Interplay Between IBC and SARFAESI Act: A Detailed Analysis

Introduction to Dual Legislative Frameworks

The financial recovery landscape in India operates under two parallel yet interconnected statutory frameworks: the Insolvency and Bankruptcy Code (IBC), 2016, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002. The interplay between the IBC and the SARFAESI Act has been a subject of extensive judicial scrutiny and interpretation, particularly following the landmark judgment by the Kerala High Court in Jeny Thankachan vs. Union of India and Ors.[1] This judgment, delivered by Justice N. Nagaresh, has significantly clarified how the interplay of these statutes operates in matters concerning individual insolvency and partnership firms.

The coexistence of IBC and the SARFAESI Act raise fundamental questions about their applicability, the extent of their overriding effects, and the circumstances under which one may supersede the other. While IBC represents a comprehensive code for insolvency resolution, the SARFAESI Act provides secured creditors with expeditious remedies for enforcement of security interests. Understanding the interplay between IBC and the SARFAESI Act becomes essential for financial institutions, borrowers, guarantors, and legal practitioners navigating debt recovery proceedings.

Historical Context and Legislative Evolution

The SARFAESI Act was enacted in 2002 as a revolutionary measure to address the mounting problem of non-performing assets in the Indian banking sector. Prior to its introduction, financial institutions had to approach civil courts for recovery of secured debts, a process that was notoriously time-consuming and inefficient.[2] The SARFAESI Act empowered banks and financial institutions to take possession of secured assets and sell them without court intervention, fundamentally transforming the debt recovery landscape.

More than a decade later, the Insolvency and Bankruptcy Code was introduced in 2016 as a unified framework to consolidate and amend the laws relating to insolvency resolution of corporate persons, partnership firms, and individuals.[3] The IBC aimed to create a time-bound process for resolving insolvency, maximizing the value of assets, promoting entrepreneurship, and balancing the interests of all stakeholders. While Part II of the IBC dealt with corporate insolvency resolution, Part III addressed insolvency resolution for individuals and partnership firms, with provisions for personal guarantors coming into effect from December 1, 2019.

The temporal evolution of these two statutes meant that financial institutions and borrowers suddenly found themselves operating within overlapping regulatory spheres. The question of which law would prevail in situations of conflict became critically important, particularly when creditors initiated proceedings under the SARFAESI Act while debtors sought protection under the IBC’s moratorium provisions.

The Jeny Thankachan Case: Factual Background and Issues

The case of Jeny Thankachan arose from a complex factual matrix involving a sleeping partner in a Limited Liability Partnership firm who faced proceedings under both the IBC and the SARFAESI Act in her capacity as a guarantor. The petitioner sought to invoke the overriding effect of the IBC, as provided under Section 238, to stay the SARFAESI proceedings initiated by banking institutions. This case highlights the critical interplay between IBC and SARFAESI Act, as the petitioner had filed an application under Section 96 of the IBC seeking the benefit of interim moratorium, which automatically stays all legal proceedings against the debtor upon filing of the insolvency application.

The core issues before the Kerala High Court revolved around several critical aspects of insolvency law. First, the Court had to determine whether the mere uploading of an application under Section 96 constituted valid filing sufficient to trigger the interim moratorium. Second, the Court examined whether the IBC’s overriding provision under Section 238 completely ousted the operation of the SARFAESI Act in all circumstances. Third, the Court analyzed whether proceedings initiated under Section 94 of the IBC by a partner in the capacity of a guarantor would automatically extend to SARFAESI proceedings against the same person in a similar capacity.

The petitioner argued that since insolvency resolution provisions for individuals and partnership firms had come into force from November 15, 2019, the IBC should override the SARFAESI proceedings. The respondent banks, however, contended that the SARFAESI Act remained independently applicable and that the petitioner’s insolvency application was defective and incomplete, failing to trigger the protective moratorium provisions.

Automatic Moratorium: Operation by Law

One of the most significant findings of the Kerala High Court pertained to the nature and operation of the moratorium under the IBC. The Court held that under Part III Chapter III of the IBC, which deals with insolvency resolution for individuals and partnership firms, both the interim moratorium under Section 96 and the regular moratorium under Section 101 operate automatically by force of law. This represents a departure from the position under corporate insolvency resolution, where the moratorium becomes effective only upon admission of the application by the National Company Law Tribunal (NCLT).

