Debt recovery is a crucial concern for financial institutions, and India has implemented two major legal frameworks to address this: the SARFAESI Act, 2002 and the Insolvency and Bankruptcy Code (IBC), 2016. Both these mechanisms provide pathways for creditors to recover dues from defaulting borrowers but differ significantly in their approach and scope.
SARFAESI Act: A Direct Asset Recovery Tool
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act enables banks and financial institutions to recover non-performing assets (NPAs) by directly seizing and auctioning secured assets without needing court intervention. This act applies to loans secured against assets such as property, vehicles, or machinery. It is particularly beneficial for quick recovery in cases where assets can be liquidated to settle the debt.
However, SARFAESI is limited to secured creditors and cannot be invoked for unsecured loans or loans under ₹1 lakh. It also excludes agricultural land from its purview. For secured creditors with clear collateral, SARFAESI provides a faster and more cost-effective method of debt recovery.
Insolvency and Bankruptcy Code (IBC): A Comprehensive Resolution
The Insolvency and Bankruptcy Code (IBC), on the other hand, offers a more comprehensive framework for resolving insolvency issues. Unlike SARFAESI, the IBC applies to both secured and unsecured creditors and allows creditors to initiate insolvency proceedings against corporate debtors or individuals. The IBC’s primary aim is to resolve insolvency within a strict time frame of 330 days, either by restructuring the debt or liquidating the company’s assets.
The IBC is beneficial in complex cases where businesses have potential for revival. It involves the formation of a committee of creditors, who work with insolvency professionals to evaluate whether the debtor company can be restructured or must be liquidated. This collaborative approach ensures that all creditors, including unsecured ones, have a say in the outcome.
Which is Better for Debt Recovery?
At Finlender, we recognize that both SARFAESI and IBC have unique advantages. SARFAESI is ideal for secured creditors seeking fast recovery through asset liquidation. It is straightforward and cost-effective when collateral is involved. For smaller defaults and non-complex cases, SARFAESI is the preferred option.
However, for larger corporate debts, particularly those where unsecured creditors are involved or restructuring is possible, the IBC is a better choice. It provides a time-bound process that addresses the interests of all creditors, offering a chance for the business to either recover or be liquidated in an orderly manner.
Conclusion
In conclusion, the choice between SARFAESI Act and IBC depends on the nature of the debt and the specific circumstances of the case. For secured, asset-backed recoveries, SARFAESI offers speed and simplicity. For more complex cases involving corporate restructuring or unsecured creditors, the IBC provides a more holistic and inclusive approach. At Finlender, we advise leveraging both tools effectively to maximize debt recovery outcomes.
