2025 (4) TMI 1545 - AT - IBC

Initiation of SARFAESI proceedings was sufficient basis to hold that the Section 94 application has been resorted to by the Appellant for putting a spanner in the recovery proceedings initiated by the Respondent No.1 or not - violation of principles of natural justice - HELD THAT - It is an admitted fact that the Corporate Debtor had failed to discharge their repayment obligations and their account was classified as a NPA way back in 30.06.2011. The Appellant as personal guarantor had also duly acknowledged the outstanding debt as early as on 13.08.2012 and had made part payment towards the loan in 2018. The debt liability is also acknowledged in the financial statements of the Corporate Debtor for the FY-2017-18. It is also an undisputed fact that a demand notice had been issued under the SARFAESI Act by the original Lender-Bank of India on 06.08.2012. The applicant s conduct aims to wilfully misuse and abuse easy access to the justice administration system. Complying with the court s order and undertaking is fundamental to litigation to achieve fairness between the parties. The borrowers have failed the test of judicial scrutiny for repetitive breaches of the court s order or multiple non-compliance with the undertakings. The DRT also directed the Appellant to comply with the Court s order and undertaking given by them from time to time. Section 94 application was filed by the Appellant within weeks after the issue of a possession notice upon them on 11.11.2022 by the Respondent No.1. When after the 4th SA was disposed of the Appellant realised that it had failed to secure any further relief from the DRT and that dispossession from the subject residential premises was imminent that the present Section 94 petition was filed on 03.12.2022 and a communication sent on 06.12.2022 to the Respondent No.1 to hold its hand from taking over possession of the residential premises on account of moratorium - Filing of the Section 94 application at this juncture leaves no room for doubt in our mind that these proceedings were not initiated with the intent of genuine insolvency resolution but as a tool to obstruct lawful recovery of enforcement with the manifest intent of the Appellant being to seek refuge under the moratorium provision under Section 96 of the IBC in an effort to prevent enforcement of possession of the secured residential premises. This is a case clearly where the Appellant on one excuse the other has all along tried to delay the handing over of the security to the Respondent No.1. The steps under SARFAESI Act have been pending since 2012. The Appellant has consistently misused the benevolent indulgence afforded by various adjudicatory forums to the Appellant in the past to resolve the matter. Each time the Appellant got relief from the court it slept over its commitment to either handover the subject residential premises to the Respondent No.1 or to make payment by selling the said property to clear the outstanding debt - The present Section 94 application is clearly yet another salvo on the part of the Appellant to stall the recovery by taking advantage of moratorium. This clearly shows that the Appellant has been ceaselessly orchestrating litigative proceedings and embroiled the Respondent No.1 in these proceedings clearly to subvert the recovery proceedings initiated against them and not for the purpose of the insolvency resolution. In the given fact situation it is inclined to agree with the findings returned by the Adjudicating Authority that the Appellant had approached the Adjudicating Authority by filing the Section 94 application with an intent other than insolvency resolution. The questioning of the jurisdiction of the Adjudicating Authority by the Appellant to examine the maintainability and bonafide of an application under Section 94 at the stage of Section 100 lacks substance. Since the report under Section 99 of the IBC had already been filed by the RP nothing prevented the Adjudicating Authority to hear the matter and pass orders under Section 100 of the IBC while also entertaining the Intervention Application of Respondent No.1 - the Adjudicating Authority by its order dated 27.03.2024 had allowed four weeks time to the Appellant to file their response. The matter was fixed for hearing on four dates viz. 08.05.2024 25.06.2024 03.09.2024 and 25.10.2024. However no reply was filed by the Appellant. Conclusion - i) The statutory right under Section 94 of the IBC to file a PIRP petition cannot be denied solely on the basis of prior SARFAESI proceedings but the bona fides of the petition must be scrutinized. ii) Repeated and persistent abuse of judicial process to delay secured creditor s recovery rights can justify dismissal of Section 94 petitions as an abuse of process. iii) The Adjudicating Authority is empowered to dismiss Section 94 petitions at the pre-admission stage upon finding fraudulent intent or abuse of process. There are no merit in the Appeal. The Appeal stands dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Adjudicating Authority was justified in allowing the Intervention Application filed by the Financial Creditor to intervene in the Section 94 petition filed by the personal guarantor under the Insolvency and Bankruptcy Code, 2016 (IBC) and subsequently dismissing the petition.

