India: Overriding Effect Of IBC On Drt Proceedings: The NCLAT Perspective

Earlier, banks and financial institutions were burdened with the problem of Non-Performing Assets (NPA), which proved to be detrimental to the financial health of the institutions. The only recourse was to initiate proceedings in Civil Courts, which were already overwhelmed with several other civil matters. To address the pressing need for quick and efficient recovery of bad debt, Debt Recovery Tribunal (DRT) was established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 now known as the Recovery of Debts and Bankruptcy Act, 1993 ("RDDBFI Act/ RDB Act"). Later on, considering the financial reforms and extending the object of RDB Act, the Government introduced Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("SARFAESI Act").

Under SARFAESI Act, a bank or a financial institution enforces its rights by issuing a notice under Section 13(2) to the borrower, calling upon it to pay the outstanding debt within a period of sixty (60) days from the date of notice. In the event the borrowers fails to discharge its liability, a bank or a financial institution, generally takes possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale over which security interest is created by the borrower under Section 13(4)(a) of the SARFAESI Act in compliance with rules stipulated under Security Interest (Enforcement) Rules, 2002 and auctions the same for realizing the outstanding debt.

With the rise in the complications relating to the remedy of NPA and indebtedness of the companies, the government bought in a straitjacket formula under the Insolvency and Bankruptcy Code, 2016 ("IBC/Code") thereby, repealing old-fashioned laws and amending certain laws which were in the legal system prior to IBC.        

The Code aims to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. IBC was enacted inter-alia ensuring an effective legal framework for timely resolution of insolvency and bankruptcy, which would aid in development of credit markets and encourage entrepreneurship, improve ease of doing business, and facilitate more investments leading to higher economic growth and development. IBC has designated the National Company Law Tribunal ("NCLT") and Debt Recovery Tribunal ("DRT") as the Adjudicating Authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. Insolvency professionals assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the IBC. IBC provides for initiating Corporate Insolvency Resolution Process ("CIRP") by financial creditor, operational creditor and corporate applicant under Section 7, Section 9 and Section 10 of IBC respectively when a default is committed by a corporate debtor.

Now, there have been scenarios wherein financial creditors, having already instituted proceedings under SARFAESI Act and RDB Act, commenced proceeding before NCLT by filing applications under Section 7 of IBC for initiating CIRP against the corporate debtor.  Such applications have been vehemently opposed by corporate debtor on the ground that, financial creditors having already initiated proceedings under the SARFAESI Act and RDB Act for the same debt and default is barred from filing an application under Section 7 of IBC.

The Hon'ble National Company Law Appellant Tribunal ("NCLAT") in various judgments has held that pendency of actions under the SARFAESI Act or actions under RDB Act does not create obstruction for filing an application under of IBC on the ground that provisions under IBC shall have overriding effect over any provisions inconsistent therewith contained in any other law for the time being in force.

FEW NOTEWORTHY JUDGMENTS OF NCLAT ARE DISCUSSED HEREUNDER

1. WITH RESPECT TO FILING A SIMULTANEOUS APPLICATION:

In the matter of Rakesh Kumar Gupta v. Mahesh Bansal & Ors., the Hon'ble NCLAT on 20.02.2020, has held that the pendency of actions under the SARFAESI Act or actions under RDB Act does not create obstruction for filing an Application under Section 7 of IBC, especially in view of Section 238 of IBC.

Further on 26.02.2020, in the matter of Punjab National Bank v. M/s Vindhya Cereals Pvt. Ltd., the question that arose before the Hon'ble NCLAT was whether subsequent to initiation of proceedings under the SARFAESI Act, a financial creditor can be precluded from filing an application under Section 7 of the Code, as the Hon'ble NCLT held such proceedings are fraudulent or malicious against the Corporate Debtor. To which the Hon'ble NCLAT held that simply because the financial creditor had initiated a parallel proceedings against a corporate debtor under SARFAESI Act as well as under the Code, it could not be called malicious. The NCLAT further opined that Section 238 of Code provides that the provisions of the Code 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. Therefore, this non-obstante clause of the Code will prevail over any other law for the time being in force.

