What is the difference between the SARFAESI Act and IBC?

To understand the difference between the SARFAESI Act and IBC, it’s important to recognize that the Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to streamline the process of managing an insolvent’s liabilities and creditor claims through a structured, time-bound resolution. Unlike the SARFAESI Act, which primarily empowers secured creditors to seize and sell assets to recover debts, the IBC provides a more comprehensive mechanism that involves all creditors in a transparent, coordinated process. The goal of IBC is not just recovery but also rehabilitation, where possible, while SARFAESI remains a recovery-focused tool.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowered secured creditors to recover their dues from defaulting borrowers by the sale of secured assets without court intervention. This Act permits the banks to seize and sell a borrower’s property, except for agricultural land. The nature of IBC and SARFAESI are similar and it becomes important to understand when IBC and SARFAESI apply.

When do SARFAESI Act and IBC clash, and which law prevails?

The conflict between IBC and SARFAESI arises because the central focus of the IBC and SARFAESI is the resolution and recovery of bad debts. The Hon’ble Supreme Court in Solidaire India Ltd. v. Fairgrowth Financial Services Pvt. Ltd, held that if there are two enactments with a similar non-obstate clause conflict with each other, the statute that was enacted later shall prevail over the one that was enacted earlier. The court explained this judgment by stating that the lawmakers were aware of the presence of the non-obstante clause in the earlier legislations and chose that the current legislation should prevail over the others. In Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeel Desai, it was held that the IBC prevails over SARFAESI. Further reference to the judgment of Indian Overseas Bank v. RCM Infrastructure Ltd. & Anr. stated that section 238 of the IBC will prevail over any act in force. Read realted article What is the Information Memorandum under IBC?

What are the primary difference between the SARFAESI Act and IBC two laws?

• IBC is regulated by the Insolvency and Bankruptcy Board of India and SARFAESI is regulated by the Ministry of Finance and the Reserve Bank of India.
• SARFAESI safeguards financial creditors such as banks and financial institutions, while IBC safeguards all creditors, including financial creditors, operational creditors, secured creditors, unsecured creditors, etc. is another key difference between the SARFAESI Act and IBC
• When it has been decided that the business cannot be revived, the IBC will move forward to liquidation because the resolution plan cannot be drafted at such a stage. An action under SARFAESI might result in recovery as the expenses on recovery is less in comparison to the IBC process. 
• IBC has specific provisions for insolvency, liquidation, and bankruptcy. On the other hand, SARFAESI makes no special division of these procedures which is another difference between the SARFAESI Act and IBC
• When the amount for debt recovery is high, SARFAESI will not be applicable. In such situations, taking physical possession of the property, which is mainly the action taken under SARFAESI, would push the business to close with little chance of being revived. The resolution plan drafted under the IBC is a better fit as the main is to revive, restructure, or rehabilitate the company while protecting the interests of the stakeholders. 

Which law is more effective for debt recovery and why?

The procedure for debt recovery under the two legislations is different procedures, however, IBC has a more effective debt recovery mechanism than SARFAESI:

• IBC has a more detailed framework for the resolution of insolvency and liquidation processes for the debtor and its stakeholders before the National Company Law Tribunal (NCLT). The primary focus of the SARFAESI Act is on recovering the debts of secured creditors but without the proceedings before the court.
• Under the IBC, a Committee of Creditors is formed, consisting of the financial creditors, that help in higher recovery rates. Recovery rates are slower in the provisions of SARFAESI as there is a limitation to realising the assets.
• Section 12 of IBC mandates that the resolution process must be completed within 180 days, with an extension period of 90 days, from the insolvency commencement date. However, SARFAESI provides for a process that involves seizing assets and selling them through a public auction. This may lead to delays, further leading to a lengthier recovery time.

