INTERFACE BETWEEN “SARFAESI” ACT AND “IBC”
The purpose of introducing the Insolvency and Bankruptcy Code, 2016 (hereinafter will be referred to as ‘IBC’) was to consolidate all the laws related to insolvency and reorganization into one. It aimed to protect the interest of all the creditors and other stakeholders of a corporate debtor. It provides for a time-bound procedure that results in either maintaining the firm as a continuing enterprise or in its liquidation and distribution of assets to the different stakeholders.
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (hereinafter will be referred as ‘SARFAESI Act’) was enacted to allow the financial institutions to determine the asset quality in different ways or we can say it enables financial institutions to find out and solve the issue of non-performing assets through various mechanisms. Securitization is a process in which financial assets are grouped together into marketable securities and thereafter they are sold to investors. This whole process is controlled by the Reserve bank of India (hereinafter will be referred as ‘RBI’).
As both IBC and SARFAESI Act has recovery of bad debt, by the way of identifying the assets of a debtor, which can be consequently used to fill in the default in the form of bad debt. Therefore, it is not possible to avoid a clash between these two enactments. This article discusses, which law ultimately overpowers the other in such situations of discord.
Non- Obstante Clause
IBC consolidated and amended almost 11 statutes and removed all the overlapping provisions in these statutes. Also, IBC also includes a non- obstante clause i.e., Section 238 which states as follows: –
The provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
This non -obstante clause establishes the primacy to IBC above any other law of the land with similar or overlapping provision. In the case of M/S Unigreen Global Private Limited v. Punjab National Bank it was first observed by the NCLAT that IBC is superior to SARFAESI Act.
The court held in this case that as soon as the moratorium was imposed under IBC the, the proceedings under Section 13(4) of the SARFAESI Act ceased. Further in the case of Rakesh Kumar Gupta v. Mahesh Bansal it was held that even a pending proceeding under SARFAESI Act cannot prevent a creditor to file a new proceeding under IBC.
Encore Asset Reconstruction Company Pvt. Ltd v. Ms. Charu Sandeep Desai
In the case of Encore Asset Reconstruction Company Pvt. Ltd v. Ms. Charu Sandeep Desai, the Supreme Court extensively discussed the situations where both SARFAESI Act and IBC came into conflict and cleared the doubts as to which will prevail over the other.
- Facts of the case-
In the year 2011 was taken by Calyx Chemicals and Pharmaceuticals Limited (Hereinafter will be referred as Principal Debtor) from Dena Bank in lieu of its property as security. Further the Principal Debtor defaulted in the making of the payment and Dena bank initiated a proceeding under SARFAESI Act to confiscate the property finally in the year 2017 bank took over the possession of the property.
Further, in October 2017 State Bank of India filed an application under Section 7 of IBC against the Corporate debtor before National Company Law tribunal (hereinafter will be referred as “NCLT”). Thereafter, Insolvency Resolution Professional (hereinafter will be referred as “IRP”) was appointed after the application was admitted in February 2018 and Mortarium was declared under Section 14 of IBC. However, Dena Bank approached NCLT and asked for an interim order to prevent IRP from demanding the property that was already confiscated and was in possession of Dena bank under the SARFAESI Act.
Dena bank based its argument on the decision given by the Supreme Court in the case of Transcore vs Union of India that as they have taken possession of the property all the rights relating to it are vested in them.
- Judgement of NCLT-
NCLT analyzed the judgement of the Supreme court in the case of Transcore vs Union of India and came to the conclusion that in the concerned case as the court held that “once the bank/FI takes possession of the secured asset, then the rights, title and interest in that asset can be dealt with by the bank/FI as if it is the owner of such an asset.” The use of words “as if “does not denote actual ownership but refers to deemed ownership of the property. Furthermore, the property still stands as an asset in the balance sheet of the company (or Corporate Debtor) and therefore under Section 18 IRP is bound to take the custody of the concerned property.
