This article is written by Thejashwini S in 3rd Year of B.A., LL.B., of The Central Law College, Salem during her internship with LeDroit India
ABSTRACT
Coexistence between the SARFAESI Act, 2002 and the IBC, 2016, has spawned considerable jurisprudential debate over overlapping remedies and conflict of jurisdiction. Whereas SARFAESI grants secured creditors certain powers to enforce security interests without judicial redress, the IBC introduces a comprehensive insolvency resolution paradigm grounded upon collective process and value maximization. The central tension falls upon the scenario where secured creditors pursue post 2002 recovery proceedings under SARFAESI whenever corporate insolvency resolution under the IBC is set in motion, along with the moratorium proclaimed under Section 14.
Courts have essentially reconciled this conflict by reinforcing the primacy of IBC through its overriding clause under Section 238 and reiterating that the insolvency resolution, revival of the debtor, and equitable treatment of stakeholders override any individual enforcement actions. Key judicial pronouncements clarified that once invoked and admitted under the IBC, the operation of SARFAESI must stay in abeyance in favour of the moratorium. However, pre-initiation steps may be relevant as evidence. This paper critically analyses the statutory framework, judicial interpretations, and policy rationale that go into shaping such hierarchy and then argues for doctrinal clarity and coordinated creditor remedies with consistency in statutory interpretation for certainty, efficiency, and fairness in India’s insolvency landscape.
Keywords: SARFAESI Act, Insolvency and Bankruptcy Code, Secured creditors, Judicial redress, Collective process.
INTRODUCTION
The Indian debt recovery and insolvency landscape has undergone a paradigm shift over the past two decades. While the SARFAESI Act of 2002 brought about a radical change by permitting secured creditors to enforce their rights without approaching the court, the IBC of 2016 brought about a new era by introducing a one-stop, time-bound approach to insolvency matters with a view to maximize the value of the assets amidst the conflicting claims of all parties. In such a situation where two laws exist concurrently, a set of fundamental issues arise:
Would lenders classify as secured creditors be able to rely on both recoveries concurrently? Would the initiation of a Corporate Insolvency Resolution Process when an IBC is triggered supersede proceedings under SARFAESI Recovery of Financial Assets and Enforcement of Security Interests Act?
This article explores these questions through a close reading of both laws and a discussion of court rulings.
LEGISLATIVE FRAMEWORK
The SARFAESI Act, 2002
The SARFAESI Act was essentially aimed at helping recoveries of long-term assets by banks and financial institutions, facing liquidity problems, and bridging the gaps between assets and liabilities. This promotes recovery through provisions for taking possession of collateral, selling it, and pruning NPAs without taking the legal course of action.
Section 13: Allows secured creditors to enforce security interests upon the event of default by the borrower. This involves serving a demand notice, taking possession of assets subject to security, and appointing managers.
Section 13(4): Enables the transfer of possession of secured assets after issuing a notice to the borrower for 60 days.
Section 13(8): Allows sale or lease of the secured assets.
Section 17: Empowers establishment of DRTs as an appellate authority against action taken under Section 13(4).
Section 31: Bars civil courts from entertaining suits or proceedings in respect of any action taken under this Act. Limitations: The Act applies only to secured creditors, namely banks, financial institutions, and securitization/reconstruction companies, and offers a one-sided enforcement mechanism in favour of creditors with a minimum debt threshold stipulated. Corporate revival or reorganization is not provided for in the Act.
The Insolvency and Bankruptcy Code, 2016
IBC heralds a new era in the approach of the country towards insolvency by consolidating and updating the laws relating to the reorganization and resolution of corporate entities, partnership firms, and individuals in a time-bound manner.
Section 7: Financial creditors may trigger Corporate Insolvency Resolution Process(CIRP).
Section 14: A moratorium operates from the date an insolvency application is admitted, which basically puts a stay on litigation, execution, alienation of assets, as well as enforcement of the security interest.
Section 14(1) (c): It expressly prohibits any action for the foreclosure, recovery, or enforcement of any security interest created by the corporate debtor.
Section 238: IBC provisions override the conflicting rules under any other law.
Section 52: During liquidation, the secured creditors may waive their security interest.
Section 53: Provides the distribution waterfall, which prioritizes the costs of the insolvency process and workmen’s dues. Goals: The IBC works towards the reorganization and resolution of corporate debtors’ insolvencies in a time-bound manner, maximizes the value of assets, promotes entrepreneurship, strikes a balance in the interests of all stakeholders, and provides an easy access to credit.
THE JURISDICTIONAL CONFLICT
Nature of Conflict
The conflict arises primarily from overlapping objectives and contradictory operational mechanisms. SARFAESI empowers individual secured creditors to unilaterally enforce security interests, while IBC requires collective resolution mechanisms that bind all creditors, including secured creditors, to participate in a collective insolvency resolution process.
