bharti Vidya Mandir( 2022) 5 SCC 345 Writ desires against SARFAESI proceedings are not justifiable when indispensable remedies are available under Section 17.
United Bank of India v. Satyawati Tandon( 2010) 8 SCC 110 Emphasized that High Courts should not intermediate in SARFAESI proceedings when indispensable statutory remedies live.
Surendra Kanwar Shekhawat vs. Authorized Officer, Punjab National Bank( 22 December 2022)
Facts of the Case
Loan Taken:- A company named M/ s Super Shiv Shakti Chemicals Pvt. Ltd. Took a loan from Punjab National Bank( PNB).
Sponsors:- The pleaders( Surendra Kanwar Shekhawat and Uchhab Kanwar) were sponsors for this loan. They pledged their houses to secure the loan.
Loan dereliction:- The company failed to repay the loan, and the bank declared the loan as Non-Performing Asset( NPA) on 30 March 2017.
Recovery Process Started:- The bank issued notices under Section 13( 2) and 13( 4) of the SARFAESI Act to the sponsors and indeed took emblematic possession of their pledged parcels.
Transaction Attempt:- The bank wanted to auction the sponsors’ parcels but the sponsors challenged this in court several times. Each time, the court allowed the transaction to do but stayed the final trade until farther orders.
Bankruptcy Proceedings latterly, the bank filed bankruptcy proceedings against the company( the top borrower) before the National Company Law Tribunal( NCLT). Fresh Notices While the bankruptcy proceedings were still ongoing, the bank again issued transaction notices in 2022 to the sponsors. The sponsors filed fresh writ desires challenging these notices.
Issues Before the Court
1. Main Issue Can the bank do against the sponsors under the SARFAESI Act when bankruptcy proceedings against the top borrower( the company) are formerly pending under the Insolvency and Bankruptcy Code( IBC)?
2. Secondary Issue Whether the writ solicitation is justifiable or the sponsors should have first gone to the Debt Recovery Tribunal( DRT) as per the SARFAESI Act.
Court’s Judgment
Independent Liability of sponsors:- The court said that sponsors have an independent legal obligation. Just because bankruptcy proceedings are going on against the company does not mean that action cannot be taken against the sponsors under SARFAESI.
SARFAESI vs IBC:- Both SARFAESI and IBC are valid recovery tools. The IBC does not stop the bank from using SARFAESI proceedings against sponsors.
Abuse of Court Process:- The court noted that the sponsors had constantly filed writ desires to delay the recovery process and latterly withdrew them when the transaction was about to do.
Alternate Remedy Available:- The court emphasized that under the SARFAESI Act, the sponsors should have approached the Debt Recovery Tribunal( DRT) rather of directly filing writ desires in the High Court.
Reference to Supreme Court Judgments:- The court reckoned on several Supreme Court cases( similar as V. Ramakrishnan, Lalit Kumar Jain, and Phoenix ARC Pvt. Ltd.) which clarified that SARFAESI proceedings can continue against sponsors indeed when IBC proceedings are pending against the borrower.
Decision:- The High Court dismissed the writ desires and assessed a cost of ₹ 10,000 on each supplicant for misusing the court process.
Conclusion
The High Court reaffirmed that recovery proceedings under the SARFAESI Act and bankruptcy proceedings under the IBC are independent mechanisms. sponsors cannot escape their contractual liability simply because bankruptcy proceedings are pending against the top borrower. The court dismissed the writ desires filed by the sponsors as not justifiable and assessed costs for misusing judicial process.
FAQs
Q1. Can a bank proceed against a guarantor under the SARFAESI Act if insolvency proceedings against the principal borrower are ongoing?
Ans: Yes. The bank can independently initiate recovery proceedings against the guarantor under the SARFAESI Act even if insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) are pending against the principal borrower.
The liability of the guarantor is separate and independent from that of the principal borrower.
Q2. Does the Insolvency and Bankruptcy Code (IBC) stop the bank from using SARFAESI proceedings against guarantors?
Ans: No. The court clarified that there is no conflict between the IBC and the SARFAESI Act. Both are separate remedies available to the creditor.
Section 238 of IBC gives the Code overriding power only in case of direct conflict, but in this situation, both recovery options can run simultaneously.
Q3. Is it mandatory to approach the Debt Recovery Tribunal (DRT) before filing a writ petition in the High Court?
Ans: Yes. The SARFAESI Act provides a statutory remedy under Section 17 through the DRT.
The Supreme Court has held that a writ petition under Article 226 of the Constitution should not be entertained if an alternative and effective remedy (like DRT) is available.
Q4. Does the approval of a resolution plan in insolvency automatically release the guarantor from liability?
Ans: No. The Supreme Court in Lalit Kumar Jain v. Union of India (2021) held that approval of a resolution plan does not discharge a guarantor’s liability.
The guarantor remains legally responsible for the debt as per the independent contract of guarantee.
Q5. What is the meaning of “symbolic possession” under the SARFAESI Act?
Ans: “Symbolic possession” means the bank has legally taken control of the property without physically occupying it.
It gives the bank the right to proceed with the auction of the property to recover the loan.
Q6. Why were the writ petitions dismissed in this case?
Ans: The High Court dismissed the writ petitions because:
The petitioners were misusing the process by repeatedly filing writs to delay recovery. They had an alternative remedy through DRT.The bank’s action under SARFAESI was legally correct.
Q7. What is the SARFAESI Act, 2002 and why is it important in this case?
Ans: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 allows banks to recover loans without court intervention by seizing and selling secured assets.
In this case, the bank used the SARFAESI Act to recover the unpaid loan by taking possession of the guarantors’ mortgaged properties.
Q8. What is the role of a guarantor in loan agreements?
Ans: A guarantor promises to repay the loan if the principal borrower fails.
In this case, the guarantors (the petitioners) had mortgaged their own properties as security for the loan taken by the company.
Q9. What is Section 60(2) of the Insolvency and Bankruptcy Code (IBC)?
Ans: Section 60(2) of the IBC says that if insolvency proceedings of a company are pending before the NCLT, then the insolvency proceedings against its guarantors should also be filed in the same NCLT.
However, this does not stop banks from taking recovery action under other laws like SARFAESI.
Q10. What does ‘Overriding Effect’ under Section 238 of the IBC mean?
Ans: Section 238 of the IBC says that if there is a conflict between IBC and any other law, IBC will prevail.
But the court clarified that SARFAESI and IBC can run together because there is no actual conflict when both laws are used for recovery through different channels.
Q11. What is the Debt Recovery Tribunal (DRT) and why was it relevant in this case?
Ans: The DRT is a special tribunal set up to hear cases related to loan recovery.
Under Section 17 of the SARFAESI Act, if a borrower or guarantor wants to challenge the bank’s action, they must approach the DRT first before going to the High Court.