Supremacy of IBC

Section 238 of the IBC provides an overriding effect on any other laws, including the SARFAESI Act. the National Company Law Appellate Tribunal (NCLAT) in Encore Asset Reconstruction Company Pvt. Ltd v. Ms. Charu Sandeep Desai held that the rights in the said property can be claimed by the financial institution “as if” it is the owner of the property in the case for a SARFAESI matter, the words “as if” denotes that the ownership is deemed and not actual ownership. Hence it was held that the interim resolution professional as per his duty under section 18 of the IBC has the duty to take custody of the property. Hence, IBC has supremacy over the SARFAESI and which make Key Differences Between SARFAESI Act and IBC

Literature Review

The non-obstante clause and its application regarding IBC and SARFAESI have been elaborated upon in Varun Akar’s article on The Interplay of Insolvency & Bankruptcy Code and SARFAESI Act-A Judicial Trend. To explain this, the author relied on several judicial pronouncements to explain the overriding effect of the non-obstante clause. For instance, M/s Unigreen Global Pvt. Ltd. v. Punjab National Bank, the court held that the pending proceedings under SARFAESI shall not hinder the proceedings by the financial creditor under IBC.

Hence, when the proceedings under SARFAESI have been initiated, and fresh proceedings have been initiated under the IBC can be accepted because of the non-obstante clause. The scope of non-obstante clause, section 238 of IBC, renders that IBC will prevail over other laws that have the same subject matter. This article covers the question of which legislation would prevail for matters that may be before the IBC or SARFAESI. 

Judicial Precedents

Encore Asset Reconstruction Company Pvt. Ltd v. Ms. Charu Sandeep Desai is an important case that deals with the conflict between IBC and SARFAESI. In this case, the corporate debtor secured a loan from Dena Bank for mortgaging their property in 2011. When there was a default, the proceedings were brought under SARFAESI and the bank took over the property in 2017. In late 2017, fresh proceedings were initiated under IBC because an application was filed under section 7 by the State Bank of India.

After the declaration of moratorium, Dena Bank approached the NCLT for an order to stop the interim resolution professional (IRP) from demanding property as it was already in the possession of the bank. The NLCT, on Dena Banks’s reference to Transcore v. Union of India, observed that the term ‘as if’ that in the referenced case denotes deemed ownership and not actual ownership. Hence, it was held that IRP was bound by law to take custody of the property under section 18 of IBC. Upon appeal, the NCLAT observed that the IRP under section has the duty to take custody of the corporate debtor’s property and that the caseTranscore v. Union of India was before the existence of IBC and it cannot be relied upon in this case because of IBC non-obtante clause which has an overriding effect over the SARFAESI. The NCLAT in Punjab National Bank v. M/s Vindhya Cereals Pvt. Ltd set aside the decision of the NCLT on the grounds of forum shopping in a matter where the NCLT rejected an application under IBC because the matter was pending under the SARFAESI.

Key Differences Between SARFAESI Act and IBC

Below is the table showing Key Differences Between SARFAESI Act and IBC

Preference for IBC in Debt Recovery

As per the statistical analysis, it has been observed that IBC has more preference over SARFAESI. In the year 2018-19, the recovery rate was 42.4%, much less than what it was before. Furthermore, the pending cases have only increased with matters under the SARFAESI Act. While IBC, has the highest-ever resolutions in fiscal 2024, with 269 cases before the NCLT with successful resolution plans, a growth of 42% growth over 189 in fiscal 2023. IBC provides a speedy remedy to companies facing financial distress and includes a wide range of the amount for the default. It has proven to be more efficient in reviving a business and protecting the stakeholder’s interests.

Conclusion

The overlap of IBC and SARFAESI arises because both focus on debt recovery, despite there being a non-obstante clause. With the help of judicial precedents on the non-obstante clause, section 238 of IBC, has clarified the issue somewhat by stating that IBC should prevail over SARFAESI. The IBC has an established legal framework for resolving the company’s financial distress and includes all types of creditors. In contrast, SARFAESI offers a streamlined approach for the recovery of specific secured assets. The Key Differences Between SARFAESI Act and IBC are the types of creditors that are dealt with and the mechanism for recovery of debts. The conflict between these two legislations delays proceedings and increases the pending cases in the judicial system.