Pre-IBC Insolvency Regime: SICA, BIFR, RDB Act and SARFAESI

Before 2016, India had no single law on insolvency. Individuals were governed by colonial era statutes, companies were wound up by High Courts under the Companies Act, sick industrial units sought protection from the BIFR, and banks pursued recovery before Debt Recovery Tribunals or under SARFAESI. Each mechanism had its own forum and logic, and together they produced delay, conflicting orders and poor recovery. This note examines each of these laws, the RBI's out-of-court schemes, the reasons for their failure and what remains of them after the Code.

Figure 1: The pre-2016 framework at a glance

1. Insolvency of Individuals

• Two Acts. The Presidency Towns Insolvency Act, 1909 applied in the former presidency towns of Calcutta, Madras and Bombay, administered by the High Courts; the Provincial Insolvency Act, 1920 applied elsewhere, administered by District Courts.
• Scheme. A debtor who committed an act of insolvency, such as transferring property to defeat creditors or suffering attachment, could be adjudged an insolvent on a petition by a creditor or by himself; his property vested in an official assignee or receiver for distribution, and he could later seek discharge.
• Position today. Section 243 of the Code repeals both Acts, but it has not been brought into force; they therefore continue to apply to individuals other than personal guarantors to corporate debtors (Topic 65)

2. Winding Up under the Companies Act, 1956

• Inability to pay debts. A company could be wound up by the High Court if it was unable to pay its debts (sections 433(e) and 434), including where it failed to pay a statutory demand within three weeks.
• Official Liquidator. On a winding up order, the Official Liquidator attached to the High Court took charge of the assets.
• Priorities. Section 529A gave workmen's dues and secured creditors' debts priority over all other debts, and section 530 listed preferential payments including government dues.
• Problems. Winding up proceedings often took decades, the assets of the company deteriorated in the meantime, and there was no mechanism for keeping the business alive.
• Companies Act, 2013. Its Chapter XIX on revival and rehabilitation of sick companies was never brought into force and was omitted by the Code; winding up moved from the High Courts to the NCLT from 15 December 2016, and inability to pay debts ceased to be a ground for winding up under section 271, being left to the Code (Topic 61)

3. SICA and the BIFR

• Sick industrial company. An industrial company registered for at least five years which had, at the end of a financial year, accumulated losses equal to or exceeding its entire net worth.
• Institutions. The Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), set up in 1987.

Figure 2: Process under SICA

• Section 22. While an inquiry or scheme was pending, no proceedings for winding up, execution, distress or appointment of a receiver, and no suit for recovery or enforcement of a guarantee, could proceed against the company without the consent of the BIFR or AAIFR.
• Abuse. Because a reference triggered this protection automatically, promoters referred companies to the BIFR to freeze recovery, and cases remained pending for years with few successful revivals.
• Repeal. The Sick Industrial Companies (Special Provisions) Repeal Act, 2003 was brought into force only on 1 December 2016, after being amended by the Code; the BIFR and AAIFR were dissolved, pending references abated, and the company could make a reference to the NCLT under the Code within 180 days.

4. The RDB Act and Debt Recovery Tribunals

• Object. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 set up Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) to decide claims of banks and financial institutions speedily, removing them from civil courts.
• Validity. Upheld in Union of India v Delhi High Court Bar Association (2002)
• Limits. It was a recovery mechanism for individual lenders, not a collective process, and the DRTs became overloaded.
• After the Code. Renamed the Recovery of Debts and Bankruptcy Act, 1993; DRTs are the adjudicating authority for individuals and partnership firms under Part III (section 179), and the DRAT hears appeals (Topic 72)

5. The SARFAESI Act, 2002

• Enforcement without court. Secured creditors may give a borrower in default sixty days' notice and then take possession of or sell the secured assets, or take over management of the business, without the intervention of a court (section 13)
• Remedy. The borrower may apply to the DRT under section 17 and appeal to the DRAT under section 18.
• Mardia Chemicals v Union of India, 2004. The Supreme Court upheld the Act but struck down the requirement of depositing 75 per cent of the claim before approaching the DRT under section 17(2) as oppressive.
• Asset reconstruction. The Act also regulates securitisation and asset reconstruction companies, which buy bad loans from banks and remain important buyers in insolvency proceedings.
• Limits. It serves only secured creditors, acting individually, and a sale of assets piece by piece often destroys the value of a running business.

