2017 (11) TMI 780 - Tri - Companies Law

Insolvency procedure - whether the word may employed in Section 7(5)(a) of Insolvency & Bankruptcy Code, 2016 can be stretched to invalidate the purpose and object of the Section 7 of the Code or not? - SARFAESI proceeding - Held that - Generally, the word may or the word shall cannot be used to go against the mandate of the Section - mandate is if debt and default is ascertained, if other conditions are fulfilled, then the petition has to be admitted. If that is so, the Adjudicating Authority is limited to see and to all conditions requisite for admitting the petition have been set out or not. That being so, can it be said that the petition need not be admitted for some other reason that is not envisaged either under the respective section or the code? To my knowledge, it can t be so. Thus whether SARFAESI proceeding or a provision of SARFAESI Act can be worked into Section 7 of the Code to say that admission of Section 7 petition will amount to public mischief. I fear, not. Normally the word shall and may are construed imperatively Lord Brougham in Queen v. Allooparao 1847 3MLA 488 P 492, it has been held if the words are it shall and may be so and so done, by such and such officer and body then the word may is held in all soundness of construction to confer, a power but the word shall is held to make that power, or the exercise of that power compulsory. Insolvency & Bankruptcy Code operates in the following manner 1. Notwithstanding clause under Section 238 of the Code will have effect on any other law inconsistent with the provisions of the Code, SARFAESI Act also being an Act dealing with creditor and debtor relation and operation of law in both the enactments being on the same field, Insolvency & Bankruptcy Code will prevail over SARFAESI Act. 2. Section 14 having categorically mentioned that declaration of moratorium will prohibit enforcement of security interest created by the Corporate Debtor in respect of its property including any action under SARFAESI Act, 2002, it can t be said that sale in progress will not remain under suspension during the moratorium period. As already said sale is not concluded because full payment is not made till date and confirmation has not been given as prescribed under sub Rule 6 of Rule 9 of Enforcement Rules, which are notified taking power from Section 13 of SARFAESI Act which is meant for enforcement of security interest.

Summary

Issues Involved:
1. Whether the sale allegedly confirmed is hit by the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Whether the application can be treated as a grievance under Section 65 of the IBC, 2016.

Issue-wise Detailed Analysis:

1. Whether the sale allegedly confirmed is hit by the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016:

The Tribunal analyzed the proceedings under the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002. It was noted that the sale process initiated by JM Financial Asset Reconstruction Company (JM) was not concluded because the full payment by the auction purchaser, Omni Active Health Technologies Ltd. (Omni), was not completed. According to the Tribunal, the sale could only be confirmed by the secured creditor after the full payment was made, as per Rule 9 of the Security Interest (Enforcement) Rules, 2002. Since only 25% of the sale price was paid, and the remaining balance was pending, the sale was not considered concluded.

The Tribunal further emphasized that under Section 14 of the IBC, the moratorium suspends any enforcement of security interest, including proceedings under the SARFAESI Act. Hence, the ongoing sale process was hit by the moratorium declared on 29.5.2017, and the sale could not be treated as concluded. The proceedings under SARFAESI were to remain suspended until the completion of the moratorium period.

2. Whether the application can be treated as a grievance under Section 65 of the IBC, 2016:

The Tribunal examined whether the petition filed by Indus (the financial creditor) was fraudulent or malicious under Section 65 of the IBC. It was determined that Indus, being a financial creditor, had the right to initiate insolvency proceedings under Section 7 of the IBC, regardless of the pending SARFAESI proceedings. The Tribunal found no evidence of fraud or malicious intent by Indus. The petition was filed to protect the interests of unsecured creditors and to seek a resolution plan under the supervision of an Insolvency Resolution Professional (IRP).

The Tribunal noted that the previous order dated 29.5.2017, which declared the moratorium, was valid and that Indus had not hidden any facts from the Tribunal. Therefore, the application by JM to recall the order on grounds of fraud was dismissed. The Tribunal held that the proceedings under Section 7 were not initiated with fraudulent intentions and did not warrant invoking Section 65 of the IBC.

Conclusion:

The Tribunal dismissed the applications filed by JM and Omni, holding that the sale process under SARFAESI was not concluded and was hit by the moratorium declared under Section 14 of the IBC. The petition filed by Indus was not found to be fraudulent or malicious, and the order declaring the moratorium was upheld. The applications were dismissed without costs.