NCLAT Rejects Successive Section 94 Petitions Filed to Evade SARFAESI Recovery Actions Through IBC Moratorium

Overview of the Ruling

The National Company Law Appellate Tribunal, Delhi Bench, has delivered a significant judgment addressing the misuse of insolvency proceedings to obstruct legitimate recovery actions. In the matter of Manoj Aggarwal Vs Karnataka Bank Limited, the Appellate Tribunal held that repeatedly invoking Section 94 of the Insolvency and Bankruptcy Code with malafide intent to obtain moratorium protection and thereby frustrate recovery proceedings commenced under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) cannot be permitted. The appeals filed by the guarantors were consequently rejected.

Factual Background of the Case

Credit Facility and Guarantee Arrangement

M/s MMR Agro Foods Pvt. Ltd., acting as the Corporate Debtor, had availed credit facilities extended by Karnataka Bank (the Respondent). Two individuals—Smt. Vimla Devi and her son Shri Manoj Aggarwal—had executed personal guarantees securing the obligations of the Corporate Debtor.

Declaration of Non-Performing Asset

The financial account of the Corporate Debtor was classified as a Non-Performing Asset (NPA) on 30.11.2022. Following this classification, Karnataka Bank issued a notice under Section 13(2) of the SARFAESI Act dated 26.12.2022 to both the principal borrower and the guarantors, initiating enforcement proceedings.

First Attempt at Property Possession

On 26.05.2023, a Possession Notice was dispatched to the guarantors by the Court Receiver, scheduling the physical takeover of the mortgaged property for 17.06.2023.

Filing of Initial Section 94 Applications

In a strategic move, both guarantors filed their respective petitions under Section 94 of the IBC on 16.06.2023—remarkably, just one day before the scheduled possession date.

Smt. Vimla Devi's First Petition: Petition No. 455 of 2023 was filed, which eventually faced dismissal for non-prosecution on 01.04.2024 after the Adjudicating Authority granted multiple adjournments.

Shri Manoj Aggarwal's First Petition: Similarly, Petition No. 364 of 2023 was instituted, which also met with dismissal for non-prosecution on 10.01.2024 following repeated requests for adjournments.

Renewed Possession Efforts and Second Round of Petitions

After the dismissal of the initial petitions, the Respondent Bank resumed recovery actions. A fresh Possession Notice was issued on 09.05.2024, fixing 30.05.2024 as the date for taking possession of the mortgaged properties.

Second Petition by Smt. Vimla Devi: On 29.05.2024—again, one day prior to the possession date—she filed Petition No. 380 of 2024 under Section 94 of the IBC. This petition was also dismissed for non-prosecution on 10.07.2024.

Second Petition by Shri Manoj Aggarwal: On 24.06.2024, he filed Petition No. 347 of 2024, which was dismissed on 08.10.2024.

Restoration Application by Smt. Vimla Devi

After the dismissal of Petition No. 380 of 2024, Smt. Vimla Devi filed Application No. New Rest.A-100/2024 seeking restoration of the dismissed petition. This restoration application was listed for hearing on 24.09.2024 and was rejected by the Adjudicating Authority due to the absence of a satisfactory explanation.

Appeals Before NCLAT

Aggrieved by the respective orders of the Adjudicating Authority, both Smt. Vimla Devi and Shri Manoj Aggarwal preferred appeals before the National Company Law Appellate Tribunal under Section 61 of the IBC.

Arguments Advanced by the Appellants

Contentions of Smt. Vimla Devi

The Appellant submitted that the Adjudicating Authority committed an error in dismissing the restoration application. She argued that restoration applications should be decided based on the genuineness of reasons for non-appearance.

Technical Glitch Explanation: It was asserted that during the hearing of Petition No. 380 of 2024 scheduled for 10.07.2024, her counsel could not make an effective appearance due to a technical malfunction. Therefore, the absence was neither intentional nor attributable to negligence.

Health Grounds: The Appellant emphasized that she is a senior citizen battling multiple ailments, including a cancer diagnosis. Due to her serious medical condition, she faced difficulties in actively pursuing the case and had to depend entirely on legal counsel. She contended that as an elderly person with limited understanding of court procedures, she should not be prejudiced by the lapses of her advocates.

Reliance on Counsel: It was highlighted that the counsel had admittedly failed to diligently follow up on the proceedings in Petition No. 455 of 2023, and the Appellant could not be held accountable for such professional negligence.

Plea for Leniency: The Appellant urged that her restoration explanation should have been considered with leniency to ensure substantive justice, allowing the Section 94 application to be examined on merits.

Contentions of Shri Manoj Aggarwal

Similar arguments were advanced by Shri Manoj Aggarwal. He submitted that he was dependent on his counsel who had admittedly not followed up properly on the court proceedings in Petition No. 364 of 2023, leading to its dismissal.

Change of Counsel: After realizing the inadequacy of the previous counsel, the Appellant engaged a new advocate who appeared before the Adjudicating Authority on 08.10.2024 and sought an adjournment. However, the Adjudicating Authority declined this prayer.

Medical Challenges: He contended that both he and his mother were facing serious medical handicaps, which prevented them from properly tracking the court proceedings.

Natural Justice Violation: It was argued that the Adjudicating Authority, by not considering the submissions of the new counsel and dismissing the petition, violated principles of natural justice, thereby causing miscarriage of justice.

Right to File Fresh Petition: The Appellant also submitted that even though his earlier petition was dismissed for non-prosecution, such dismissal had not attained finality. Therefore, he was well within his rights to file a second Section 94 petition. He relied on the judgment in Venus Sugar Ltd. Vs SASF in CA(AT)(Ins) No. 1517 of 2019 to support his contention.

Reliance on Supreme Court Precedent: He placed reliance on the judgment of the Hon'ble Supreme Court in Ashok Kumar Vs New India Assurance Company in CP No. 4758 of 2023, wherein it was held that complainants cannot be made to suffer for the faults of their advocates.

Arguments Advanced by the Respondent Bank

Karnataka Bank's Submissions

The Respondent Bank vehemently contested the appeals, submitting that the Appellants had been consistently abusing the process of law with malafide intentions.

Strategic Use of Moratorium: The Bank argued that the Appellants were exploiting the moratorium provisions under Section 96 of the IBC to stall and defeat the recovery proceedings legitimately initiated under the SARFAESI Act.

Non-Disclosure: It was emphasized that the Appellants had deliberately not disclosed to the Adjudicating Authority that their first Section 94 petitions had already been dismissed for non-prosecution.