Case Note & Summary
The appellant, Punjab National Bank, stood as a secured creditor by virtue of a guarantee executed by the second respondent, Soumit Ranjan Jena, for a loan availed by M/s. R.B.S. Commtrade Pvt. Ltd. The guarantor deposited title deeds of immovable property with the bank. Upon default by the borrower, the bank declared the account as a non-performing asset and invoked the personal guarantee. The guarantor was subsequently adjudicated insolvent in Insolvency Petition No. 2 of 2016 under the Presidency-Towns Insolvency Act, 1909. The Official Assignee took over the insolvent's estate and filed reports. The appellant bank then issued a demand notice under the SARFAESI Act, 2002 and took symbolic possession of the secured asset, expressing its intention to stand outside the insolvency proceedings and enforce its security under the special Act. It filed Notice of Motion No. 37 of 2018 seeking a direction to the Official Assignee to hand over physical possession of the mortgaged flats and keys to enable sale. The learned Single Judge dismissed the motion, holding that equitable principles did not permit the bank to recover its debt in full by selling the mortgaged properties to the detriment of other unsecured creditors, and directed the bank to deposit the title deeds with the Official Assignee. The bank appealed. The Division Bench examined the scheme of the Presidency-Towns Insolvency Act, 1909, particularly Section 48 and the Second Schedule Rules 9 to 11, which provide secured creditors with the choice to realize their security and prove for the balance, surrender the security and prove for the whole debt, or retain the security and assess its value for dividend distribution. The court noted that the appellant had clearly opted to realize its security outside the insolvency process. Relying on the Supreme Court’s decision in Pegasus Assets Reconstruction Pvt. Ltd. and the Madras High Court’s decision in Indian Bank, the Bench held that the SARFAESI Act, being a special and later enactment, overrides the general provisions of the 1909 Act, and insolvency proceedings are pari materia with liquidation proceedings. Consequently, no fetters could be placed on a secured creditor’s right to enforce its security, and the equitable principle invoked by the Single Judge was not sustainable. Addressing apprehensions that the bank might delay action, the appellant undertook by affidavit a definite timeline for initiating and completing the sale process and agreed to keep the Official Assignee informed. The court accepted this undertaking and directed the appellant to withdraw its proof of claim before the Official Assignee, with liberty to re-submit a claim in the event of a shortfall. The appeal was allowed, the impugned order was set aside, and the bank was permitted to proceed under the SARFAESI Act as per its proposed course of action.
Headnote
A) Insolvency Law - Rights of Secured Creditor - Section 48 and Second Schedule of Presidency-Towns Insolvency Act, 1909 - A secured creditor has the option to either realize his security and prove for balance, surrender security and prove for whole debt, or retain security and assess its value for dividend - The appellant chose to stand outside insolvency proceedings by invoking SARFAESI Act, which is permissible under Rule 9; Held that the learned Single Judge erred in imposing a requirement to deposit title deeds and invoking an equitable principle not found in the statute (Paras 8-12). B) Banking and Finance - Enforcement of Security Interest - Sections 13(4), 13(2) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) - SARFAESI Act is a special and later Act that provides a secured creditor with an independent remedy to enforce security without interference from insolvency/liquidation proceedings - The appellant had issued demand notice and taken symbolic possession under Section 13(4); its intention to opt out was clear; Held that the right under SARFAESI Act overrides the general provisions of the 1909 Act, and no fetters can be placed by directing deposit of title deeds with the Official Assignee (Paras 10-12). C) Interpretation of Statutes - Relationship between Insolvency Act and SARFAESI Act - Principles of pari materia and implied repeal - Insolvency proceedings under the 1909 Act and liquidation under Companies Act are pari materia; the Supreme Court in Pegasus Assets Reconstruction Pvt. Ltd. held that SARFAESI Act, being a special and later enactment, allows a secured creditor to stand outside winding up; Held that the same principle applies to insolvency, and the impugned order placing equitable fetters is unsustainable (Paras 11-12). D) Practice and Procedure - Directions to Secured Creditor - Affidavit undertakings - To address apprehensions about delays, the appellant filed an affidavit undertaking a timeline for sale process and to inform Official Assignee; the Court accepted these statements and allowed the appeal with directions to withdraw claim lodged before Official Assignee and re-submit in case of shortfall; Held that the appellant may enforce its security under SARFAESI Act as per the indicated course of action (Paras 13-15).
Issue of Consideration
Whether a secured creditor under the SARFAESI Act can stand outside insolvency proceedings under the Presidency-Towns Insolvency Act, 1909 and enforce its security interest, and whether the Official Assignee can direct deposit of title deeds.
Final Decision
Appeal allowed; impugned order dated 4th December 2018 quashed; appellant permitted to enforce its security under SARFAESI Act by opting out of insolvency proceedings; appellant to withdraw its claim before Official Assignee and may re-submit if shortfall; appellant to inform Official Assignee of steps taken and outcome of sale; timeline for sale process accepted.
Law Points
- Secured creditor under SARFAESI Act can stand outside insolvency proceedings and enforce security interest without interference from Official Assignee
- SARFAESI Act being a special and later Act overrides the Presidency-Towns Insolvency Act
- 1909
- Rules 9
- 10
- 11 of Second Schedule of the Act of 1909 do not bar a secured creditor from opting out
- equitable principle cannot defeat statutory rights
- pari materia between insolvency and liquidation proceedings