Section 96(1) of the IBC provides that upon filing of an application for insolvency resolution, an interim moratorium commences on the date of application itself. This moratorium prohibits the institution or continuation of suits or proceedings against the debtor in respect of any debt, the execution of any judgment against the debtor, any action to foreclose or enforce security interests, the recovery of property by any owner or lessor, and any action to recover property in the possession or control of the debtor.[4]

The automatic nature of this moratorium serves an important policy objective. It provides immediate relief to financially distressed individuals and prevents creditors from engaging in a race to enforce their claims during the pendency of the insolvency application. This breathing space allows the debtor to formulate a repayment plan and seek resolution of their debts in an orderly manner. The moratorium essentially creates a standstill period during which all recovery actions are halted, ensuring that the insolvency resolution process can proceed without external interference or pressure.

However, the Court emphasized that this automatic moratorium is not without conditions. The application must meet certain threshold requirements before the protective shield of the moratorium becomes operational. The Court clarified that the moratorium does not commence merely upon uploading an application to the NCLT’s electronic system but requires the application to be complete, valid, and properly filed in accordance with the procedural requirements of the IBC and the relevant rules.

Procedural Completeness: Filing versus Uploading

A crucial distinction made by the Kerala High Court pertains to what constitutes valid filing of an application under Section 96 of the IBC. The Court held that mere uploading of an application on the NCLT’s electronic portal cannot be equated with the filing of an application. For an application to be considered validly filed, it must be complete in all respects, free from procedural defects, and accompanied by all necessary documents and information as prescribed under the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

This distinction between uploading and filing carries significant practical implications. In the digital age, most tribunals and courts have adopted electronic filing systems where documents are first uploaded to an online portal. However, the mere act of uploading does not automatically result in the application being registered or numbered by the registry. The registry officials examine the uploaded documents to verify their completeness and compliance with procedural requirements. Only after this verification process, when the application is assigned a regular case number, can it be considered validly filed.

In the Jeny Thankachan case, the NCLT had not assigned a regular case number to the petitioner’s application, indicating that the registry had not accepted it as a valid filing. The Court observed that this failure to obtain a case number meant that the interim moratorium under Section 96(1)(b)(i) could not be operationalized. The application remained incomplete or defective in some manner, preventing it from triggering the automatic moratorium provisions.

This ruling underscores the importance of procedural compliance in insolvency proceedings. Debtors seeking the protection of the IBC’s moratorium provisions must ensure that their applications are meticulously prepared, complete in all respects, and accompanied by all requisite documents. Any deficiency or non-compliance with procedural requirements can result in the application being rejected or returned, leaving the debtor vulnerable to creditor actions during the interim period.

The Overriding Effect of IBC: Section 238 Analysis

Section 238 of the IBC provides that the provisions of the Code shall have 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 gives the IBC an overriding effect over other legislation, subject to certain specified exceptions. The question that frequently arises is whether this overriding provision completely nullifies the operation of the SARFAESI Act in all circumstances.

The Kerala High Court provided crucial clarity on this issue by holding that while the IBC does have an overriding effect as per Section 238, it does not entirely oust the operation of the SARFAESI Act. The Court observed that both statutes operate in distinct domains and address different aspects of financial distress and debt recovery. The IBC primarily deals with insolvency resolution through a collective mechanism that aims to maximize the value of the debtor’s assets while balancing the interests of all stakeholders. The SARFAESI Act, on the other hand, provides secured creditors with specific remedies for enforcing their security interests.

The Court clarified that the IBC would override the SARFAESI Act only in cases where there is direct conflict or repugnancy between specific provisions of the two statutes. In the absence of such conflict, both laws can operate simultaneously without one completely overshadowing the other. This interpretation aligns with the principle of harmonious construction, which requires courts to interpret statutes in a manner that gives effect to both rather than rendering one entirely nugatory.

For instance, if a corporate debtor undergoes insolvency resolution under the IBC and a moratorium is declared under Section 14, the SARFAESI proceedings against the corporate debtor would be stayed during the moratorium period due to direct conflict. However, this does not mean that the SARFAESI Act ceases to exist or becomes inapplicable in all circumstances. Once the moratorium is lifted or in situations where the IBC does not apply, the SARFAESI Act continues to provide a valid mechanism for debt recovery.