Key Areas of Conflict
- Moratorium Effect: Section 14 of IBC imposes a complete moratorium on enforcement of security interests, directly conflicting with remedies available under Section 13 of SARFAESI
- Priority of Claims: SARFAESI allows secured creditors to realize their dues independently, while IBC Section 53 establishes a waterfall mechanism that may subordinate secured creditor claims
- Continuation of Proceedings: Whether SARFAESI proceedings initiated before CIRP can continue during moratorium
- Choice of Remedy: Whether secured creditors can choose between IBC and SARFAESI or must follow IBC exclusively.
Legislative Intent
The Parliamentary debates and Statement of Objects and Reasons reveal that IBC was intended as a comprehensive code to address insolvency holistically, while SARFAESI was designed as a creditor-friendly debt recovery mechanism. The tension reflects competing policy objectives: maximizing individual creditor recovery versus collective stakeholder value maximization.
JUDICIAL INTERPRETATION: EVOLUTION OF JURISPRUDENCE
Innovative Industries Limited vs. ICICI Bank (2018) 1 SCC 407
This historic Supreme Court decision affirmed the constitutional validity of IBC, though it didn’t resolve the conflict between SARFAESI and IBC. This decision did set out essential parameters on IBC’s legislative intent, a beneficial law that provides revival for corporate debtors.
Swiss Ribbons Pvt. Ltd. vs. Union of India (2019) 4 SCC 17
The Court upheld the constitutional validity of the IBC provisions, including the moratorium under Section 14. It termed IBC as a ‘harmonization regime,’ which has a balanced and nuanced character that gives equal weight to the interests of all stakeholders. However, it did not address SARFAESI matters.
Innovative Industries Ltd. v. ICICI Bank, (2017) the Supreme Court held that financial creditors can opt to proceed under the IBC or the SARFAESI Act and that after the initiation of the CIRP, the Section 14 moratorium applies and prevents further proceedings under the SARFAESI Act.
The Definitive Pronouncement
Sundaresh Bhatt, the liquidator for ABG Shipyard Ltd vs. Central Board of Indirect Taxes and Customs (2023) 4 SCC 1 gave a lucid view on how IBC is interconnected with other laws. The Supreme Court explained that once liquidation begins, Section 33(5) of the IBC is like a full stop, precluding every claim, excepting such claims which are explicitly provided within the Code. This even applies to SARFAESI cases, which need to be stayed during the continuance of liquidation.
In Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgears Ltd (2022) 8 SCC 152 the Court held that an operational creditor does not have a right to demand recovery during a moratorium period. While the judgment pertained to operational creditors, the underlying principle is most relevant in equal measure for secured creditors attempting to enforce security interest under SARFAESI at the time CIRP is going on.
The State Bank of India v. Ramakrishnan (2018) 17 SCC 394 explained that even in liquidation, secured creditors have the right to realize secured assets, which would then have to be continued under the liquidator’s supervision in compliance with Section 52. It becomes clear from the judgment that the rights of the secured creditors are not totally wiped off but have to make their move within the IBC framework.
The Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (2019) 6 SCC 1, the Supreme Court emphasized the primacy of the distribution plan under IBC over other statutory priorities. It held that the waterfall under Section 53 for the distribution of the asset overrides Sections 11(2A) of the Central Excise Act and 48(1) of the Customs Act. The Court held that the IBC is a complete code that integrated and amended the laws relating to insolvency and its provisions would always override the conflicting statute on account of Section 238.
In the case of Phoenix ARC Pvt. Ltd. v. Vishwa Bharati Vidya Mandir & Ors., the bench stated that the SARFAESI suit commenced prior to the initiation of the CIRP is stayed during the moratorium period. This is because Section 14(1) (c) prohibits “any action to foreclose, recover or enforce any security interest.” This implies that the continuation of the SARFAESI suit is not possible during the moratorium period.
In the judgment of the case of ICICI Bank Ltd. v. Sidco Leathers Ltd (2023) 3 SCC 371, the court asserted that the secured creditors have the discretion to choose the remedial path that would suit them; however, once the application for the CIRP is accepted, the moratorium mechanism applies to all. The discretion to choose the remedial path continues only prior to the execution of the CIRP otherwise, the provision of the IBC prevails.
In Tata Steel BSL Limited vs. Venus Recruiter Private Limited & Ors. 2023, the Court held that upon the approval of the resolution plan, all claims which were not included in the plan stand extinguished, which includes the claims of secured creditors, even under SARFAESI, thereby emphasizing the all-encompassing nature of the resolution plan in the Insolvency Code.
