SARFAESI and the IBC: Enforcement Meets Insolvency

SARFAESI lets one secured creditor enforce its own security; the Insolvency and Bankruptcy Code deals with a failing company collectively. When the two meet, the Code wins. Once insolvency resolution is admitted, the moratorium stops SARFAESI action against the company's assets, and in liquidation a secured creditor must choose between relinquishing its security and realising it itself. This note sets out the moratorium, the liquidation choice and waterfall, and the lender's strategic choice between the two regimes.

1. The Moratorium Stops SARFAESI

Admission, moratorium, override

Figure 1: Admission, moratorium, override

CIRP admitted. When the NCLT admits a corporate debtor into the corporate insolvency resolution process, a moratorium is declared.
Moratorium, s.14(1)(c). It bars any action to foreclose, recover or enforce any security interest over the debtor's property, including any action under SARFAESI.
Overriding effect, s.238. The IBC overrides inconsistent provisions of other laws, so SARFAESI measures against the debtor's assets must stop during the process.
Only the debtor's property. The moratorium protects the corporate debtor's assets; it does not protect a guarantor's property (Topic 78)

2. Liquidation and the Waterfall

Relinquish or realise

Figure 2: Relinquish or realise

Relinquish, s.52. A secured creditor may relinquish its security to the liquidation estate and be paid in the s.53 waterfall.
Realise, s.52. Or it may realise its security itself, including through SARFAESI, but must contribute towards insolvency costs and workmen's dues and prove any shortfall as unsecured.
The waterfall, s.53. Insolvency costs first; then workmen's dues and relinquishing secured creditors pari passu; then employees; then unsecured financial creditors; then government dues with any secured shortfall.
The workmen's link. As under the old s.529A, workmen stand alongside secured creditors, a continuity with company law (Topic 62)

3. Choosing Between the Regimes

Enforcement or resolution

Figure 3: Enforcement or resolution

Two routes for a lender. A secured financial creditor may enforce under SARFAESI or file a s.7 application under the IBC, depending on its objective.
SARFAESI: realise the asset. Suits a lender that wants its own security sold for its own debt, without a collective process.
IBC: resolve the debtor. Suits a lender seeking collective resolution of the company; but once CIRP is admitted, SARFAESI must stop.
s.26E yields to the IBC. The Explanation to s.26E makes secured-creditor priority subject to the IBC where insolvency proceedings are pending (Topic 49)

⚠ Exam trap

State the hierarchy: once CIRP is admitted, s.14(1)(c) of the IBC bars any action to enforce a security interest over the corporate debtor's property, expressly including SARFAESI, and s.238 gives the Code overriding effect. In liquidation, s.52 gives the secured creditor a choice to relinquish and rank in the s.53 waterfall, or realise outside the estate while contributing to costs and workmen's dues. Note the Explanation to s.26E, which makes SARFAESI priority subject to the IBC, and that the moratorium does not protect a guarantor's property.

4. Frequently Asked Questions

Can a bank continue SARFAESI action after insolvency proceedings begin?

Not against the corporate debtor's property. Once the NCLT admits the corporate insolvency resolution process, the moratorium under Section 14(1)(c) of the IBC bars any action to foreclose, recover or enforce any security interest created by the corporate debtor over its property, including action under SARFAESI, and Section 238 gives the IBC overriding effect. Pending SARFAESI measures must stop. The moratorium does not, however, protect a personal guarantor's property, against which the creditor may continue to proceed.

What are a secured creditor's options in liquidation under the IBC?

Under Section 52 of the IBC, a secured creditor may either relinquish its security interest to the liquidation estate and receive proceeds in the Section 53 waterfall, where it ranks pari passu with workmen's dues after insolvency costs, or realise its security interest itself, including through SARFAESI, in which case it must contribute towards insolvency costs and workmen's dues and may prove any shortfall as an unsecured creditor. The Explanation to Section 26E of SARFAESI confirms that, where insolvency proceedings are pending, secured-creditor priority is subject to the Code.

5. Related Topics

Topic 78: Guarantors across SARFAESI and the IBC. Why the moratorium does not shield guarantors.
Topic 49: Section 26E Priority. The Explanation subjecting priority to the IBC.