The Telangana High Court (Hyderabad Bench) has held that mere issuance of a demand notice under Rule 7(1) of the Insolvency and Bankruptcy Rules, 2019 to a personal guarantor does not amount to initiation of insolvency resolution proceedings under Section 95 of the IBC. Unless a Section 95 application is actually filed, the interim moratorium under Section 96 does not commence. Therefore, in the absence of any insolvency proceeding against the personal guarantors, a secured creditor is legally entitled to continue recovery and enforcement action against them under the SARFAESI Act, notwithstanding CIRP and Section 14 moratorium operating against the corporate debtor.
The Court also held that Section 60 of the IBC does not automatically oust SARFAESI proceedings against personal guarantors unless there are actual insolvency or bankruptcy proceedings pending against those guarantors. A pending CIRP only against the corporate debtor is not enough to invalidate SARFAESI measures against guarantors. The DRT therefore erred in treating the Bank’s SARFAESI action as void ab initio merely because the Bank had issued a Rule 7 notice and was a member of the committee of creditors in the corporate debtor’s CIRP.
The Division Bench comprising Justice Moushumi Bhattacharya and Justice Gadi Praveen Kumar identified the core issue as whether SARFAESI recovery proceedings against personal guarantors could continue even after the Bank had issued a Rule 7(1) demand notice under the 2019 IBC Rules, and when CIRP against the corporate debtor was pending before the NCLT. The guarantors argued that once the Bank invoked the IBC route, the matter had to proceed only under the IBC before the NCLT, and that the IBC would override SARFAESI. The Bank and the auction purchaser argued that mere issuance of a Rule 7 notice did not amount to filing an application under Section 95 of the IBC and therefore no interim moratorium under Section 96 had commenced against the guarantors.
The Court accepted the Bank’s and auction purchaser’s position and held that the Bank had only issued a demand notice in Form B under Rule 7(1), but had not filed any application under Section 95 of the IBC against the personal guarantors. The Court said that filing of a Section 95 application is the necessary trigger for the interim moratorium under Section 96(1). Since no such application was filed, no interim moratorium ever came into effect for the guarantors.
The Court further observed that the moratorium under Section 14 of the IBC operating against the corporate debtor is different from the interim moratorium under Section 96 applicable to individuals and personal guarantors. According to the Court, a moratorium in the corporate debtor’s CIRP does not by itself bar a secured creditor from enforcing security against personal guarantors under the SARFAESI Act. The Court said the IBC consciously treats the corporate debtor and personal guarantors as separate categories, and proceedings against them do not merge automatically unless insolvency proceedings are actually initiated against both in the manner contemplated by the Code.
On Section 60 of the IBC, the High Court clarified that the provision centralises insolvency and bankruptcy proceedings concerning the corporate debtor and personal guarantors before the same NCLT only where proceedings against both actually exist. In this case, only the corporate debtor was in CIRP before the NCLT, and no Section 95 proceeding had ever been initiated against the guarantors. Therefore, there was no occasion to invoke Section 60 to say that SARFAESI action against the guarantors was barred or that all proceedings had to be transferred to the NCLT.
The Court also stressed the sanctity of a public auction conducted under Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002. It noted that these rules contain a strict statutory sequence and safeguards, including public notice, reserve price discipline, deposit requirements and issuance of a sale certificate only after compliance. Since the auction purchaser had paid the full consideration within time and held a sale certificate, the Court found that the DRT had interfered with a completed auction on an incorrect legal basis.
The High Court additionally noted that the DRT had granted reliefs beyond the prayers made in the securitisation application. The guarantors had mainly sought declaratory reliefs against the possession notice, sale certificate, auction notice and related steps, along with disclosure of the loan account and costs. However, the DRT went further and directed refund of sale consideration with interest to the auction purchaser and restoration of possession to the guarantors, even though such consequential directions were not specifically prayed for in that manner.
Briefly, the two petitions arose out of the same loan recovery dispute between Union Bank of India, the personal guarantors of the borrower company, and the auction purchaser of the secured asset. The Bank challenged the Debts Recovery Tribunal-II, Hyderabad order, while the guarantors challenged the Debts Recovery Appellate Tribunal, Kolkata order passed in the auction purchaser’s appeal.
The borrower company’s account was classified as NPA on April 30, 2017. The Bank issued a demand notice under Section 13(2) of the SARFAESI Act on Jan 29, 2018. Later, CIRP was initiated against the corporate debtor and a moratorium was imposed by the NCLT. The Bank also issued a possession notice under Section 13(4), accepted a one-time settlement in March 2020, cancelled that OTS on June 02, 2021, and then on Nov 23, 2021 issued a demand notice to the guarantors under Rule 7(1) of the Insolvency and Bankruptcy Rules relating to personal guarantors. Thereafter, the Bank filed recovery proceedings before the DRT, issued an auction notice on Sep 26, 2022, auctioned the secured asset on Oct 20, 2022, and issued a sale certificate on Oct 28, 2022 in favour of the auction purchaser.
The guarantors approached the DRT challenging the possession notice and the sale certificate. On Aug 08, 2025, the DRT allowed the securitisation application, treated the possession notice, auction sale and subsequent SARFAESI measures as void, directed the Bank to refund the auction amount with 6% simple interest to the auction purchaser, and directed the auction purchaser to hand over physical possession of the property to the guarantors.
