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Sarfaesi proceedings against personal guarantors can proceed even after moratorium

Cause Title : Mr. Latif Yusuf Manikkoth vs Bank of Baroda, Writ Petition (L) No. 9116 Of 2023, Bombay  High Court

Date of Judgment/Order : 20/07/2023

Corum : G. S. Kulkarni & Rajesh S. Patil, JJ.

Citied: 

  1. M/s. Innoventive Industries Ltd. Vs. ICICI Bank1 (Para No. 11)
  2. Authorized Officer, State Bank of Travancore Vs. Mathew K.C.2 (Para Nos. 4, 11)
  3. Phoenix ARC Private Ltd. Vs. Vishwa Bharati Vidhya Mandir3 (Para Nos. 7, 8, 9 & 13.2)
  4. Surinder Kumar Verma Vs. Union of India4 (Para No. 7)
  5. State of Bank India Vs. Ramakrishnan5 (Para Nos. 5.8)
  6. Kotak Mahindra Bank Vs. Girnar Corrugators Pvt. Ltd. 6 (Para Nos. 5, 6, 7, 8, 9, 10, 11, 12)

Background

The Petitioner is personal guarantor against loan sanctioned by the Bank in favour of One Alaska Creations Pvt. Ltd. The Respondent No. 4 was the supplier of footwear to the borrower. When the borrower failed to pay their dues, the Respondent No. 4 filed an application under Section 9 of Insolvency and Bankruptcy Code which was admitted and moratorium was declared. Meanwhile as the account of the borrower had turned NPA, the Bank filed a Securitisation Application before the Chief Metropolitan Magistrate. The Respondent No.5/Chief Metropolitan Magistrate passed an order appointing Respondent No.6, the Assistant Registrar, Chief Metropolitan Magistrate as Court Commissioner to take possession of the Secured Asset.

The Borrower and the Petitioner filed series of applications against the actions taken by the Bank and finally this writ petition. The primary objection filed by the petitioner was that the borrower being an MSME the relationship between the Borrower and the Bank would be governed by the provisions of MSMED Act being the later law and the last legislation, would override the earlier law in respect of adjudicating upon the relationship between the Borrower and the Bank and that the Bank cannot be proceed before multiple forums based on the very same cause of action between the very same parties in terms of Sections 34, 38 and 41 of the Specific Relief Act, 1963.

Judgment

The High Court observed that the Petitioner had approached multiple forums including the High Court on earlier occasions asking for the same relief and has not succeed. Further, the Petitioner has not disputed Borrower having availed the Loan Amount or charge being created over the Secured Assets, but the Petitioner has challenged the Legal Steps taken by the Respondent Bank under the provision of the SARFAESI.

The Petitioner since the initiation of the proceedings under SARFAESI by the respondent No.3, has neither objected to the Demand Notice dated 25.04.2019 nor has he and or Borrrower approached the Respondent Bank, with a proposal to restructure or for the settlement of the due to the Borrower.

By Order dated 11.09.2019, the NCLT has declared a moratorium against the action being taken against the Borrower, including the SARFAESI proceedings. However, the Secured Asset is owned by the Petitioner/Guarantor. 

The High Court held that the Respondent No.3 /Bank can proceed against the Mortgaged Property of Personal Guarantor as per S.13(11) of the SARFAESI. The issue is already covered by the judgment of the Supreme Court in State Bank of India v. V. Ramakrishan & Anr. (2018) 17 SCC 394, which holds that S. 14 and S.31 of the IBC does not bar initiation and continuation of the SARFAESI proceedings against the Guarantor. As such, the bank has not violated the moratorium as ordered by the NCLT, in initiating SARFAESI Proceedings against Petitioner / Guarantor.

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