India has had a multitude of insolvency laws that have been at constant loggerheads with each other. Out of these are the two most recent acts, The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) and The Insolvency and Bankruptcy Code of India (IBC) which have steadily gained momentum. In this paper, the author has analyzed the conflicting provisions of both the acts along with a comparative study of the merits and demerits of the same. The comparison is drawn taking into consideration many subjects like the time period for recovery, the prevailing jurisdiction of the courts over the two, the types of creditors for which both the acts provide for. The paper also looks at the statistical data collected since the implementation of IBC, which shows the efficiency of one act over the other. The article concludes with the opinion of the author about whether or not the IBC has been successful in providing a unified mechanism for insolvency.
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) was enacted in 2002 as a guideline to recover debts and other financial assets in case of default. It is regulated by the Ministry of Finance and the Reserve Bank of India (RBI). It allows creditors like banks and other financial institutions to recover bad loans by auctioning the collateral and residential assets. It is not specifically directed towards insolvency but rather financial debts that are defaulted.
The Insolvency and Bankruptcy Code of India (hereafter referred to as IBC) was enacted in the year 2016 and is regulated by the Insolvency and Bankruptcy Board of India. This code specifically targets those entities which go insolvent. Under this Act, a company has to file for bankruptcy or insolvency, and then they go through the liquidation process. However, IBC has certainly facilitated bringing India to the world economic sphere. As insolvency is one of the criteria to measure development, India has certainly jumped ranks in the Ease of Doing Business rankings.
Comparison between the IBC and SARFAESI Act
There often arises a conflict between the two acts since they both deal with the liquidation process. However, in Encore Asset Reconstruction Company Pvt Ltd v. Ms Charu Sandeep Desai, it was confirmed by the National Company Law Tribunal that, section 238 of IBC provides a non-obstante clause that IBC will prevail over any acts at force at that particular time.
Here we look at some key differences between the two acts.
- Court intervention
The SARFAESI Act works without any court intervention. The financial creditors, mostly the banks, can enforce their right to credit by sampling auctioning off the assets of the debtor.
Under IBC, a company has to file for liquidation in a court, and the same is regulated by the Insolvency Board. However, IBC is wider in its definition as it includes within the list of creditors, not only banks but other operational creditors, even secured and unsecured ones.
- Difference between creditors
The process of insolvency is much more streamlined in the case of IBC than in the SARFAESI Act. IBC provides for different venues of liquidation for different entities. For example, corporate debtors are looked after by the National Company Law Tribunal (NCLT) and individual firms are processed by the Debt Recovery Tribunals (DBT). The default for corporate debtors must be at least 1495USD.
The SARFAESI Act provides for no such distinction.
The expenses under SARFAESI Act are comparatively lesser than that of the IBC. The recovery process of SARFAESI is more cost-effective than the resolution process of IBC.
An overriding aspect of the SARFAESI Act to the IBC is when a debtor has no revenue or particularly profitable asset, it also allows the sale of the assets for recovery. However, there is no such provision when it comes to the resolution process of IBC.
However, IBC is more efficient in the sense that it works for the revival of the company. In cases where the debt burden is very high, SARFAESI can kill a business.
The SARFAESI Act includes a provision for the setting up of ARC or Asset Reconstruction Companies. ARCs are institutions that specialize in acquiring bad loans from the debtors and recovering the debts by some special mechanism. It hence provides for securitization or asset reconstruction. However, it does not allow these ARCs to be part of the resolution process, which is a serious drawback, as it hampers the quick and easy debt recovery process.
The IBC, on the other hand, provides for the ARCs to submit a resolution plan and be involved in the subsequent process.
- Recovery Rate
According to an article published in Business Standard, the data of recovery for the year 2018-19 shows that the recovery rate under SARFAESI was 14.5% in comparison to a whopping 42.4% under IBC. Hence, we can see that creditors prefer IBC over the alternative as it provides for a speedier recovery and more efficient resolution.
- Minimum Default
Under the SARFAESI Act, there is no minimum default that the debtor needs to incur before he can be subjected to this act.
Under the IBC however, the debtor needs to incur a minimum default of at least Rs 1 lakh to be eligible to file an application.
The SARFAESI Act prescribes a maximum of 1-2 years for the investigation and proper disposal of the case.
The IBC provides for an ideal insolvency resolution process which begins just after the company filed for liquidation. However, the resolution must take place between 180 to 270 days.
The SARFAESI act makes no restriction to who a resolution applicant can be. A promoter can therefore try to exert his rights post resolution. This adds an element of fraudulency in the recovery process.
The IBC on the other hand makes the distinction between unsecured financial creditors and operational creditors. One criticism of this distinction is that the operational creditor is the largest creditor of the company. The act puts no special power in the hands of the operational creditor.
When can a bank shift from SARFAESI to IBC?
It is left up to the preference of the bank as to when it wants to shift over to IBC. SARFAESI gets suspended during the period of moratorium. At this period of time, IBC would be effective and the bank can make its transfer. In addition, a financial creditor can move for insolvency as soon as a debt of 1 lakh is incurred and does not need to wait for 90 days which is necessary under the SARFAESI. In this regard, IBC is more beneficial to the creditors than SARFAESI. This period of moratorium prevents a company from facing multiple suits at once. As soon as a reference is filed, the SARFAESI Act has stayed and IBC takes over. At the end of the moratorium period, the company can either go for resolution or liquidation. If the resolution plan is approved, an arrangement scheme is for the secured creditors, and all the proceedings under SARFAESI stand void. On the other hand, if the company goes for liquidation, then the rights of the secured creditors are maintained by Section 52 of IBC, and the proceedings under SARFAESI stand void.
The process of recovery under any insolvency law is nullified as soon as a company files for liquidation under the IBC. That is to say, IBC takes precedence over any insolvency law.
In Indian Overseas Bank Vs RCM Infrastructure Ltd. & Anr., the court held that section 238 of IBC will prevail over any act in force. Similarly, the sale of the assets of the Corporate Debtor during the moratorium was in conflict with section 14 of IBC and hence the appeal was dismissed.
If the resolution plan submitted by the company is approved, all the creditors are bound to accept it. If the resolution plan is rejected, the company goes into liquidation. Section 53 of the IBC provides for a “waterfall mechanism” for resolution where secured financial creditors are given a preference compared to the others.
Henceforth the contribution of IBC laws in streamlining the process of insolvency cannot be denied. There existed numerous insolvency laws before the IBC which were a source of constant conflict and confusion- Sick Industrial Companies Act 1985, RDDBFI Act 1993, and even as old as pre-independence acts like the Presidency Towns Insolvency Act 1908. It is only the IBC that has provided for a unified mechanism of insolvency along with quick and efficient implementation.
 THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, (2002).
 THE INSOLVENCY AND BANKRUPTCY CODE, (2016).
Encore Asset Reconstruction Company Pvt Ltd v. Ms Charu Sandeep Desai, Company Appeal (AT) (Insolvency) No. 719 of 2018 (2018).
 Transcript of the XI Annual National Law School of India Review Symposium on the Insolvency and Bankruptcy Code, 30 NAT’l L. Sch. INDIA REV. 136 (2018).
 THE INSOLVENCY AND BANKRUPTCY CODE, 52 (2016).
 Indian Overseas Bank Vs RCM Infrastructure Ltd. & Anr., Company Appeal (AT) (Insolvency) No. 736 of 2020 (2021).
 THE INSOLVENCY AND BANKRUPTCY CODE, 53 (2016).