Interplay between SARFAESI Sale and Interim Moratorium under IBC (Section 96)

Interplay between SARFAESI Sale and Interim Moratorium under IBC (Section 96)

The conflict between the enforcement powers of secured creditors under the SARFAESI Act, 2002 and the protective framework of the Insolvency and Bankruptcy Code, 2016 (IBC) has been a recurring source of litigation. This conflict becomes particularly acute when a SARFAESI auction is in progress and an interim moratorium under Section 96 of the IBC intervenes due to initiation of personal insolvency proceedings. This article critically examines the statutory scheme, judicial interpretation, and practical consequences of such an overlap, with special emphasis on whether a SARFAESI sale can be completed after the commencement of Section 96 interim moratorium.

1. Introduction

The SARFAESI Act empowers secured creditors to enforce security interests without court intervention, enabling speedier recovery of public money. Conversely, the IBC represents a paradigm shift in Indian insolvency law, prioritising collective resolution, debtor protection, and value maximisation.

While both statutes pursue legitimate objectives, friction arises when individual insolvency proceedings are initiated under Part III of the IBC during an ongoing SARFAESI process. The core question is:

Can a secured creditor complete a SARFAESI sale once an interim moratorium under Section 96 IBC has commenced?

2. Statutory Scheme under SARFAESI Act

2.1 Enforcement Mechanism

Under SARFAESI:

• Section 13(2): Demand notice upon NPA classification

• Section 13(4): Measures including possession of secured asset

• Rules 8 & 9 of the SARFAESI Rules, 2002: Procedure for sale

2.2 Completion of Sale

A SARFAESI sale is statutory, not contractual. Ownership transfers only when:

1. Entire sale consideration is paid, and

2. Sale Certificate is issued under Rule 9(6)

Mere auction or confirmation of sale does not transfer title.

3. Section 13(8) SARFAESI – Post-2016 Amendment

The 2016 amendment to Section 13(8) curtailed the borrower’s right of redemption, providing that redemption must occur before publication of the sale notice.

However, courts have clarified that:

• Loss of redemption ≠ loss of ownership

• Ownership continues until issuance of a valid sale certificate

This distinction lies at the heart of SARFAESI–IBC conflicts.

4. Interim Moratorium under Section 96 IBC

4.1 Nature and Scope

Section 96 IBC provides that upon filing of an application under Section 94 or 95:

• Interim moratorium commences automatically

• Applies from the date of filing, not admission

• Stays all legal actions or proceedings in respect of any debt

4.2 Distinction from Section 14 Moratorium

5. Judicial Interpretation: The Settled Position

5.1 Indian Overseas Bank v. RCM Infrastructure Ltd. (2022)

The Supreme Court held:

• SARFAESI sale is complete only upon issuance of sale certificate

• Acceptance of balance consideration after moratorium is illegal

• Sale conducted during moratorium is incomplete and unenforceable

This judgment firmly establishes that timing of moratorium is decisive.

5.2 Dilip B. Jiwrajka v. Union of India (2024)

The Supreme Court clarified:

• Section 96 interim moratorium is broader than Section 14

• It stays any legal action “in respect of any debt”

• Designed as a protective shield for the debtor

5.3 Sanjay Dhingra v. IDBI Bank Ltd. (Delhi High Court, 2024)

Held that:

• Section 96 applies to secured debts and mortgaged property

• Bank cannot accept balance payment or proceed under SARFAESI

• Even ongoing SARFAESI proceedings must halt

6. Does Celir LLP Change the Law?

Banks frequently rely on Celir LLP v. Bafna Motors (2024). However, this reliance is often misplaced.

Key Clarification:

• Celir LLP concerns right of redemption, not IBC moratorium

• No insolvency proceedings were involved

• It does not override Indian Overseas Bank or Section 96 IBC

Thus, Celir LLP does not legitimise SARFAESI completion during an interim moratorium.

7. Doctrine of Supremacy of IBC

Section 238 of the IBC provides overriding effect:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent contained in any other law…”

The Supreme Court in Innoventive Industries v. ICICI Bank reaffirmed that IBC prevails in case of conflict with SARFAESI.

8. Practical Consequences of Section 96 Intervention

If interim moratorium intervenes before sale completion:

1. Bank cannot accept balance consideration

2. Sale certificate issued during moratorium is void

3. Auction purchaser acquires no title

4. Possession cannot be delivered

5. Transaction remains legally inchoate

9. Impact on Auction Purchasers

Auction purchasers often claim equities based on payment and confirmation. However:

• SARFAESI creates statutory risk

• Title flows only through valid sale certificate

• Purchaser’s remedy lies in refund, not possession

Courts consistently prioritise statutory compliance over equities.

10. Harmonious Construction: The Correct Approach

The correct reconciliation is:

• SARFAESI governs enforcement

• IBC governs insolvency and debt protection

• Once insolvency law intervenes, enforcement must yield

This ensures:

• Protection of debtor rights

• Preservation of insolvency estate

• Uniform treatment of creditors

The jurisprudence on the interplay between SARFAESI sale and interim moratorium under Section 96 IBC is now well-settled. While SARFAESI enables swift enforcement, it cannot override the protective mandate of insolvency law. A SARFAESI sale, unless completed by issuance of a sale certificate before commencement of interim moratorium, remains incomplete and unenforceable.

The legislative intent behind Section 96 is to freeze all debt-related actions at the threshold, ensuring that insolvency proceedings are not rendered illusory by parallel enforcement actions. Any contrary interpretation would defeat the very purpose of the IBC.