The provisions of IBC will prevail over the provisions of SARFAESI Act

provisions-of-SARFAESI-Act

STATUS AS ON 24/05/2019

The foremost objective of Insolvency and Bankruptcy Code, 2016 is to protect the interests of all the stakeholders and creditors of the corporate debtor. Adhering to the aforementioned objective, the legislature has come with the Corporate Insolvency Resolution Process as the primary step wherein all the efforts are put in to revive the defaulting company. However, if the resolution does not seem possible then only the company or corporate debtor is sent into liquidation.

Steps under IBC

If an insolvency application against the corporate debtor is admitted then an Interim Resolution Professional or Resolution Professional is appointed to take over the control of the management of the corporate debtor with the sole purpose of reviving the corporate debtor and get the maximum value of the assets of the corporate debtor which is the only way to promote the interests of the aggrieved creditors of the corporate debtor.

Moratorium and duties of Resolution Professional

The legislature has incorporated every provision in accordance with the objective of the code. Thus, after the admission of application the moratorium period comes into picture and IRP is appointed. Both of the procedural steps make sure that the properties or assets or the value of the assets or properties of the corporate debtor are not diminished at all.

Under section 14 of IBC after the admission of insolvency application the moratorium period comes into picture, according to which any act diminishing the value of assets or properties of the corporate debtor is completely prohibited. The aforementioned period allows the IRP to freely work upon the revival of the corporate debtor and to remain the properties of the corporate debtor intact till the arrival of any viable resolution plan.

Likewise under section 18(f) the IRP shall take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor. The IRP is empowered to take control of the assets owned by the corporate debtor may or may not be in the possession of the corporate debtor but does not include the assets owned by third party in possession of the corporate debtor.

SARFAESI ACT

Under section 13(4) of the SARFAESI Act, 2002 once a corporate debtor defaults in repaying the loan amount taken from the bank, the bank can file the application to take over the physical possession of the property of the corporate debtor.

Inconsistency between IBC and SARFAESI

On one hand under IBC, the IRP or RP is empowered to take over the physical possession of the property of the corporate debtor whereas on the other hand under SARFAESI Act bank is legally entitled to take over the physical possession of the property of the defaulting corporate debtor.

While interpreting the aforementioned provisions of both the enactments and analyzing the essentiality of the property of the corporate debtor NCLAT in the matter of Encore asset Reconstruction Company Pvt. vs. Ms. Charu Sandeep Desai & Ors. laid down that section 18 of the code will prevail over section 13(4) of SARFAESI Act.

Brief Facts

The bank had rightly taken over the possession of the property of the corporate debtor by filing the application under Section 13(4) of the act however; it does not mean that the bank became the owner of the property of the corporate debtor thus under section 18 of IBC the IRP/RP has full authority to obtain the physical possession of the property undertaken by the bank under SARAESI Act.

Thus as per section 18 of the code even if the property is not in possession of corporate debtor but the ownership is in the name of the corporate debtor the bank has to hand over the property to the IRP/RP.

CONCLUSION

Therefore in the light of above provision and section 238 of IBC, when there arises any inconsistency between the aforementioned two laws the provision of IBC will prevail over the provisions of SARFAESI Act, 2002. Also, since the IBC is creditor oriented legislation thus based upon the facts of the case in my opinion approaching adjudicating authority against defaulting corporate debtor under IBC would be a viable option.

Disclaimer –  Please note that the above view is based on personal interpretation and for general awareness. The readers are required to take opinion from the Top IBC professionals or Insolvency Professionals before relying on the article. For any clarifications, please write to us at ibc@centrik.in

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