- Whether the Section 94 petition filed by the personal guarantor was maintainable and bona fide, or was an abuse of process intended to stall the recovery proceedings initiated under the SARFAESI Act.

- Whether the initiation of SARFAESI proceedings prior to filing the Section 94 petition disentitles the personal guarantor from exercising the statutory remedy under Section 94 of the IBC.

- Whether the Adjudicating Authority violated principles of natural justice by entertaining the Intervention Application and dismissing the Section 94 petition without allowing the personal guarantor an opportunity to respond.

- Whether the Adjudicating Authority was empowered to dismiss the Section 94 petition at the pre-admission stage, particularly in absence of adverse findings in the Resolution Professional's report under Section 99 of the IBC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Allowing Intervention and Dismissing Section 94 Petition

Relevant Legal Framework and Precedents: Section 94 of the IBC provides a statutory remedy for personal guarantors of corporate debtors to initiate a Personal Insolvency Resolution Process (PIRP) upon default. Section 100 empowers the Adjudicating Authority to admit or reject such applications. The SARFAESI Act provides a mechanism for secured creditors to enforce security interests. The Tribunal in a precedent judgment (Getz Cables Pvt. Ltd.) held that initiation of SARFAESI proceedings prior to Section 94 application does not bar filing of such application.

Court's Interpretation and Reasoning: The Court examined the chronology of events, noting that the Corporate Debtor's loan default occurred in 2011 and SARFAESI proceedings were initiated as early as 2012. The personal guarantor had repeatedly initiated multiple legal proceedings over a decade to delay or frustrate recovery efforts by the secured creditor. The Section 94 petition was filed shortly after a possession notice was issued in November 2022, indicating an intent to stall recovery by invoking moratorium under the IBC.

Key Evidence and Findings: The Adjudicating Authority and the Tribunal noted the extensive history of litigation initiated by the personal guarantor, including several Securitisation Applications before the Debt Recovery Tribunal (DRT) that were dismissed with adverse observations about the guarantor's conduct. The guarantor had failed to comply with court orders and undertakings to hand over possession or pay dues. The timing of the Section 94 petition-filed within weeks of the possession notice-was critical evidence of an ulterior motive.

Application of Law to Facts: While the right to file under Section 94 is statutory and cannot be denied merely because SARFAESI proceedings were initiated earlier, the Court emphasized that the Adjudicating Authority must consider the bona fides of the application. The repeated abuse of judicial process to delay recovery and the timing of the petition led to the conclusion that the Section 94 petition was filed with an intent other than genuine insolvency resolution.

Treatment of Competing Arguments: The personal guarantor argued the petition was a legitimate exercise of statutory rights and that dismissal was premature without adverse findings from the Resolution Professional. The secured creditor contended the petition was a misuse of process aimed at frustrating recovery. The Court rejected the guarantor's contention, holding that the Adjudicating Authority was justified in dismissing the petition based on the established pattern of conduct and timing.

Conclusions: The Adjudicating Authority rightly allowed intervention and dismissed the Section 94 petition as an abuse of process intended to stall recovery proceedings.

Issue 2: Effect of Prior SARFAESI Proceedings on Maintainability of Section 94 Petition

Relevant Legal Framework and Precedents: The IBC does not expressly bar filing of Section 94 applications due to prior SARFAESI proceedings. The Getz Cables judgment clarified that initiation of SARFAESI proceedings alone cannot disqualify a personal guarantor from filing under Section 94.

Court's Interpretation and Reasoning: The Tribunal distinguished the present facts from Getz Cables on the ground that in the latter, the Section 94 petition was filed immediately after SARFAESI proceedings commenced, indicating bona fide insolvency resolution. In contrast, here SARFAESI proceedings had been ongoing for over a decade, with multiple litigations by the guarantor to delay possession. The long gap and pattern of evasive conduct rendered the Section 94 petition suspect.

Key Evidence and Findings: The admitted default, acknowledgment of debt, and repeated litigation to stall recovery were material facts. The SARFAESI proceedings themselves confirmed default and security enforcement steps.

Application of Law to Facts: The Court held that while SARFAESI proceedings do not per se bar Section 94 petitions, the facts showed the petition was filed not for insolvency resolution but as a tactical move to delay enforcement. Thus, the prior SARFAESI proceedings, combined with the conduct of the guarantor, justified dismissal.

