IBC and SARFAESI Act confusion again as RBI takes up Aircel case

Topics IBC | Sarfaesi Act | RBI

Experts point out that there are fundamental differences between how ARCs were conceived through statutory provisions
The differences between the Insolvency and Bankruptcy Code (IBC) and the SARFAESI Act, 2002, are apparent again after the Reserve Bank of India (RBI) reportedly rejected UV Asset Reconstruction Company’s (UVARCL) plan to buy the assets of Aircel, the distressed telecom company.

The RBI reportedly said UVARCL’s plan did not confirm with guidelines laid out for Asset Reconstruction Companies (ARCs) and the provisions of the SARFAESI Act. This puts a question mark on participation of ARCs in the bidding process for companies undergoing insolvency resolution. UVARCL has been approved by a committee of creditors to buy Reliance Telecom’s distressed assets, including its spectrum.

Here is a look at why it may be legally untenable for ARCs to be part of bidding processes under IBC—at least till regulators like the RBI and the Insolvency and Bankruptcy Board of India clarify the matter.


Insolvency and Bankruptcy Code, 2016, provides a comprehensive legal framework for time-bound insolvency resolution process and liquidation. The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, is for secured financial creditors, namely banks and financial institutions.  

“Whereas the former focuses on evolving solutions to ensure a collective mechanism for resolving insolvency and preserving the economic value of the corporate entity, the latter deals with securitisation, asset reconstruction, enforcement of security without intervention of the court,” says Poornima Advani, partner at The Law Point.

IBC's ambit is wider, as it takes into consideration of all kinds of creditors: both financial and operational; secured and the unsecured. The SARFAESI Act empowers secured creditors to enforce their security interest.

The IBC is regulated by the Ministry of Corporate Affairs through the IBBI, along with a framework that has roles chalked out for different stakeholders, including the Committee of Creditors, the Resolution Professionals, the NCLTs and their appellate forum. The SARFAESI Act is regulated by the Ministry of Finance and the RBI.

When IBC, SARFAESI overlap

The IBC Act did away with overlapping provisions in various laws, like the Sick Industrial Companies (Special Provisions) Act, 1985, The Recover of Debts Due to Bans and Financial Institutions Act, 1993, and the Companies Act 2013.

An amendment in 2016 widened the SARFAESI Act’s scope, changing the definition of debt and secured creditors and giving RBI more powers in relation to making of policies.

To do away with inconsistencies, the IBC under section 238 stated that its provisions would override any other law that is in force. Experts say that this is not the first time that the two laws are crossing each other’s path. In several cases, the courts have given precedence to IBC over the SARFAESI Act.

In the grey about distressed assets

The RBI issued in July guidelines for ARCs, saying they must follow transparent and non-discriminatory practices in acquisition of assets. They must also maintain an arm’s length distance in the pursuit of transparency, the guidelines add.

Experts point out that there are fundamental differences between how ARCs were conceived through statutory provisions, and in the way bidders of distressed assets under IBC behave. 

“ARCs are expected to acquire securities and maximise their value, including through reconstruction. This would lead to upside sharing with secured creditors. On the other hand, a resolution applicant is interested in getting the asset with minimum possible payout to creditors,” said Sitesh Mukherjee, a Delhi-based independent legal counsel.

Mukherjee said if the RBI is uncomfortable with ARCs stepping out of the domain of Securitisation and Reconstruction Act, it should make regulations disallowing them from participating in the IBC auction process.

There are apprehensions among IBC stakeholders whether the ARCs violate or breach any of the provisions of the IBC.

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