Three routes, three purposes
Indian lenders can recover defaulted loans through enforcement of security under SARFAESI, a recovery claim before the Debts Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993, or corporate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. Each has a different objective and a different consequence for the borrower.
SARFAESI: security enforcement
This is the fastest route where the loan is secured and the asset is realisable. It needs no decree. Its limits are that it operates only against the security interest, requires an NPA classification and remains open to challenge under Section 17. It suits mortgages over real estate and hypothecated stock.
DRT: recovery of the whole debt
For claims of twenty lakh rupees and above, a bank can file an original application before the DRT to obtain a recovery certificate against the borrower and guarantors and enforce it against all their assets. It suits cases where the security is insufficient or where guarantors need to be reached. It is slower than a Section 13 action because it involves pleadings and evidence.
IBC: collective resolution
A financial creditor can initiate corporate insolvency under Section 7 of the IBC for a default of at least one crore rupees. Admission triggers a moratorium under Section 14 that bars SARFAESI action and other recovery proceedings against the corporate debtor. The aim is resolution or, failing that, liquidation, rather than individual recovery. It suits stressed businesses with going concern value.
Can they run together?
Lenders often invoke SARFAESI and the DRT in parallel. Once an IBC moratorium begins, SARFAESI measures against the corporate debtor's assets must stop. Claims against personal guarantors follow a separate insolvency track under Part III of the IBC.
Choosing between them
Lenders should weigh the value and quality of the security, the presence of guarantors, the borrower's operating condition and the likelihood of settlement. Borrowers should run the same analysis in reverse, since it tells them which remedy to expect and which defences are available.
Frequently Asked Questions
Q. Can SARFAESI proceed once an IBC moratorium starts?
A. No. Section 14 of the IBC bars enforcement of security interests against the corporate debtor during the moratorium.
Q. What is the minimum claim for a DRT application?
A. Twenty lakh rupees, as notified under the Recovery of Debts and Bankruptcy Act.
Disclaimer: This article is for general information only and is not legal advice. The law may change, and the facts of each matter differ.