When a borrower defaults, lenders in India are often faced with a strategic decision rather than a purely legal one. Should they enforce their security directly under the SARFAESI Act, or should they trigger insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC)? Both routes aim at recovery, yet they work very differently and lead to very different outcomes.
Understanding these differences is essential, not just for banks and financial institutions, but also for corporate borrowers, promoters, and guarantors who are affected by these actions.
Understanding the SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was introduced to empower secured creditors to recover dues without court intervention.
SARFAESI is a creditor-driven enforcement mechanism.
Once an account is classified as a non-performing asset, the lender can issue a demand notice under Section 13(2). If the borrower fails to comply, the lender can take measures under Section 13(4), including:
- Taking possession of secured assets
- Taking over management of the borrower’s business
- Appointing a manager
- Selling the secured assets to recover dues The process is relatively swift and focuses squarely on the value of the secured asset.
Understanding Insolvency Proceedings under the IBC
The Insolvency and Bankruptcy Code takes a very different approach. It is not just about recovery. It is about resolution of financial distress.
Once a corporate insolvency resolution process (CIRP) is initiated, control of the company shifts from the management to an insolvency professional. A moratorium comes into effect, freezing all recovery actions, including SARFAESI enforcement.
The objective here is either to revive the company through a resolution plan or, if that fails, to liquidate it in an orderly manner.
Insolvency proceedings are collective in nature. All creditors, secured and unsecured, become part of a single process.
Key Differences Between SARFAESI and Insolvency Proceedings
While both mechanisms address default, their structure and impact differ significantly.
Nature of the process
SARFAESI is enforcement-focused and asset-specific. Insolvency proceedings are company-wide and resolution-oriented.
Control over assets
Under SARFAESI, the lender controls the enforcement and sale of secured assets. Under the IBC, control shifts to the resolution professional, and decisions are driven by the committee of creditors.
Speed and complexity
SARFAESI actions can be faster in straightforward cases. Insolvency proceedings involve statutory timelines but are often more complex due to multiple stakeholders.
Impact on other creditors
SARFAESI benefits the enforcing secured creditor. Insolvency proceedings balance competing interests of all creditors.
Judicial Guidance on the Interplay Between the Two
Indian courts have repeatedly examined the overlap between SARFAESI and the IBC.
In Innoventive Industries Ltd. v. ICICI Bank (2018), the Supreme Court clarified that once insolvency proceedings commence, the moratorium under the IBC overrides SARFAESI actions.
Similarly, in Indian Overseas Bank v. Ashok Saw Mill (2009), the Court recognised SARFAESI as a powerful tool but emphasised that borrowers must have access to remedies under the Act.
More recently, courts have reiterated that lenders may initiate SARFAESI proceedings even after filing an insolvency application, but once CIRP is admitted, SARFAESI enforcement must stop.
When SARFAESI Makes More Sense
SARFAESI is often the preferred route in certain situations.
- The lender is fully secured and confident of asset value
- The borrower’s business viability is not a concern
- The focus is on quick recovery rather than revival
- There are no complex creditor disputes For lenders dealing with single-asset companies or immovable property-backed loans, SARFAESI can be efficient and cost-effective.
When Insolvency Proceedings Are the Better Choice
Insolvency proceedings may be more suitable where recovery through asset sale alone is unlikely.
- The borrower has multiple creditors with competing claims
- The business has operational value beyond its assets
- Enforcement under SARFAESI may trigger value erosion
- Resolution through restructuring is commercially viable IBC proceedings also provide transparency and finality, especially in cases involving large corporate borrowers.
Strategic Considerations for Lenders
Choosing between SARFAESI and insolvency is rarely a binary decision. It often involves timing and leverage.
Many lenders initially invoke SARFAESI to pressure borrowers into settlement. If that fails, insolvency proceedings are triggered as a last resort.
However, this strategy must be handled carefully. Delayed insolvency filings may reduce recovery if asset value deteriorates or if other creditors act first.
Lenders must also consider the risk of losing control once CIRP begins.
Borrower and Promoter Perspective
From a borrower’s standpoint, SARFAESI is often seen as aggressive and disruptive, especially when business assets are involved.
Insolvency proceedings, while serious, offer a structured opportunity for resolution. Promoters may still participate through resolution plans, subject to eligibility under the Code.
That said, insolvency also brings reputational risks and loss of management control.
Practical Takeaways
There is no one-size-fits-all answer.
SARFAESI works best as a direct recovery tool for secured creditors. Insolvency proceedings work best as a collective restructuring mechanism.
The choice depends on asset value, business viability, creditor structure, and long-term objectives.
Legal advice at an early stage can significantly influence outcomes, both in terms of recovery and risk management.
Conclusion
SARFAESI and insolvency proceedings are not competing laws. They are complementary tools within India’s recovery framework.
The real question is not which law is stronger, but which process aligns better with the facts of the case. For lenders, the right choice can mean the difference between timely recovery and prolonged litigation. For borrowers, it can determine whether a business survives or shuts down.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments and is not guaranteed to be accurate, complete, or up-to-date. Readers should consult a qualified legal professional before taking any action based on the information provided. The authors and publishers disclaim any liability for any loss or damage incurred as a result of reliance on this article. This article does not create an attorney-client relationship.