SARFAESI ACT VS. INSOLVENCY AND BANKRUPTCY CODE: A COMPARATIVE ANALYSIS

Introduction: The Indian financial sector has witnessed significant reforms in recent years, particularly in the areas of debt recovery and insolvency resolution. Two crucial legislations governing these aspects are the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Insolvency and Bankruptcy Code (IBC). While both aim to facilitate debt recovery and ensure financial stability, they differ in their scope, procedures, and objectives. This article provides a comparative analysis of the SARFAESI Act and the IBC, highlighting their key features and assessing their effectiveness.

1. SARFAESI Act: The SARFAESI Act was enacted in 2002 to address the issue of non-performing assets (NPAs) and provide banks with additional powers to recover debts. Its primary objective is to enable banks and financial institutions to enforce security interests and recover dues without the intervention of courts. Key features of the SARFAESI Act include: a. Securitization and Reconstruction: The Act empowers banks to securitize and reconstruct financial assets, allowing them to transfer or sell stressed assets to asset reconstruction companies (ARCs). b. Enforcement of Security Interest: Banks can take possession of the collateral and sell or lease the secured assets to recover outstanding dues without court intervention. c. Debt Recovery Tribunals (DRTs): DRTs were established under the Act to adjudicate disputes arising from the enforcement of security interests.
2. Insolvency and Bankruptcy Code: The Insolvency and Bankruptcy Code was enacted in 2016 as a comprehensive framework to deal with insolvency and bankruptcy cases across various sectors. It aims to promote a time-bound and efficient resolution process for distressed entities. Key features of the IBC include: a. Insolvency Resolution: The IBC provides for a corporate insolvency resolution process (CIRP) and an individual insolvency resolution process (IRP), ensuring a structured and time-bound resolution of insolvency cases. b. Insolvency Professionals (IPs): IPs play a crucial role in managing the affairs of the debtor during the resolution process, maximizing value for creditors. c. National Company Law Tribunal (NCLT): The NCLT is the adjudicating authority for insolvency proceedings under the IBC, with the National Company Law Appellate Tribunal (NCLAT) functioning as the appellate body.

Comparative Analysis:

1. Scope: The SARFAESI Act primarily deals with the enforcement of security interests, while the IBC focuses on the resolution and insolvency of entities.
2. Recovery Process: The SARFAESI Act allows banks to recover debts without court intervention, whereas the IBC follows a structured resolution process under the supervision of the NCLT and NCLAT.
3. Time-bound Resolution: The IBC emphasizes time-bound resolution, with a maximum period of 180 days (extendable by 90 days) for completing the CIRP. The SARFAESI Act does not provide a specific timeline for debt recovery.
4. Inclusion of Individuals: Unlike the SARFAESI Act, the IBC covers individuals, providing a framework for their insolvency resolution.
5. Rights of Creditors: The IBC ensures fair treatment of creditors through the Committee of Creditors (CoC), whereas the SARFAESI Act does not have a similar mechanism.
6. Judicial Intervention: The SARFAESI Act limits judicial intervention, while the IBC involves the NCLT and NCLAT at various stages of the insolvency resolution process.

In conclusion, both the Sarfaesi Act and the IBC have their own strengths and weaknesses. While the Sarfaesi Act is useful for the quick recovery of dues for secured debts, the IBC provides a comprehensive framework for the resolution of insolvency and bankruptcy cases. It is essential for banks and financial institutions to understand the differences between the two acts and choose the appropriate mechanism for recovery of dues based on the specific circumstances of the case.