Source: http://vinodkothari.com/2017/09/application-under-sarfaesi-a-liberal-approach-sc/
Timestamp: 2019-04-21 06:31:08+00:00

Document:
In the case of M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd., the Hon’ble Supreme Court held that there was no illegality in an Non-Banking Financial Company (NBFC) invoking SARFAESI Act for recovery of loan arrears with respect to an account classified as Non-Performing Asset (NPA) before the NBFC got notified under the Act. It also clarified that NBFC is entitled to initiate both arbitration proceedings and SARFAESI proceedings with respect to a loan account, and that the ‘doctrine of election’ was not attracted in such a scenario. There was a cleavage of judicial opinions inter se the High Courts, while the Full Bench of the Orissa High Court, as also the Delhi High Court and the Allahabad High Court have taken a view favourable in terms of the simultaneous legal processes under the SARFAESI Act and arbitration recovery proceedings, the Andhra Pradesh High Court has taken a divergent view and after careful scrutiny of the rival contentions and the judicial precedents cited, the Apex Court has finally settled the law on the point. Below, we discuss the same.
M.D. Frozen Foods Exports Pvt. Ltd. (Appellant) borrowed monies for their business against security of immovable properties by the creation of an equitable mortgage by deposit of title documents. The account of the Appellant was classified as a NPA.
The agreement inter se the parties contained an arbitration clause and thus, the matter went to arbitration, on Hero Fincorp Ltd. (Respondent) invoking the arbitration clause. However, prior to this invocation, a notification was issued in exercise of powers conferred under Section 2(1)(m)(iv) read with Section 31A of the SARFAESI Act, wherein the Respondent was notified as a financial institution (Notification).
In view of the aforesaid Notification, the Respondent issued a notice under Section 13(2) of the SARFAESI Act. The statement of claim was filed by the Respondent before the Arbitrator and interim orders were granted by the Arbitrator restraining the Appellant from creating any third party interest over the properties. The legality of the arbitration proceedings was challenged by the Borrower in view of the invocation of SARFAESI Act. The challenge being repelled both by the Arbitrator, and later by the Delhi High Court, the matter landed up before the Apex Court.
Whether resort can be had to Section 13 of the SARFAESI Act in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the Lender?
The SARFAESI Act was brought into force to solve the problem of recovery of large debts in NPAs. Thus, the very rationale for the said Act to be brought into force was to provide an expeditious procedure where there was a security interest. It certainly did not apply retrospectively from the date when it came into force. The question is whether the Act being applicable to the lender at a subsequent date and thereby allowing the lender to utilize its provisions with regards to a past debt, would make any difference to this principle? The Hon’ble Supreme Court answered in negative. The Act applies to all the claims which would be alive at the time when it was brought into force. Thus, qua the Respondent or other NBFCs, it would be applicable similarly from the date when it was so made applicable to them.
In Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Ltd. the Apex Court has succinctly set out this aspect. No doubt, till the time the lender was not a ‘financial institution’ within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, it was not a ‘secured creditor’ as defined under Section 2(1)(zd) of the SARFAESI Act and, thus, could not have invoked the provisions of the SARFAESI Act. However, the right to proceed under the SARFAESI Act accrued once the Notification was issued.
The case of Unique Engineering Works v. Union of India dealt with the issue of retrospectivity and retroactivity. In case of retroactivity, the Parliament takes note of the existing conditions and promulgates the remedial measures to rectify those conditions. In fact the SARFAESI Act, in our view, was to remedy such a position and provide a measure against secured interests. The scheme of the SARFAESI Act, is really to provide a procedural remedy against security interest already created. Therefore, an existing borrower, who had been granted financial assistance was covered under Section 2(f) of the said Act as a ‘borrower’. Not only this expression, the definition clauses dealing with ‘debt securities’, ‘financial assistance’, ‘financial assets’, etc., clearly convey the legislative intent that the SARFAESI Act applies to all existing agreements irrespective of the fact whether the lender was a notified ‘financial institution’ on the date of the execution of the agreement with the borrower or not. The scheme of the SARFAESI Act sets out an expeditious, procedural methodology, enabling the bank to take possession of the property for non-payment of dues, without intervention of the court. The mere fact that a more expeditious remedy is provided under the SARFAESI Act does not mean that it is substantive in character or has created an altogether new right, if this view is accepted, it would imply that there is an inherent right to delay the enforcement against the security interest!
Whether the lender can invoke the SARFAESI Act provision where its Notification as financial institution under Section 2(1)(m) has been issued after the account became an NPA under Section 2(1)(o) of the said Act?
That the debtor/borrower should have been declared an NPA..
“35. The provisions of this Act to override other laws. – The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
The aforesaid two Acts are, thus, complimentary to each other and it is not a case of election of remedy. The only twist in the present case is that, instead of the recovery process under the RDDB Act, the concern lies with regard to the arbitration proceeding. It is trite to say that arbitration is an alternative to the civil proceedings. In fact, when a question was raised as to whether the matters which came within the scope and jurisdiction of the Debt Recovery Tribunal under the RDDB Act, could still be referred to arbitration when both parties have incorporated such a clause, the answer was given in the affirmative. That being the position, the appellants can hardly be permitted to contend that the initiation of arbitration proceedings would, in any manner, prejudice their rights to seek relief under the SARFAESI Act. In HDFC Bank Limited v. Satpal Singh Bakshi, it was opined that an arbitration is an alternative to the RDDB Act. The jurisdiction of the Civil Court is barred for matters covered by the RDDB Act, but the parties still have freedom to choose a forum, alternate to, and in place of the regular courts or judicial system for deciding their inter se disputes. All disputes relating to the ‘right in personam’ are arbitrable and, therefore, the choice is given to the parties to choose this alternative forum. A claim of money by a bank or a financial institution cannot be treated as a ‘right in rem’, which has an inherent public interest and would, thus, not be arbitrable.
The aforesaid is not a case of election of remedies since the alternatives are between a Civil Court, Arbitral Tribunal or a Debt Recovery Tribunal constituted under the RDDB Act. Insofar as that election is concerned, the mode of settlement of disputes to an arbitral tribunal has been elected. The provisions of the SARFAESI Act are thus, a remedy in addition to the provisions of the Arbitration Act. In Transcore v. Union of India it was clearly observed that the SARFAESI Act was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith. Liquidation of secured interest through a more expeditious procedure is what has been envisaged under the SARFAESI Act and the two Acts are cumulative remedies to the secured creditors.
The Hon’ble Supreme Court held that the principle of retrospective operation of law was not applicable in the instant case. There was no retrospective operation involved, because as on the date of Notification, the claim was subsiting and operative. Thus, the provisions of the SARFAESI Act would become applicable to all the debts owing and existing when the Act became applicable to the lender. On perusal of the above, it can further be noted that the Apex Court, unequivocally, held that the judgments in Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Ltd., HDFC Bank Limited v. Satpal Singh Bakshi and Pradeep Kumar Gupta v. State of U.P lays down the correct proposition of law and the view expressed in M/s. Deccan Chronicles Holdings Ltd. v. Union of India following the overruled decision in Subash Chandra Panda v. State of Orissa does not set forth the correct position in law. SARFAESI proceedings and arbitration proceedings, thus, can go hand in hand.

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