2. WITH RESPECT TO CONSIDERING THE LIMITATION PERIOD:

On 22.11.2019 the Hon'ble NCLAT in the case of Sesh Nath Singh & Anr. v. Baidyabati Sheoraphuli Cooperative Bank Ltd. & Anr. held that in computing the period of limitation under Section 14(2) of the Limitation Act, 1963 the time during which the respondent has been prosecuting with due diligence other civil proceedings against the corporate debtor for the same relief is to be excluded. Thus, the time exhausted in the applicant's bonafide proceeding which was within limitation period under SARFAESI Act was to be excluded when computing the limitation period for the filing of the applicant's application under Section 7 of the Code.

However, in the matter of V Hotels Limited v. Asset Reconstruction Company (India) Ltd.,  the Hon'ble NCLAT on 11.12.2019, held that a financial creditor cannot derive any benefit of the action taken under SARFAESI Act for demonstrating that the application filed under Section 7 of the Code was within limitation, since SARFAESI Act, is guided by separate provisions of limitation.

On 12.03.2020 in the case of Ishrat Ali v. Cosmos Cooperative Bank Ltd. and Ors. this issue of law was brought before a larger bench of the Hon'ble NCLAT to be appropriately adjudicated as the holding of Sesh Nath Singh (supra) was doubted. In this regard, the NCLAT analysed a catena of judgments to note that the date of default is the date for the purpose for computing the period of limitation of application under Section 7 of the Code. Thus, a judgment or decree passed by a court for recovery of money by a Civil Court or DRT cannot shift forward the date of default for the purpose of computing the period of filing an application under Section 7 of the Code. Section 14(2) of the Limitation Act, 1963 is clear that in computing the period of limitation for any application, the time during which the applicant has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or appeal or revision against the same party for the same relief is to be excluded where such proceeding is prosecuted in good faith in a court which due to defect of jurisdiction or any other similar cause is unable to entertain such a suit.

It was further noted that an action taken by the 'financial creditor' under Section 13(2) or Section 13(4) of the SARFAESI Act, cannot be termed to be a civil proceeding before a court of first instance or appeal or revision or any other forum. Thus, action taken under Section 13(2) of the SARFAESI Act, cannot be counted for the purpose of exclusion of the period of limitation under Section 14(2) of the Limitation Act, 1963. Moreover, in an application under Section 7 of the Code, relief is sought for resolution of a corporate debtor or liquidation on failure of such resolution. As it is not a money claim or suit, no benefit can be given to any person under Section 14(2) of the Limitation Act, 1963 until it is shown that the application under Section 7 was being prosecuted with due diligence in a court of first instance or appeal or revision which has no jurisdiction. The larger bench of the Hon'ble NCLAT thereby categorically held the ruling of Sesh Nath Singa(supra) to be incorrect law.

Following this, on 22.05.2020, the Hon'ble NCLAT in the case of M/s. Gradient Nirman Private Limited and Anr. v. M/s. IFCI Ltd. and Ors. held that the benefit under Section 14(2) of the Limitation Act, 1963 cannot be given to the applicant as there was no material on record to show that the subject application was being prosecuted with due diligence in a court of first instance or appeal or revision which has no jurisdiction. As previously held, proceedings under the Code cannot be construed to be that of a recovery or a money suit. Further, it was recognized that the period spent while pursuing SARFAESI proceedings cannot be excluded from the period of limitation as it is not the intent of the Court to give a new lease of life to the debt which is already time barred.

In the matter of Babasaheb Sawalaram Chaware v. Punjab National Bank & Anr., the Hon'ble NCLAT on 02.06.2020 has stated that the Corporate Debtor has time and again admitted and acknowledged its dues and are therefore not hit by limitation. Further the Hon'ble Tribunal has also stated that abatement of original suit before DRT will not affect the IBC proceedings as the dues still remain outstanding.

CONCLUSION

In the light of the above mentioned judicial precedents of Hon'ble NCLAT, it is crystal clear that, action taken under Section 13(4) of the SARFAESI Act, 2002 or pendency of suit against Corporate Debtor before a DRT or appeal pending before the DRAT cannot be a ground to reject an application in view of Section 238 of IBC which has an overriding effect over any provisions which are inconsistent in the provision of IBC.  Further, non-reliance on the DRT proceedings to extend the date of default and fit in the limitation period for filing Section 7 application under IBC also elucidates the independence and paramount status of IBC over DRT proceedings. 

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