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The SARFAESI and IBC overlap: a system at odds with itself

Secured creditors face competing timelines and forums. A practical view of how enforcement and resolution collide, and how to sequence remedies.

Two statutes, two philosophies

The SARFAESI Act, 2002 is an enforcement statute. It exists to allow a secured creditor to realise its security without the intervention of a court, by taking possession of the secured asset and selling it. The Insolvency and Bankruptcy Code, 2016 is a resolution statute. It exists to preserve the corporate debtor as a going concern where that is possible, and to distribute value collectively where it is not. The first is individual and asset-focused; the second is collective and entity-focused. They pull in opposite directions.

The moratorium

The point of collision is Section 14 of the Code. On the admission of an application and the commencement of the corporate insolvency resolution process, a moratorium prohibits, among other things, any action to foreclose, recover or enforce any security interest, including any action under SARFAESI. A secured creditor who has issued a Section 13(2) notice, taken symbolic possession under Section 13(4), and advertised the asset for auction, finds the entire exercise frozen. If the sale has not been completed, the asset returns to the pool.

The sequencing question

This produces a race. A secured creditor with a valuable and liquid security will often prefer to complete a SARFAESI sale before any insolvency application is admitted. A financial creditor with an unsecured or thinly secured exposure will prefer admission, because the collective process gives it a share of value it would not otherwise reach. The corporate debtor, meanwhile, may file its own application under Section 10 precisely to obtain the moratorium and stop the auction.

Where litigation clusters

Three areas recur. First, the validity of steps taken under SARFAESI after the moratorium has commenced, which are void. Second, the position of an auction purchaser who has paid but not received a sale certificate before admission, and whether delay in payment invalidates the sale. Third, the treatment of a security interest in the resolution plan, and the extent to which a dissenting secured creditor is entitled to the liquidation value of its security.

What we advise

Secured creditors should not treat SARFAESI and the Code as alternatives to be selected at leisure. Monitor the debtor for insolvency filings from the moment default occurs, and move on enforcement with an awareness that the window may close without notice. Where an auction is under way and an insolvency application appears imminent, prioritise completing the sale, including issue of the sale certificate and registration, rather than pausing to negotiate. Where the moratorium has already commenced, stop. Steps taken in the teeth of a moratorium are not merely ineffective; they invite adverse costs and, in a proper case, contempt.

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