Orissa High Court Holds SARFAESI Cannot Be Invoked After Debt Is Extinguished Under IBC Resolution Plan
Introduction
The Orissa High Court examined the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the SARFAESI Act, 2002, particularly whether enforcement rights under SARFAESI survive after a debt has been extinguished under an approved resolution plan. The Court held that once the underlying debt stands resolved, SARFAESI powers cannot be invoked.
Factual Background
The dispute arose from loan transactions involving Sree Metaliks Limited, whose loan account was assigned by the State Bank of India (SBI) to an asset reconstruction company through agreements executed in 2014 and 2015.
Subsequently, the Corporate Insolvency Resolution Process (CIRP) was initiated against the company before the NCLT, Kolkata Bench on 30 January 2017. A resolution plan was approved on 7 November 2017 and later upheld by the NCLAT on 13 December 2018. Pursuant to the resolution plan, the debt stood satisfied, and a “No Dues Certificate” was issued in April 2025.
Despite this, SBI appropriated the petitioner’s fixed deposit upon its maturity in July 2021, claiming rights under the SARFAESI Act.
Procedural Background
Aggrieved by SBI’s action, the petitioner filed a writ petition before the Orissa High Court challenging the legality of the appropriation of its fixed deposit after the debt had already been extinguished under the IBC resolution plan.
Issues
1. Whether SARFAESI enforcement powers can be invoked after the underlying debt has been extinguished under an approved resolution plan.
2. Whether Section 31 of the SARFAESI Act provides an independent source of enforcement power.
3. Whether retention of the fixed deposit by the bank amounts to unlawful deprivation of property under Article 300A of the Constitution.
Contentions of Parties
The petitioner contended that once the debt stood resolved and satisfied under the approved resolution plan, no enforceable liability remained. Therefore, SBI could not invoke SARFAESI powers or retain the fixed deposit. It was argued that such action was without authority of law and violated Article 300A of the Constitution.
The petitioner also submitted that the continuation of lien in absence of a subsisting debt was illegal and arbitrary.
SBI sought to justify its action by relying on its rights under the SARFAESI Act. It contended that its enforcement powers permitted appropriation of the fixed deposit and that the petitioner had alternative remedies available.
Reasoning and Analysis
The Court held that SARFAESI enforcement is contingent upon the existence of a legally recoverable debt. Once the debt is extinguished through a resolution plan under the IBC, the foundation for invoking SARFAESI ceases to exist.
It rejected the interpretation of Section 31 of the SARFAESI Act as an independent source of enforcement power, holding that the provision cannot operate in isolation from the existence of a subsisting liability. The Court emphasized that the resolution plan under the IBC is binding and results in the extinguishment of prior claims. Therefore, any subsequent enforcement action based on the same debt is legally unsustainable.
On the constitutional aspect, the Court held that retention of the fixed deposit without any subsisting liability amounted to unlawful deprivation of property under Article 300A. It further observed that where an action lacks legal foundation, the existence of alternative remedies does not bar the exercise of writ jurisdiction.
Decision
The High Court allowed the writ petition and directed SBI to release the fixed deposit along with accrued interest to the petitioner within eight weeks.
In this case the petitioner was represented by Senior Advocate Sidharth Ray with Advocates Kshirod Kumar Sahoo. Meanwhile the respondent was represented by Advocates Dilip Kumar Mohapatra and Shibani Shankar Pradhan.