ANALYSING SECTION 238: THE NON-ABSTANT CLAUSE
Section 238 of the Insolvency and Bankruptcy Code (IBC) states that the provisions in the Code “shall apply notwithstanding anything inconsistent therewith in any other law or instrument deriving its force from the British Charter,” i.e., having equal legal strength. The non-obstante clause in Section 238 has particular importance in scenarios where two laws contradict each other regarding jurisdiction.
With regard to this issue, it has been held by the Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh (2020) 11 SCC 467 that as soon as the process of insolvency initiation is commenced, the laws pertaining to IBC override the Arbitration and Conciliation Act, 1996, as per Section 238 thereof. The same applies with regard to SARFAESI Act.
Core Interpretation Principles
Effective time scope: Section 238 comes into force as soon as the CIRP begins.
Wide-gauge application: It applies to all laws, not only to select laws.
The resulting hierarchy: IBC occupies the supreme position regarding insolvency law and influences the functioning of other laws.
Practical Limitations: It does not abrogate or nullify substantive rights; it merely specifies procedural priority.
MORATORIUM UNDER SECTION 12: LEGAL ANLYSIS
Section 14(1) of IBC imposes a comprehensive moratorium upon admission of the insolvency application. The moratorium prohibits:
- Institution of suits or continuation of pending suits
- Execution, enforcement, or recovery proceedings
- Any action to foreclose, recover, or enforce security interests
- Transfer, encumbrance, alienation, or disposal of assets by the corporate debtor
Section 14(1) (c) Specific Analysis:
The clause “any action to foreclose, recover or enforce any security interest created by the corporate debtor” uses expansive language that encompasses all forms of security interest enforcement, including SARFAESI proceedings. The use of the word “any” indicates legislative intent to comprehensively prohibit all security enforcement actions.
Judicial Interpretation:
Courts have consistently held that Section 14’s moratorium is absolute and automatic, requiring no further judicial intervention once CIRP is admitted. This interpretation ensures:
- Preservation of Assets: Prevents dissipation of corporate debtor’s assets
- Maximization of Value: Enables resolution applicants to assess going concern value
- Collective Process: Ensures all creditors participate in resolution rather than individual enforcement
- Time-bound Resolution: Prevents parallel proceedings from disrupting resolution timelines
Exceptions:
Section 14(3) provides certain exceptions to the moratorium, including supply of essential goods and services, but does not exempt SARFAESI proceedings. The absence of such exemption indicates legislative intent to suspend SARFAESI proceedings during CIRP.
RIGHTS OF SECURED CREDITORS: A BALANCED PERSPECTIVE
Although the rights available in IBC override the rights available in SARFAESI Law within the CIRP, secured creditors retain very important rights in the Code:
During CIRP
Right to Vote: The secured creditors constitute the Committee of Creditors (CoC) and make major decisions in terms of the plan.
Rights under section 52: These powers can either be transferred to the administration estate through liquidation or realized through administration.
Information rights: They can attend Committee of creditors meetings and get information regarding the decision-making process of the resolution.
Challenge rights: They possess the right to challenge a resolution plan if it is not in conformity with the IBC.
During liquidation
State Bank of India vs. Ramakrishnan (2018) 17 SCC 394
It was held that the secured creditors under Section 52 are entitled to realization of the security interests either outside the liquidation or to transfer the same to the liquidation estate. Thus, the priority of the secured creditors is maintained to some extent. Practical Implications: If the secured creditors decide to realize their security interests through SARFAESI outside the proceedings of liquidation under Section 52, the creditors can access the SARFAESI framework under the oversight of the liquidator and within the timelines of the IBC. Such an aspect achieves a balance between the interests of the secured creditors and the overall objective for insolvency resolution.
PRACTICAL SCENARIOS AND THEIR RESOLUTION
SARFAESI Proceedings Initiated Before CIRP
Situation: A secured creditor initiates SARFAESI proceedings, issues notice under Section 13(2), and takes possession of secured assets. Subsequently, another financial creditor initiates CIRP, which is admitted by NCLT.
Legal Position: Based on Phoenix ARC and other judgments, SARFAESI proceedings stand suspended upon CIRP admission. The secured creditor must:
- Cease enforcement actions under SARFAESI
- Join CoC and participate in resolution process
- Cannot continue sale proceedings for secured assets
- Must return possession to Interim Resolution Professional/Resolution Professional
Rationale: Section 14(1)(c) prohibits continuation of security interest enforcement. The moratorium is automatic and comprehensive.
Secured Creditor Chooses Between IBC and SARFAESI
Situation: A borrower defaults on secured loan. The secured creditor can initiate either SARFAESI proceedings or trigger CIRP under Section 7 of IBC.
Legal Position: The secured creditor has the choice of remedy before initiating proceedings.
