Recovery of Non-performing Assets (Hereinafter referred to as 'NPA') is one of the most critical components of development in a burgeoning economy, especially one recuperating from the effects of a pandemic. Mounting bad debts discourage a steady flow of credit in the economy and as more and more financial institutions crumble under the load of failed recoveries, India's legal framework tries its best to keep up. Introduction of the Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as IBC or the Code) propelled India from a rank of 142 in 2014 to a 63 in 2019 in World Bank's Doing Business reports. Since its inception in 2016, it saw a steadfast recovery of 44% of bad debts as compared to the combined recovery of 24% from Debt Recovery Tribunals, SARFAESI Act, 2002, and Lok Adalats, in the financial years, 2018-2020.

IBC was introduced as a means of amalgamation of all the legislations scattered across different statues and in an attempt to introduce speedy recovery of NPAs and despondent financial institutions. Even though the Code faced an impediment in the form of COVID-19, when fillings were deferred from 25th March 2020, it managed to bounce back in no time.

Reserve Bank of India Governor Shaktikanta Das has also been noted praising the Code, saying that recoveries under the IBC had been far greater than those via other debt recovery mechanisms. It can be said with no doubt that IBC has launched India to the forefront for potential financial investments. However, what has the IBC done differently that its predecessors failed to do?

Failures of the SARFAESI over the IBC

Before the IBC came into force the SARFAESI Act was one of the major instruments of financial asset reconstruction. While both the IBC and the SARFAESI are geared towards recovering bad debts by analyzing the assets of a debtor, IBC deals with companies as a going concern as opposed to the SARFAESI which is more concerned with liquidating the assets of the debtor to recover debts.

Even though the RBI has tried to formulate schemes to revive defaulting companies, most of them were unsuccessful and financial distress due to increasing non-performing assets was a common scenario before the advent of the code. There was a lack of proper insolvency law and the process of winding up of companies was tedious.

Due to such insufficiency, most of the defaulting companies would end up filing winding-up petitions. After which there were two solutions left to the secured creditors; to either enforce their securities under the SARFAESI Act after a long winding-up process or relinquish their securities and anticipate payment after the liquidation of the company's assets, alongside a long list of unsecured creditors.

Even though it was in the best interests of the banks and other financial institutions to revive or restructure a distressed debtor as opposed to winding up, there was very limited scope to do the same.

After its introduction in 2016, creditors have time and again preferred IBC over the SARFAESI Act. Even after the amendments to the SARFAESI Act, several shortcomings persist. Furthermore, the Act has failed to exhibit its viability in numbers. In the fiscal year 2018-19, recoveries made under the SARFAESI Act were just 14.5 percent, while it was a whopping 42.4 percent under the IBC, which is considerably higher than the former. Moreover, the SARFAESI Act continues to have a problem of pending proceedings. Even though IBC faced a sudden backlog of cases when filings were suspended last year due to the ongoing pandemic, there is an expected rise in its operation since proceedings were resumed in March 2021.

It is very evident that the legislators also bestow a great deal of importance to the code, apart from the lenders. This can be concluded from the existence of a non-obstante clause. The application of the clause gives preference to the IBC over the SARFAESI, or as a matter of fact any other law, in cases where proceedings under both have been instituted simultaneously.

This inclination of adjudicating authorities towards the code can be observed in numerous cases. It was held in Rakesh Kumar Gupta v. Mahesh Bansal, that pending proceedings under the SARFAESI cannot impede proceedings initiated by financial creditors under the IBC. The non-obstante clause allows for the initiation of fresh proceedings under the code even when proceedings are ongoing under the SARFAESI. Thus, there is a clear prevalence of the IBC over any other laws of the same essence.

Reference can be drawn from the landmark case of Encore Asset Reconstruction Company Pvt. Ltd v. Ms. Charu Sandeep Desai to prove this preference of IBC over other debt recovery laws. The corporate debtor had secured a loan from Dena Bank, in 2011, by mortgaging property and when proceedings were instituted under the SARFAESI Act on subsequent default, the property was seized by the bank. Fresh proceedings were instituted under IBC after the enactment of the act and consequently, a moratorium was declared under the code.

