All NotesCorporate LawInsolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016

IBC vs SARFAESI vs DRT vs Winding Up: Choosing the Remedy

A creditor facing a defaulting company can enforce its security, sue in the DRT, start a CIRP, or in limited cases seek winding up. Questions test which remedies are available on the facts, whether they can run together, what happens to individual remedies once a CIRP begins, and when the Companies Act still has a role. The four questions below cover the main combinations.

1. The Law in Brief

Individual and collective remedies compared

Figure 1: Individual and collective remedies compared

  • Cumulative remedies. Before a CIRP, a creditor may pursue SARFAESI, the DRT and the Code together; filing under the Code does not require abandoning other proceedings.
  • During a CIRP. The moratorium bars SARFAESI enforcement (section 14(1)(c)) and continuation of DRT proceedings and execution (section 14(1)(a)); section 238 gives the Code overriding effect.
  • Companies Act. Inability to pay debts is no longer a ground of winding up; section 271 covers other grounds, such as fraud, acts against the State or the just and equitable ground.

2. Can SARFAESI, DRT and IBC Run Together?

Facts

AB Bank lent ₹50 crore to CD Ltd against a mortgage of its factory. CD Ltd defaulted. AB Bank issued a SARFAESI notice under section 13(2), filed a recovery application in the DRT, and also filed under section 7. CD Ltd argues that the bank must elect one remedy, and that the section 7 application is an abuse while SARFAESI is pending. Decide.

  • Issue. Whether a secured creditor may pursue SARFAESI, the DRT and the Code at the same time.
  • Law. The remedies under the SARFAESI Act, the RDB Act and the Code are cumulative; the existence of one does not bar another. Section 238 gives the Code overriding effect in case of inconsistency, and the solvency of the debtor or pending proceedings are not grounds for refusing a complete section 7 application (Topic 98)
  • Application. CD Ltd has defaulted on a financial debt above one crore rupees. The pending SARFAESI notice and DRT application do not affect the section 7 application.
  • Conclusion. AB Bank need not elect. If the section 7 application is admitted, the moratorium will stay the SARFAESI and DRT proceedings, and AB Bank will participate in the CIRP as a secured financial creditor.

3. Is Winding Up for Inability to Pay Still Available?

Facts

EF Ltd owes GH Ltd ₹3 crore for supplies. In 2026, GH Ltd files a petition before the NCLT under the Companies Act seeking EF Ltd's winding up on the ground that it is unable to pay its debts. Separately, the Registrar of Companies seeks winding up of JK Ltd, a solvent company, alleging that its affairs were conducted fraudulently. Advise on both.

  • Issue. Whether winding up under the Companies Act is available for inability to pay debts, and on what grounds it remains available.
  • Law. The Code, through its Eleventh Schedule, amended the Companies Act, 2013 to remove inability to pay debts as a ground of winding up. Section 271 still allows the NCLT to wind up a company on grounds such as a special resolution, acts against the sovereignty or security of the State, fraudulent conduct of its affairs on an application by the Registrar or an authorised person, or the just and equitable ground.
  • Application. GH Ltd's petition rests on inability to pay debts, which is no longer a ground. The Registrar's petition against JK Ltd rests on fraud, which remains a ground, whatever the company's solvency.
  • Conclusion. GH Ltd's petition is not maintainable; it should serve a demand notice and apply under section 9. The Registrar's petition against JK Ltd may proceed under section 271.

Where the Companies Act still applies

Figure 2: Where the Companies Act still applies

4. Can a Pending Winding Up Move to the NCLT?

Facts

A winding up petition against LM Ltd was admitted by a High Court in 2016. An official liquidator was appointed, but no assets have been sold and no claims settled. In 2026, a financial creditor files a section 7 application before the NCLT and asks for the High Court proceedings to be transferred. The official liquidator objects. Decide.

  • Issue. Whether winding up proceedings pending in a High Court may be transferred to the NCLT for a CIRP.
  • Law. In Action Ispat and Power v Shyam Metalics (2020), the Supreme Court held that winding up proceedings in a High Court may be transferred to the NCLT even after a winding up order, unless they have reached an irreversible stage, such as sale of assets, where a CIRP would be futile. The aim is to give the company a chance of resolution as a going concern.
  • Application. Although a winding up order was passed, no assets have been sold and no claims settled; the process has not reached an irreversible stage.
  • Conclusion. The High Court may transfer the proceedings, and the NCLT may entertain the section 7 application. If the official liquidator had already sold the main assets, the High Court would ordinarily continue the winding up.

5. What Remedies Exist below One Crore?

Facts

NO Bank lent ₹60 lakh to PQ Ltd against a hypothecation of machinery, and PQ Ltd has defaulted on the whole amount. A trade supplier is separately owed ₹8 lakh by PQ Ltd, which is not an MSME. What remedies do the bank and the supplier have?

  • Issue. Remedies available where the default is below the Code's threshold.
  • Law. Section 4 sets a minimum default of one crore rupees for a CIRP. The SARFAESI Act applies to secured debts of one lakh rupees or more, subject to its exclusions. The RDB Act allows banks to apply to the DRT for debts of twenty lakh rupees or more. Other creditors must sue in civil courts or arbitrate.
  • Application. The bank's ₹60 lakh is below one crore rupees but above the SARFAESI and DRT limits, and is secured. The supplier's ₹8 lakh is below every special threshold, and PQ Ltd is not eligible for a pre-pack.
  • Conclusion. The bank may enforce its hypothecation under SARFAESI and apply to the DRT, but cannot use the Code. The supplier must file a civil suit or commercial suit, or arbitrate if there is an agreement. If PQ Ltd's total defaults to financial creditors later exceed one crore rupees, a joint section 7 application could be considered.

⚠ Exam trap

Remedies are cumulative until a CIRP begins; then the moratorium freezes SARFAESI and DRT proceedings, and s. 238 gives the Code primacy. In liquidation, secured creditors may again use SARFAESI through s. 52(4). Inability to pay debts is no longer a winding up ground; fraud and other s. 271 grounds remain. Old High Court petitions can move to the NCLT unless irreversible (Action Ispat, 2020). Below one crore, use SARFAESI, the DRT or civil courts.

6. Frequently Asked Questions

Does a DRT recovery certificate help under the Code?

Yes. It gives a fresh cause of action for a section 7 application, and its holder is a financial creditor (Dena Bank, 2021; A. Balakrishnan, 2022).

Is the consent requirement for joint SARFAESI enforcement the same as under section 52?

No. SARFAESI requires consent of creditors holding 60 per cent in value; section 52 after 2026 requires 66 per cent for realising shared security in liquidation.

How does a solvent company that no longer wants to operate close down?

By voluntary liquidation under section 59 of the Code, or, if defunct, by striking off under section 248 of the Companies Act.

7. Related Topics

  • Topic 86: IBC vs SARFAESI and RDB Act. Creditors' remedies compared.
  • Topic 87: IBC vs Companies Act Winding Up. Two ways a company ends.
  • Topic 138: GST and Income Tax in CIRP. Taxes in insolvency.