6. RBI Schemes and the 2018 Circular

• Out-of-court schemes. Corporate Debt Restructuring (2001), Joint Lenders' Forums and corrective action plans (2014), Strategic Debt Restructuring (2015) and the Scheme for Sustainable Structuring of Stressed Assets, S4A (2016) allowed lenders to restructure loans by agreement, but were often used to postpone recognition of bad loans.
• Section 35AA, Banking Regulation Act. Inserted in 2017 to allow the Central Government to authorise the RBI to direct banks to initiate insolvency proceedings for specific defaults; the RBI then directed the referral of twelve large accounts in June 2017.
• Circular of 12 February 2018. Withdrew the earlier schemes and required large accounts to be referred under the Code if not resolved within 180 days of default.
• Dharani Sugars and Chemicals v Union of India, 2019. The Supreme Court struck down the circular as ultra vires, holding that section 35AA permits directions only in respect of specific defaults authorised by the Central Government, not a general direction; the RBI replaced it with the Prudential Framework of June 2019 based on inter-creditor agreements.

7. Why the Old Regime Failed

Figure 3: Problems of the old regime and the Code's response

The Bankruptcy Law Reforms Committee identified the root problem as the absence of a single, credible process in which creditors could assess the viability of a business and decide quickly whether to rescue or liquidate it. Laws overlapped, so the same company could face a BIFR reference, a winding up petition, DRT proceedings and SARFAESI action at once, with different forums issuing conflicting orders. The Code answers this by establishing one collective process, a strict timeline, a committee of creditors in control and specialised professionals and tribunals.

8. What Survives

• SARFAESI and the RDB Act. Both remain available to lenders and are often used alongside or instead of the Code; once a moratorium is declared under section 14, however, SARFAESI action and DRT proceedings against the corporate debtor must stop (Topic 22)
• Winding up under the 2013 Act. Still available on other grounds in section 271, such as a special resolution of the company, acts against the sovereignty and integrity of India, or fraud in the conduct of affairs.
• Schemes of arrangement. Compromises and arrangements under sections 230 to 232 of the Companies Act, 2013 continue, and may be used even during liquidation under the Code (Topic 59)
• Overriding effect. Where any of these laws conflicts with the Code, section 238 gives the Code precedence (Topic 77)

9. Frequently Asked Questions

What happened to cases pending before the BIFR?

When the SICA Repeal Act came into force on 1 December 2016, the BIFR and AAIFR were dissolved and pending references and appeals abated. The company could make a reference to the NCLT under the Code within 180 days of that date.

Can a bank use SARFAESI and the Code at the same time?

A bank may pursue either remedy, and the existence of SARFAESI proceedings does not bar an application under the Code. Once the NCLT admits the application and declares a moratorium, however, SARFAESI action against the corporate debtor's assets must stop.

Why did the Supreme Court strike down the RBI circular of February 2018?

Because section 35AA of the Banking Regulation Act allowed the RBI to direct banks to initiate insolvency only in respect of specific defaults, on authorisation by the Central Government. A general direction covering all large accounts went beyond that power (Dharani Sugars, 2019).

10. Related Topics

• Topic 1: Background and Object of the Code. Why the Code was enacted.
• Topic 61: Transfer of Winding Up Cases. Pending Companies Act proceedings.
• Topic 86: IBC vs SARFAESI and the RDB Act. Choosing between remedies.