The Court’s interpretation prevents the complete erosion of secured creditors’ rights while simultaneously recognizing the IBC’s paramount importance in insolvency resolution. This balanced approach ensures that the legislative intent behind both statutes is preserved and that neither becomes redundant or ineffective.

Guarantors and Dual Capacity: A Critical Distinction

Another significant aspect of the Jeny Thankachan judgment relates to the treatment of guarantors who may face proceedings in different capacities under both the IBC and the SARFAESI Act. The Court held that the initiation of proceedings under Section 94 of the IBC by a partner of an LLP in the capacity of a guarantor does not automatically extend to proceedings initiated against the same person under the SARFAESI Act in the capacity of a guarantor.

This ruling recognizes that a person may assume multiple roles and capacities in commercial transactions, and proceedings in one capacity do not necessarily affect proceedings in another capacity. A partner in a firm may be liable both as a partner for firm debts and separately as a personal guarantor for loans taken by the firm or other entities. These are distinct legal obligations arising from different contractual relationships.

Section 94 of the IBC deals with the application for insolvency resolution by creditors, while Section 13 of the SARFAESI Act provides for enforcement of security interest by secured creditors.[5] When a creditor initiates proceedings under the SARFAESI Act against a guarantor for recovery of dues, this action is based on the guarantee agreement and the security interest created in favor of the creditor. If the same guarantor separately initiates insolvency proceedings under the IBC, the moratorium arising from such proceedings would not automatically stay the SARFAESI proceedings unless there is a direct overlap and the debt in question is the same debt covered by both proceedings.

The Court’s reasoning prevents debtors and guarantors from using the IBC as a tactical tool to indefinitely stall legitimate recovery proceedings initiated by secured creditors under the SARFAESI Act. It emphasizes that a clear nexus must exist for the moratorium to take effect, reflecting the proper interplay between IBC and SARFAESI Act. This approach balances the rights of distressed debtors seeking resolution through the IBC with the rights of secured creditors to enforce their legitimate claims.

Regulatory Framework: IBC Provisions for Individuals

The IBC’s provisions for individuals and partnership firms, contained in Part III of the Code, came into force through a phased manner. While the Code received presidential assent in 2016, the provisions relating to insolvency resolution for individuals and partnership firms were notified much later. The provisions relating to personal guarantors to corporate debtors came into force on December 1, 2019, through a notification issued by the Ministry of Corporate Affairs.

Section 95 of the IBC allows a debtor to file an application before the Adjudicating Authority (NCLT or Debt Recovery Tribunal, as the case may be) for initiating an insolvency resolution process. Upon such filing, Section 96 provides for an automatic interim moratorium that commences from the date of application and continues until the application is admitted or rejected by the Adjudicating Authority.[6]

Once the application is admitted, Section 101 provides for a full moratorium that continues during the insolvency resolution process. This moratorium is more comprehensive than the interim moratorium and includes additional restrictions on the debtor’s ability to transfer or dispose of property. The moratorium under Section 101 ceases when a resolution plan is approved, the application is rejected, or the adjudicating authority passes an order for bankruptcy.

The IBC also provides for appointment of a resolution professional who manages the affairs of the debtor during the insolvency resolution process, prepares an information memorandum, invites claims from creditors, convenes meetings of creditors, and facilitates the preparation of a resolution plan. The entire process is designed to be time-bound and transparent, with clear timelines prescribed for each stage of the proceedings.

Regulatory Framework: SARFAESI Act Provisions

The SARFAESI Act provides secured creditors with the power to enforce their security interests without the intervention of courts or tribunals. Section 13 of the Act sets out the procedure for enforcement of security interest. When a borrower defaults in repayment of a secured debt, the secured creditor must issue a notice under Section 13(2) requiring the borrower to discharge their liabilities within sixty days from the date of notice.[7]

If the borrower fails to comply with the notice within the stipulated period, the secured creditor is empowered under Section 13(4) to take possession of the secured assets, transfer the secured assets by way of lease, assignment or sale, appoint a manager to manage the secured assets, or require any person who has acquired the secured assets to pay the amount due. These are powerful remedies that allow creditors to swiftly recover their dues without prolonged litigation.

However, the SARFAESI Act also provides safeguards for borrowers. Section 13(3A) allows borrowers to represent against the measures proposed to be taken by the secured creditor. Section 17 provides for appeal to the Debt Recovery Tribunal against the actions of the secured creditor, provided the borrower deposits fifty percent of the amount claimed by the creditor or the amount of the debt due as determined by the Tribunal, whichever is less.

