Interplay between Insolvency Resolution and SARFAESI Proceedings: Analysis of Ashok Harry Pothen v. Indian Bank (2025) 256 Comp Cas 48

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) has emerged as a comprehensive mechanism for the resolution of corporate insolvency in India. Its core objective is to provide a time-bound process for insolvency resolution while balancing the interests of creditors and debtors. Simultaneously, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) continues to provide banks and financial institutions the power to enforce security interests without the intervention of courts.

However, a recurring point of conflict arises when creditors, particularly banks, initiate proceedings under SARFAESI even after the approval of a resolution plan under the IBC. This tension was addressed in the recent judgment of the Madras High Court in Ashok Harry Pothen v. Indian Bank (2025) 256 Comp Cas 48, where the Court clarified the rights of banks that are not parties to insolvency resolution proceedings.

Facts of the Case

• The corporate debtor underwent the Corporate Insolvency Resolution Process (CIRP) under the provisions of the IBC, 2016.

• A resolution plan was duly approved by the National Company Law Tribunal (NCLT).

• The petitioner sought to restrain Indian Bank from continuing proceedings under the SARFAESI Act, arguing that the approval of the resolution plan extinguished all claims against the corporate debtor.

• Indian Bank contended that it was not a party to the insolvency proceedings and had not been involved in the formulation or approval of the resolution plan.

• The primary issue before the Court was whether a bank, not being part of the CIRP or resolution plan, could still pursue remedies under the SARFAESI Act, 2002.

Legal Issues

1. Whether the approval of a resolution plan under Section 31 of the IBC binds a bank that was not a participant in the CIRP.

2. Whether banks can be restrained from exercising statutory rights under the SARFAESI Act post-resolution approval.

3. Interplay between the overriding effect of IBC under Section 238 and independent rights under SARFAESI.

Judgment

The Madras High Court held as follows:

• The binding effect of a resolution plan under Section 31 of the IBC extends only to the corporate debtor, its creditors, members, employees, and other stakeholders who were part of or represented in the CIRP.

• If a financial creditor such as a bank was not a party to the proceedings before the NCLT, and its claims were not considered during the resolution process, it cannot be deprived of its statutory remedies under SARFAESI.

• Consequently, Indian Bank, being outside the purview of the CIRP in this case, was entitled to continue its enforcement action under the SARFAESI Act.

• The Court declined to grant the petitioner’s plea to restrain the Bank, reinforcing that statutory rights under SARFAESI cannot be nullified indirectly when the creditor was not even involved in the resolution process.

Analysis

1. Binding Nature of Resolution Plans

Section 31(1) of the IBC provides that a resolution plan, once approved, shall be binding on the corporate debtor and its creditors. The Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) clarified that such binding nature prevents reopened claims. However, the condition precedent is that the creditor’s claim must have been considered or at least invited during CIRP.

In Ashok Harry Pothen, Indian Bank’s exclusion from the CIRP meant that its independent rights were unaffected.

2. Co-existence of IBC and SARFAESI

While IBC has an overriding effect under Section 238, courts have repeatedly emphasized that it does not entirely oust the operation of other recovery legislations. The SARFAESI Act continues to remain an effective tool for secured creditors unless specifically stayed or restricted during the moratorium period under Section 14 of IBC.

Once CIRP concludes, if a creditor was not bound by the resolution, it can still exercise its independent remedies.

3. Protection of Non-participating Creditors

The judgment underscores the principle that no creditor can be prejudiced without participation. Excluding a secured creditor from the CIRP and then binding it to a resolution plan would amount to deprivation of property without due process, violating Article 300A of the Constitution.

This approach aligns with natural justice, ensuring that creditors who are left out retain their statutory enforcement powers.

Implications of the Judgment

1. For Banks and Financial Institutions:

   • Reinforces their right to pursue SARFAESI remedies if not included in CIRP.

   • Encourages vigilance among creditors to actively participate in CIRP to safeguard their interests.

2. For Resolution Applicants:

   • Resolution plans must account for all known creditors; otherwise, the corporate debtor may still face parallel enforcement actions.

   • Due diligence becomes critical in identifying and negotiating with all creditors.

3. For Corporate Debtors:

   • The “clean slate” principle of IBC applies only if all creditors’ claims are dealt with during CIRP.

   • Any exclusion could result in fresh enforcement actions, thereby undermining business revival.

Conclusion

The ruling in Ashok Harry Pothen v. Indian Bank clarifies the scope of resolution plans under the IBC and their interplay with SARFAESI. It safeguards the rights of non-participating creditors while reaffirming that insolvency resolution cannot override statutory rights where due process has not been followed.

This judgment strikes a careful balance between the finality of insolvency resolutions and the protection of creditor rights, ensuring that revival of companies under IBC does not occur at the cost of justice to excluded stakeholders.

Citation: Ashok Harry Pothen v. Indian Bank, (2025) 256 Comp Cas 48 (Madras HC).

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