The Insolvency and Bankruptcy Code (IBC), enacted in 2016, is a comprehensive legal framework designed to address insolvency issues and facilitate the restructuring of financially distressed companies. This law empowers creditors to initiate insolvency proceedings when a company defaults on its debts. For instance, if a textile company fails to repay a ₹50 crore loan, the lender can approach the NCLT (National Company Law Tribunal) to seek resolution or liquidation.
In contrast, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), established in 2002, allows lenders to recover loans without court intervention by selling secured assets. For example, if a borrower defaults on a housing loan, the bank can seize and auction the pledged property to recover the outstanding amount.
The goals of IBC and SARFAESI are distinct:
Direct comparisons between IBC and SARFAESI can be misleading. IBC handles complex insolvency situations involving multiple stakeholders, while SARFAESI is limited to recovering debts through the enforcement of mortgage securities. For example, if a company owes money to several lenders and is unable to make repayments, the IBC process is more appropriate. Conversely, if an individual defaults on one housing loan, the SARFAESI process suffices.
Some analyses attempt to compare recovery rates between the two laws, which is often unfair. IBC typically manages more distressed assets with numerous stakeholders involved. For example, while IBC may recover only 30% of the owed amount, it often revives companies. In contrast, SARFAESI may achieve a quicker recovery of 70%, but it is generally used for simpler cases.
The IBC provides time-bound solutions that aid in the revival of companies and ensure equitable treatment of creditors. Since its implementation in 2018, IBC has facilitated the recovery of over ₹3 lakh crore for banks, surpassing recoveries made through SARFAESI or Lok Adalats.
Despite the effectiveness of IBC, SARFAESI remains valuable, particularly for individual loans or smaller financial cases. However, for larger-scale insolvencies, IBC is the more suitable option.
It is crucial to recognize the unique roles of both laws. Policymakers should strive for coordinated implementation rather than viewing one as a substitute for the other, as each serves a specific purpose in the financial framework.
Q1. What is the main purpose of the IBC?
Answer: The IBC aims to provide a structured process for resolving insolvency and restructuring financially distressed companies, ensuring timely and fair treatment of creditors.
Q2. How does SARFAESI differ from IBC?
Answer: SARFAESI focuses on recovering secured loans through asset seizure without court involvement, whereas IBC addresses broader insolvency issues involving multiple stakeholders.
Q3. Can both IBC and SARFAESI be used simultaneously?
Answer: No, they serve different purposes; IBC is suitable for complex insolvencies, while SARFAESI applies to straightforward loan recoveries.
Q4. What are the recovery rates like for both laws?
Answer: Recovery rates can vary; IBC might recover less but aids in company revival, while SARFAESI may recover more quickly in simpler cases.
Q5. Why are both laws important for the economy?
Answer: Both laws play crucial roles in maintaining financial stability, ensuring fair creditor treatment, and facilitating the recovery of distressed assets.
Question 1: What is the primary aim of the IBC?
A) Recovery of secured loans
B) Restructuring financially distressed companies
C) Liquidation of assets
D) Enforcement of security interests
Correct Answer: B
Question 2: Which law allows lenders to recover loans without court involvement?
A) IBC
B) SARFAESI
C) RERA
D) Companies Act
Correct Answer: B
Question 3: What is the NCLT's role in the IBC process?
A) Approve loan recovery
B) Resolve insolvency disputes
C) Liquidate assets
D) Enforce security interests
Correct Answer: B
Question 4: When should SARFAESI be used over IBC?
A) For complex insolvency
B) For individual loan recovery
C) For multiple stakeholders
D) For company revival
Correct Answer: B
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