Dena Bank approached the NCLT to prevent the resolution professional from taking control of the property which was already under their possession owing to previously instituted proceedings under SARFAESI. Learned counsel for the bank argued that in light of the judgment in Transcore v. Union of India, all rights in the property stay vested with them as they were already in possession of the same. It was held, an Interim Resolution Professional is bound to take custody of the property in dispute, under section 18 of the code.

The appellants further appealed to NCLAT which upheld the judgment of the NCLT:

Decision in M/s. Transcore v. Union of India & Anr. was rendered in the year 2008 when the 'I&B Code' was not in existence. The 'I&B Code' came into force w.e.f. 1st December, 2016� 'SARFAESI Act, 2002' being an existing law, Section 238 of the 'I&B Code' will prevail over any of the provisions of the 'SARFAESI Act, 2002' if it is inconsistent with any of the provisions of the 'I&B Code'.

Conclusion
Recovery of non-performing assets is at the forefront of both the legislations due to which they have often come into conflict. Even though the existence of a non-obstante clause indicates a clear-cut preference of IBC, at times the two laws are in dispute due to regulatory gaps and overlaps. A lack of proper consonance between the two often leads to such problems. One such scenario is UV Asset Reconstruction's acquirement of Aircel's assets.

RBI has recently rejected a resolution plan submitted by the Asset reconstruction company (ARC) under the acumen of not adhering to SARFAESI guidelines, although the same was approved by the NCLT. While the SARFAESI discourages ARCs to submit resolution plans, section 29A of the IBC permits the same and. The enactment of the section succeeds SARFAESI guidelines and as such should prevail. Thus, RBI's disregard for the non-obstante clause causes confusion and disrupts precedence.

But, regardless of minor uncertainties, IBC has always emerged victorious. Even though the IBC is fairly new and possesses challenges faced by any new legislation, it is still quite fast in its workings. Therefore, the IBC is preferred over the SARFAESI Act, basically on the grounds that it offers a speedy recovery and is additionally compelling in managing debt and defending the interests of all creditors.

Recent developments in IBC promise efficiency and a boom in the recovery of non-performing assets. With the introduction of the Pre-packaged Insolvency Resolution Process (PIRP) in the Insolvency and Bankruptcy Code (Amendment) Bill, 2021, legislators plan to combat one of the biggest challenges posed by the Corporate Insolvency Resolution Process. The prolonged resolution process and drawn-out litigation by promoters and bidders had made around 79 percent of the ongoing 1723 insolvency resolution proceedings cross the 270-day mark.

The pre-pack resolutions will limit itself to 120 days only, with strictly 90 days for bringing a resolution plan for approval to the NCLT. Apart from this, another factor that contributes to the efficiency of the PIRP is that it permits existing management to maintain control instead of appointing resolution professionals, as in the case of CIRP. PIRP aims to provide quick resolution for distressed debtors and reduce the burden of NPAs on the economy.

One of the primary objectives of an effective debt recovery law is to provide a range of tools to help enterprises address different stages of financial distress. In particular, a debt recovery law should allow plenty of room for the restructuring of viable businesses and exit of non-viable businesses. The IBC provides such a framework with a time-bound mechanism for restructuring companies through a CIRP or exiting the market through a liquidation process. It has been an important legislative reform that has reduced India's financial distress by reducing NPAs, helped strengthen its' insolvency regime, and increased overall recovery for creditors.

The COVID-19 pandemic is expected to have far-reaching and destabilizing effects on businesses. Forecasts predict large numbers of business failures globally, particularly small businesses, and insolvency regimes need to be equipped to rapidly restructure viable businesses and liquidate non-viable ones.

In a very short time, the IBC has made great strides in providing a predictable framework that aims to provide timely, efficient, and impartial resolution of viable businesses and a transparent liquidation process, which recognizes existing creditor rights and respects the priority of claims.