The Act applies only to secured creditors, which include banks, financial institutions, and securitization or reconstruction companies. It does not apply to unsecured creditors. Further, the secured debt must be at least one lakh rupees for the Act to be applicable, though this threshold has been subsequently increased to two lakh rupees. The Act also contains provisions relating to securitization of assets, establishment and regulation of asset reconstruction companies, and registration of securitization and reconstruction transactions.

Practical Implications for Stakeholders

The Kerala High Court’s judgment in Jeny Thankachan has several important practical implications for various stakeholders in the financial ecosystem. For financial institutions and secured creditors, the judgment clarifies that SARFAESI proceedings can continue unless there is a validly filed insolvency application that triggers an automatic moratorium covering the same debt. Creditors can no longer be stayed merely by the uploading of an incomplete or defective insolvency application.

For borrowers and guarantors, the judgment emphasizes the critical importance of procedural compliance when filing insolvency applications. A hastily prepared or incomplete application will not provide the protection of the interim moratorium, leaving the debtor vulnerable to creditor actions. Legal advice and meticulous preparation become essential to ensure that applications meet all statutory requirements and are accepted as valid filings by the NCLT.

For insolvency professionals and resolution professionals, the judgment provides guidance on when the moratorium provisions become effective and the scope of their protective umbrella. Resolution professionals must carefully examine whether the application has been validly filed and numbered before taking a position on the applicability of moratorium provisions.

For the judiciary, the judgment establishes important precedents on the interpretation of moratorium provisions, the interplay between IBC and SARFAESI Act, and the principle of harmonious construction. Lower courts and tribunals can now refer to this judgment when dealing with similar issues, ensuring consistency and predictability in judicial decisions.

The judgment also has implications for legislative policy and regulatory oversight. It highlights potential gaps or ambiguities in the existing legal framework that may require clarification through amendments or regulatory guidelines. The government and insolvency regulators may need to consider whether additional safeguards or clearer procedural requirements are necessary to balance the interests of debtors and creditors.

Comparative Judicial Perspectives

While the Jeny Thankachan judgment represents an important interpretation by the Kerala High Court, it is useful to examine how other courts have addressed similar issues. Different High Courts have occasionally taken varying approaches to questions involving the interplay between the IBC and SARFAESI Act, reflecting the evolving nature of insolvency jurisprudence in India.

Some courts have emphasized the primacy of the IBC’s moratorium provisions, holding that once insolvency proceedings are initiated, all recovery actions including SARFAESI proceedings must be stayed.[8] This view prioritizes the collective resolution mechanism envisaged by the IBC over individual enforcement actions by secured creditors. Other courts have adopted a more nuanced approach, examining whether the specific debt in question is covered by the insolvency proceedings and whether there is direct conflict between the two statutory remedies.

The Supreme Court of India has periodically intervened to clarify ambiguities and resolve conflicts in interpretation. In several landmark judgments, the apex court has emphasized that the IBC represents a paradigm shift in India’s approach to insolvency and bankruptcy, moving away from a debtor-in-control regime to a creditor-in-control regime. However, the Court has also recognized that this shift must be balanced against principles of fairness and the legitimate rights of all stakeholders.

The diversity of judicial opinions reflects the complexity of the issues involved and the need for careful case-by-case analysis rather than rigid, formulaic approaches. Each case must be examined on its own facts to determine whether the conditions for moratorium have been satisfied, how the interplay between IBC and SARFAESI Act affects the resolution process, and how the competing interests of debtors and creditors can be fairly balanced.

Future Directions and Reforms

The legal landscape governing insolvency and debt recovery continues to evolve through amendments, regulatory guidelines, and judicial interpretations. The Insolvency and Bankruptcy Board of India (IBBI), as the regulatory authority overseeing insolvency proceedings, regularly issues circulars and regulations to address practical challenges and improve the effectiveness of the insolvency resolution process.

Recent amendments to the IBC have sought to address various concerns raised by stakeholders. These include provisions relating to the treatment of home buyers as financial creditors, limitations on participation of certain persons in the resolution process, and enhanced time limits for completion of proceedings. Similarly, the SARFAESI Act has been periodically amended to strengthen secured creditors’ rights while providing additional safeguards for borrowers.