Section 18 of IBC states the “duties of interim professionals” and clause f and f (i) particularly provides for the IRP to take “control” and “custody” of assets of the corporate debtor.
- The interim resolution professional shall perform the following duties, namely: –
(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including—
(i) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (ii) assets that may or may not be in possession of the corporate debtor; (iii) tangible assets, whether movable or immovable; (iv) intangible assets including intellectual property; (v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies; (vi) assets subject to the determination of ownership by a court or authority.
- Decision of NCLAT
Dena bank appealed to the National Company Law Appellate Tribunal. It was observed by the NCALT that Section 18 puts an obligation on the IRP to “take control and custody of any asset over which the corporate debtor has ownership rights.”
Further even though the possession was transferred to the Dena Bank the ownership of the property still resided with the corporate debtor and neither this was the case in which title has been transferred nor the assets has been sold under Section 13(4) of the SARFAESI. Section 13(4) gives the right to the creditor to sell the secured asset in case the corporate debtor defaults in payment.
Finally, the NCLAT observed that the Transcore Judgement was given in 2008 and the IBC came into existence much after that, ALso, the non- obstante clause (Section 238) of the code indisputably establishes that it will prevail over SARFAESI Act in the case of conflict.
DIFFERENCES BETWEEN BOTH THE LAWS
The following are the key differences between both the laws in pointers-
- SARFAESI Act safeguards the financial creditors, which are generally the banks and other financial institutions, by empowering them to enforce their security interests and the same is done without intervention of any court. On the other hand, IBC safeguards the rights of all types of creditors, which have been further classified by the IBC as Financial and Operational Creditors. 
- During the Insolvency Resolution process, the code takes precedence over SARFAESI as explicitly has been mentioned under the law.
- The position with respect to of individuals and unincorporated entities is different and the IBC has differentiated liquidation and Insolvency process between Corporate Debtors (which shall be dealt by the NCLT) and Individuals and firms liquidation process (which shall be of the jurisdiction of DRT), while the same has not been done by the SARFAESI Act.
- In cases where there is no existence of revenue stream, no potential for the revival of the business and no significant assets with the guarantors also, an action under the SARFAESI Act would result in recovery through the sale of assets whereas, a resolution plan under the IBC is generally not possible under such cases. Furthermore, expenses under SARFAESI Act on recovery is lesser than the cost of the resolution process under IBC.
- In large size cases where there is a high debt burden, SARFAESI Act is not much effective and taking physical possession in such instances kills the business and there is little scope of revival. On the other hand, resolution plans under IBC are focused towards securing the interest of all stakeholders and directed toward the revival of the business as well, hence in such large cases, IBC is highly effective.
We have seen the judicial trend to understand the applicability and implications of both the laws and circumstances when they clash with each other. We have also discussed the key differences between the two and the reasons why IBC is preferred over the SARFAESI Act for the recovery of debt. Even though there is an explicit provision of the non-obstante clause, cases are still witnessed where both the laws overlap and hence clash with each other, further delaying the proceedings. What can be concluded on the basis of this observation is that even though the legislature has made considerable efforts to bring harmony between both the laws, the same is not being implemented properly.
The existence of multiple laws in relation to the same subject matter in itself is a problematic concern. Interplay of the Code with debt recovery laws such as the SARFAESI Act and DRT Act has not been fully addressed, and there is an apparent tension between these statutes. However, for an insolvency regime to function effectively, clear harmonization for the interplay of the different laws will have to be done.
We have seen so far that even though IBC amended and consolidated most of the laws there are still areas where it comes in conflict with SARFAESI Act. However, by observing the judicial trend we can safely conclude that IBC prevails over SARFAESI whenever the situation of conflict arises between them. Section 238 of IBC grants it the power to override any conflicting provision of any other law. However, there is a need to make further changes in both these laws to bring harmony between them as well as fill the grey areas.
By- Indira Yadav