- SARFAESI Advantages: Quicker realization, direct control over secured assets, no moratorium affecting creditor’s rights
- IBC Advantages: Time-bound resolution, potential for revival of corporate debtor as going concern, collective creditor participation, override of other proceedings
Case Law: ICICI Bank v. Sidco Leathers (2006) affirmed this choice of remedy principle.
DRT appeal pending when CIRP admitted
Situation: A borrower appeals to DRT under Section 17 of SARFAESI Act against measures taken under Section 13(4). During pendency of DRT proceedings, CIRP is initiated and admitted.
Legal Position: DRT proceedings must be stayed due to Section 14 moratorium. The DRT lacks jurisdiction to continue proceedings once CIRP is admitted. The corporate debtor can raise issues regarding secured creditor’s claim before IRP/RP and CoC.
Resolution Plan Approval and SARFAESI Claims
Situation: A resolution plan is approved by CoC and NCLT. A secured creditor who did not participate in CoC seeks to enforce security interest under SARFAESI post-approval.
Legal Position: Based on Tata Steel BSL and Essar Steel principles, all claims not included in the approved resolution plan stand extinguished. The secured creditor cannot subsequently enforce SARFAESI rights against resolved corporate debtor.
Binding Effect: Section 31 of IBC makes resolution plans binding on all stakeholders, including secured creditors who did not participate in the process.
PRE IBC VS POST IBC: A COMPARATIVE ANALYSIS
Creditor Rights
Under SARFAESI, before IBC, secured creditors could move swiftly and almost unilaterally, facing little opposition. Recovery was thus driven by the creditors themselves, aimed at individual assets and immediate realization.
Following IBC, secured creditors are forced to submit to a collective resolution process, where their rights are pitted against the interests of other stakeholders. The focus then shifts toward resurrecting the company through maximization of value.
Time Efficiency
There was no fixed deadline to the SARFAESI era since delays were common due to DRT appeals and court interventions. On an average, the realizations took about 3 to 5 years.
IBC has strict timelines, a maximum of 330 days, with extensions being possible. CoC decisions and plan approvals are with mandatory deadlines. The actual results are approximately 400 to 500 days on average, although the statutory limits are often breached.
Recovery Rates
Empirical evidence shows IBC delivering higher recovery: roughly 40–45% of admitted claims, whereas SARFAESI has worked out approximately 14–18%. This disparity partly explains why legislation favors IBC in insolvency cases.
LEGISLATIVE AMENDMENTS AND FUTURE DIRECTIONS
IBC Amendment Act, 2020
The Amendment introduced several changes, including:
- Section 10A allowing withdrawal of CIRP applications with CoC approval
- Clarifications regarding pre-packaged insolvency resolution for MSMEs
- Enhanced protections for resolution applicants
These amendments did not specifically address SARFAESI-IBC conflicts, indicating legislative satisfaction with judicial interpretation.
Proposed Reforms
Law Commission Recommendations: The Insolvency Law Committee has suggested:
- Clear statutory timelines for secured creditor decision-making
- Enhanced coordination between NCLT and DRT
- Specific provisions addressing cross-border insolvency
Practical Reforms Needed:
- Explicit clarification in SARFAESI Act regarding IBC proceedings
- Mandatory training for secured creditors on IBC procedures
- Standardized templates for secured creditor claims in CIRP
- Faster resolution of jurisdictional disputes through specialized benches
CONCLUSION
The play between the SARFAESI Act and the Insolvency and Bankruptcy Code (IBC) represents a paradigm shift in the credit and insolvency regime in India. Courts have held, in the decisions of Essar Steel, Phoenix ARC, and ICICI Bank v. Sidco Leathers, among others, that the onset of insolvency triggers the dominance of the IBC over the SARFAESI Act due to the cumulative operation of the moratorium provision in Section 14 and the overlapping provision in Section 238 of the IBC. The dominance represents a clear legislative will to unlock maximum corporate value, tap into the support of stakeholders, and arrive at a time and value-efficient resolution.
However, SARFAESI is not an archaic law. It is still a robust tool for recovery of loans outside of insolvency cases with secured lenders having rights which can be exercised during the insolvency of a firm under Section 52 of the IBC. The important point is that SARFAESI is not in conflict with the IBC. They are complementary to each other. SARFAESI deals with enforcement of loans individually, whereas the IBC deals with collective insolvency. The relative rights change once CIRP is triggered.
Going forward, focus needs to be on efficiency of procedure, more definitive guidance on selecting an appropriate remedy, and coordinated actions by the adjudicatory bodies. Further development by courts, combined with legislative intervention, would enhance concurrency of creditor rights and revival purposes, making India’s insolvency regime better.