Looking ahead, several areas may require further legislative attention or judicial clarification. The exact contours of what constitutes a complete and valid application under the IBC need clearer specification, either through statutory amendments or detailed rules. The interaction between the IBC and other recovery mechanisms such as the Recovery of Debts and Bankruptcy Act, 1993, also requires continued judicial scrutiny to ensure harmonious operation.

The rise of digital technologies and online dispute resolution mechanisms presents both opportunities and challenges for insolvency proceedings. Electronic filing systems need robust frameworks to ensure that applications are not only uploaded but also properly verified and registered. The use of artificial intelligence and data analytics in insolvency proceedings may improve efficiency but also raises questions about fairness and human oversight.

International best practices and comparative insolvency law also offer valuable insights for India’s evolving framework. Many jurisdictions have developed sophisticated mechanisms for cross-border insolvency, treatment of complex financial instruments, and balancing of stakeholder interests. India’s insolvency regime can benefit from selective adoption of successful practices while remaining sensitive to local legal traditions and economic realities.

Conclusion

The interplay between the Insolvency and Bankruptcy Code, 2016 F(IBC), and the SARFAESI Act, 2002, represents one of the most significant issues in contemporary Indian financial law. The Kerala High Court’s judgment in Jeny Thankachan vs. Union of India and Ors. has provided crucial clarity on several aspects of this relationship, establishing that while the IBC has an overriding effect, it does not completely oust the operation of the SARFAESI Act in all circumstances. Both statutes can operate concurrently in their respective domains unless there is direct conflict or repugnancy.

The judgment emphasizes the critical importance of procedural compliance in insolvency applications, clarifying that mere uploading does not constitute valid filing and that the automatic moratorium provisions are triggered only when an application is complete and properly filed. This ruling protects the rights of secured creditors while ensuring that debtors who genuinely seek resolution through the IBC receive appropriate protection.

For financial institutions, borrowers, guarantors, and legal practitioners, the judgment provides valuable guidance on navigating the complex intersection of these two legislative frameworks. It underscores the need for careful legal analysis, meticulous preparation of documentation, and strategic decision-making when choosing between different recovery mechanisms or seeking protection from creditor actions.

As India’s insolvency and bankruptcy regime continues to mature, judicial pronouncements like the Jeny Thankachan judgment play a vital role in shaping the law, clarifying ambiguities, and ensuring that the legislative intent behind both the IBC and the SARFAESI Act is effectively realized. The balanced approach adopted by the Kerala High Court, recognizing the validity of both statutory frameworks while providing clear principles for determining the interplay between IBC and SARFAESI Act, represents a significant contribution to the evolving jurisprudence in this critical area of law.

References

[1] Jeny Thankachan vs. Union of India and Ors., Kerala High Court, WP(C) No. 31502 of 2023. Available at: https://ibclaw.in/jeny-thankachan-vs-union-of-india-and-ors-kerala-high-court/ 

[2] Overview of SARFAESI Act 2002, TaxGuru. Available at: https://taxguru.in/corporate-law/overview-sarfaesi-act-2002-note-process-enforcement-security-interest-section-13.html 

[3] Insolvency and Bankruptcy Code, 2016, Ministry of Corporate Affairs. Available at: https://www.mca.gov.in/ 

[4] Section 96 of IBC, 2016: Interim Moratorium. Available at: https://ibclaw.in/section-96-interim-moratorium/ 

[5] Section 13 of SARFAESI Act, 2002: Enforcement of Security Interest. Available at: https://ibclaw.in/section-13-enforcement-of-security-interest/ 

[6] The Legal School, Section 96 of IBC, 2016: Detailed Overview. Available at: https://thelegalschool.in/blog/section-96-ibc 

[7] The Legal School, Section 13 of SARFAESI Act: Enforcement of Security Interest. Available at: https://thelegalschool.in/blog/section-13-sarfaesi-act 

[8] Nishith Desai Associates, Dissecting the Insolvency Code: Scope and Impact of Interim Moratorium. Available at: https://www.nishithdesai.com/NewsDetails/10625 

[9] SARFAESI Act Wikipedia Overview. Available at: https://en.wikipedia.org/wiki/Securitisation_and_Reconstruction_of_Financial_Assets_and_Enforcement_of_Security_Interest_Act,_2002 

Authorized by Dhrutika Barad