Treatment of Competing Arguments: The guarantor relied heavily on the legal proposition that SARFAESI proceedings cannot deny the right to file Section 94 petition. The Court accepted this principle but found it inapplicable on facts due to abuse of process.

Conclusions: Prior SARFAESI proceedings do not automatically bar Section 94 petitions, but the facts here justified dismissal due to misuse of the remedy.

Issue 3: Alleged Violation of Natural Justice in Entertaining Intervention Application

Relevant Legal Framework: Principles of natural justice require an opportunity to be heard before adverse orders are passed. Section 100(4) of the IBC requires reasoned orders for dismissal of Section 94 petitions.

Court's Interpretation and Reasoning: The Tribunal noted that the Adjudicating Authority had granted four weeks' time to the personal guarantor to file a reply to the Intervention Application. The matter was listed on multiple occasions, but no response was filed by the guarantor. Therefore, the contention of denial of opportunity was unsupported by the record.

Key Evidence and Findings: The procedural history showed ample opportunity granted, but the guarantor failed to avail it.

Application of Law to Facts: Since the guarantor did not file any response despite opportunity, the Adjudicating Authority's action did not violate natural justice.

Treatment of Competing Arguments: The guarantor claimed procedural irregularity and premature dismissal; the secured creditor denied these allegations. The Court sided with the secured creditor on the procedural record.

Conclusions: No violation of natural justice occurred as the guarantor failed to respond within the time granted.

Issue 4: Power of Adjudicating Authority to Dismiss Section 94 Petition at Pre-Admission Stage

Relevant Legal Framework: Section 100 of the IBC empowers the Adjudicating Authority to admit or reject Section 94 applications. Dismissal is permissible if the application is found to be filed with fraudulent intent or abuse of process.

Court's Interpretation and Reasoning: The Tribunal observed that the Adjudicating Authority was entitled to examine the maintainability and bonafides of the Section 94 petition at the pre-admission stage, especially in light of the Resolution Professional's report under Section 99. The absence of adverse findings in the report did not preclude the Authority from dismissing the petition if the application was found to be an abuse of process.

Key Evidence and Findings: The extensive history of delay tactics and the timing of the petition were sufficient grounds for dismissal.

Application of Law to Facts: The Adjudicating Authority's dismissal was consistent with statutory provisions and judicial precedents that safeguard against misuse of insolvency provisions.

Treatment of Competing Arguments: The guarantor argued dismissal was premature; the Court disagreed based on the totality of facts and procedural history.

Conclusions: The Adjudicating Authority acted within its jurisdiction in dismissing the petition at the pre-admission stage.

Issue 5: Right to Protection from Coercive Recovery Measures Post Dismissal

Though not a core issue in the appeal, the guarantor sought protection from coercive recovery measures citing age and health conditions. The Tribunal did not grant such protection, implicitly affirming the secured creditor's right to proceed with possession and recovery after dismissal of the Section 94 petition.

3. SIGNIFICANT HOLDINGS

"The present Section 94 application is clearly yet another salvo on the part of the Appellant to stall the recovery by taking advantage of moratorium. This clearly shows that the Appellant has been ceaselessly orchestrating litigative proceedings and embroiled the Respondent No.1 in these proceedings clearly to subvert the recovery proceedings initiated against them and not for the purpose of the insolvency resolution."

"While the right to file under Section 94 is statutory and cannot be denied merely because SARFAESI proceedings were initiated earlier, the Adjudicating Authority must consider the bona fides of the application."

"The Adjudicating Authority by its order dated 27.03.2024 had allowed four weeks' time to the Appellant to file their response. The matter was fixed for hearing on four dates... However, no reply was filed by the Appellant. The contention of the Appellant in this regard is unsupported by record and therefore lacks credulity."

Core principles established include:

• The statutory right under Section 94 of the IBC to file a PIRP petition cannot be denied solely on the basis of prior SARFAESI proceedings, but the bona fides of the petition must be scrutinized.
• Repeated and persistent abuse of judicial process to delay secured creditor's recovery rights can justify dismissal of Section 94 petitions as an abuse of process.
• The Adjudicating Authority is empowered to dismiss Section 94 petitions at the pre-admission stage upon finding fraudulent intent or abuse of process.
• Principles of natural justice require opportunity to respond, but failure to avail such opportunity disentitles the petitioner from raising such a plea.

Final determinations on each issue affirm the dismissal of the Section 94 petition and uphold the intervention by the secured creditor, thereby allowing recovery proceedings to continue unhindered.