Challenge under SARFAESI Act against action by secured creditor no bar to arbitration proceedings: Delhi High Court

Challenge under SARFAESI Act against action by secured creditor no bar to arbitration proceedings: Delhi High Court

Appointing an arbitrator, it referred the borrower and the guarantors to arbitration

The Delhi High Court has reiterated that arbitration proceedings and proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002, can go together.

The single bench of Justice V Kameswar Rao held that even if a party intended to take action under the SARFAESI Act by filing a petition before the Debt Recovery Tribunal (DRT) to challenge the action of the secured creditor, it would not bar the initiation of arbitration proceedings by the secured creditor.

The petitioner, Hero Fincorp. Limited, advanced loan facilities to respondent No. 1 Techno Trexim (I) Pvt. Ltd., in terms of the Master Facilities Agreements and Supplementary Agreements executed between the parties. The Deeds of Guarantee were also executed by respondents no. 2 to 7, guaranteeing the loans advanced to Techno.

However, when the respondent failed to repay the loan amount, Hero filed a petition before the court under the Arbitration and Conciliation (A&C) Act, 1996, seeking the appointment of an arbitrator.

Techno submitted that the petitioner had already initiated proceedings under the SARFAESI Act for the recovery of the loan amount. It had also taken symbolic possession of the immovable property. Techno added that the value of the immovable property was more than adequate to satisfy the alleged outstanding amount claimed by the petitioner.

The respondent argued that it intended to challenge the proceedings initiated by the petitioner before DRT. It contended that DRT had exclusive jurisdiction to decide the issue of the outstanding dues and the jurisdiction of the civil court was barred under the SARFAESI Act.

Relying upon the decision of the Supreme Court in the Vidya Droliya vs Durga Trading Corporation case, the respondent submitted that the claims of the banks and financial institutions, covered under the Recovery of Debts and Bankruptcy (RDB) Act, 1993, were non-arbitrable as, due to implications, there was a prohibition against waiver of DRT's jurisdiction.

The respondents further contended that the dispute raised by the petitioner was not arbitrable and that the invocation of arbitration could not undermine the statutory rights of the respondents to seek remedies available under the SARFAESI Act.

Meanwhile, respondent No.2-4 submitted that proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 were instituted against them by the Union Bank of India before the National Company Law Tribunal (NCLT). Since a moratorium under IBC was in place, no legal proceedings could be initiated against them.

The court noted that since Hero, a Non-Banking Financial Company (NBFC), was not notified by the Central government under the RDB Act; the proceedings could not be initiated by the petitioner. It ruled that the decision of the apex court in the Vidya Droliya mater was not applicable in this case.

Citing the judgment in the MD Frozen Foods Exports vs Hero Fincorp Ltd case, the bench stated that the top court had ruled that the provisions of the SARFAESI Act provided a remedy in addition to the A&C Act. The judgment was that while SARFAESI proceedings were in the nature of enforcement, arbitration was an adjudicatory process.

Thus, Justice Rao ruled that if the secured assets were insufficient to satisfy the debts, the secured creditors could proceed against other assets in execution against the debtor, after determining the outstanding amount. He added that the Supreme Court had held that the two Acts provided cumulative remedies to the secured creditors and the SARFAESI proceedings and arbitration proceedings could go en masse.

The bench said the mandate of the DRT was limited to examining whether the action initiated by the secured creditor was in accordance with the law. It ruled that the proceedings fell under the SARFAESI Act and not the RDB Act.

The court held that even if the respondent intended to take action under the SARFAESI Act by filing a petition before DRT, it would not bar the initiation of arbitration proceedings by the petitioner. The same applied to the immovable property in symbolic possession of the petitioner.

The judge said that if any recovery was made by the petitioner through the process of the SARFAESI Act, it could be brought to the notice of the arbitrator. There could be an eventuality where the complete due amount may not be recovered. The court, therefore, appointed an arbitrator and referred the borrower and the guarantors to arbitration.