Differences between the SARFAESI Act and the Insolvency and Bankruptcy Code (IBC)
Introduction to the SARFAESI Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to address the problem of mounting non-performing assets (NPAs) in the Indian banking system. The Act empowers banks and financial institutions to enforce security interests and recover secured debts without the intervention of courts or tribunals. Its primary focus is on speedy recovery of secured assets, thereby strengthening the credit system and improving financial discipline among borrowers. SARFAESI is essentially a creditor-centric recovery mechanism, designed to protect the interests of secured lenders
Introduction to the Insolvency and Bankruptcy Code, 2016 (IBC)
The Insolvency and Bankruptcy Code, 2016 (IBC) represents a landmark reform in India’s insolvency regime. It provides a comprehensive, time-bound framework for resolving insolvency of corporate persons, partnership firms, LLPs, and individuals. Unlike earlier recovery-oriented laws, the IBC prioritizes revival and resolution of distressed entities, ensuring maximization of asset value and balancing the interests of all stakeholders. The Code operates under the supervision of the National Company Law Tribunal (NCLT) and emphasizes collective decision-making by creditors, with liquidation as a last resort
Differences between the SARFAESI Act and the Insolvency and Bankruptcy Code (IBC)
| Basis | SARFAESI Act, 2002 | Insolvency and Bankruptcy Code, 2016 |
|---|---|---|
| Objective | Recovery of secured debts | Insolvency resolution and revival of the debtor |
| Nature of Law | Recovery-oriented and creditor-centric | Resolution-oriented and holistic |
| Applicability | Banks and financial institutions | Corporate debtors, firms, LLPs, and individuals |
| Type of Debt Covered | Only secured debts | Both secured and unsecured debts |
| Initiation of Proceedings | By secured creditor alone | By financial creditors, operational creditors, or the debtor |
| Adjudicating Authority | Minimal court involvement; review by DRT | Supervised by NCLT |
| Focus of the Process | Enforcement of security interest | Corporate rescue and value maximization |
| Management Control | Remains with borrower | Vests with Resolution Professional during CIRP |
| Moratorium | No statutory moratorium | Mandatory moratorium under Section 14 |
| Time Frame | No strict statutory timeline | Strict and time-bound process |
| Role of Creditors | Individual enforcement | Collective decision-making through CoC |
| Outcome | Sale of secured assets | Resolution plan or liquidation |
| Overriding Effect | Limited | Overriding effect under Section 23 |
Conclusion
While both the SARFAESI Act and the IBC address financial default, they differ fundamentally in purpose and approach. SARFAESI focuses on swift recovery of secured assets, whereas the IBC aims at revival of distressed entities and holistic insolvency resolution. In cases of conflict, the IBC prevails due to its overriding effect, reflecting a legislative shift from fragmented recovery mechanisms to a unified insolvency framework.
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