Supreme Court allows simultaneous SARFAESI and arbitration proceedings in loan recovery: M.D. Frozen Foods Exports Pvt. Ltd. vs Hero Fincorp Ltd. (21 September 2017)

Can a lender pursue both arbitration and SARFAESI proceedings to recover a debt? The Supreme Court of India addressed this question in a recent case. This case clarifies the interplay between arbitration and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The judgment was delivered by a two-judge bench of Justices Rohinton Fali Nariman and Sanjay Kishan Kaul, with the opinion authored by Justice Sanjay Kishan Kaul.

Case Background

M.D. Frozen Foods Exports Pvt. Ltd. (the appellants) borrowed money from Hero Fincorp Ltd. (the respondent). The loan was secured by an equitable mortgage on seven properties. The appellants defaulted, and their account became a Non-Performing Asset (NPA) on July 6, 2016. The loan agreement included an arbitration clause. The respondent invoked this clause on November 16, 2016. Before this, on August 5, 2016, a notification was issued. This notification brought certain NBFCs, including the respondent, under the SARFAESI Act. The respondent then initiated SARFAESI proceedings on November 24, 2016, for one property and later for two more on February 16, 2017.

Timeline

Course of Proceedings

The appellants challenged the order of the arbitrator and filed an appeal under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996. The Delhi High Court dismissed this appeal on July 13, 2017. The appellants then approached the Supreme Court.

Legal Framework

The case involves the interpretation of the SARFAESI Act, specifically Section 13, which deals with the enforcement of security interest. The Act allows financial institutions to take possession of securities without court intervention. Section 2(1)(o) defines a Non-Performing Asset (NPA). Section 2(1)(m) defines a financial institution. Section 35 states that the SARFAESI Act overrides other laws. Section 37 clarifies that the Act is in addition to other laws. The Reserve Bank of India Act, 1934, is also relevant for defining NBFCs.

Section 13(1) of the SARFAESI Act states that, “Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.”

Section 35 of the SARFAESI Act states that, “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.”

Section 37 of the SARFAESI Act states that, “The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.”

Arguments

Appellants’ Arguments:

• The appellants argued that Section 13(2) of the SARFAESI Act is a substantive provision. It imposes a new burden by allowing enforcement of security without court intervention. This right was not available before the notification.

• They contended that applying the SARFAESI Act to a loan that became an NPA before the Act applied to the respondent is a retrospective application of a substantive law.

• The appellants argued that the SARFAESI Act creates new obligations. They stated that the debt must be repaid within 60 days of notice under Section 13 of the SARFAESI Act.

• They argued that NBFCs are different from banks. They said that not all NBFCs are automatically included under the Act. Only those notified by the Central Government are included.

• The appellants also argued that the respondent elected its remedy by initiating arbitration first. Thus, it could not simultaneously initiate SARFAESI proceedings.

Respondent’s Arguments:

• The respondent argued that the SARFAESI Act applies to all existing debts. It applies from the date the Act became applicable to the respondent.

• They stated that the Act was created to expedite debt recovery. It should apply to all past debts that are still due.

• The respondent argued that the SARFAESI Act does not create new obligations. It only provides a procedure to enforce existing rights.

• They contended that there is no legal bar to simultaneous arbitration and SARFAESI proceedings. They argued that the SARFAESI Act provides an additional remedy.

Issues Framed by the Supreme Court

1. Whether arbitration proceedings can be carried on simultaneously with SARFAESI proceedings?
2. Whether Section 13 of the SARFAESI Act can be used for debts arising from loan agreements created before the Act’s application to the respondent?
3. Whether a lender can invoke the SARFAESI Act when its notification as a financial institution occurred after the account became an NPA?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Mardia Chemicals Ltd. & Ors. vs. Union of India & Ors. [(2004) 4 SCC 311] – Supreme Court of India. This case analyzed the background and salient features of the SARFAESI Act.
• United Bank of India vs. Satyawati Tondon [(2010) 8 SCC 110] – Supreme Court of India. This case also discussed the background and salient features of the SARFAESI Act.
• Transcore vs. Union of India & Anr. [(2008) 1 SCC 125] – Supreme Court of India. This case held that proceedings under the RDDB Act and SARFAESI Act can occur simultaneously.
• Mathew Varghese vs. M. Amritha Kumar [(2014) 5 SCC 610] – Supreme Court of India. This case reiterated that the SARFAESI Act is in addition to the RDDB Act.
• HDFC Bank Limited vs. Satpal Singh Bakshi [2013 (134) DRJ 566 (FB)] – Delhi High Court (Full Bench). This case held that arbitration is an alternative to the RDDB Act.
• Sarthak Builders Pvt. Ltd. vs. Orissa Rural Development Corporation Limited [2014 SCC OnLine Ori 75] – Orissa High Court (Full Bench). This case supported the view that SARFAESI and arbitration can proceed simultaneously.
• Pradeep Kumar Gupta vs. State of U.P [AIR 2010 All 3] – Allahabad High Court (Division Bench). This case also supported simultaneous SARFAESI and arbitration proceedings.
• Unique Engineering Works vs. Union of India [II 2004) BC 241 (DB)] – Uttarakhand High Court (Division Bench). This case dealt with the issue of retrospectivity and retroactivity.
• West vs. Gwynne [1911 2 Ch 1] – English Court of Appeal. This case discussed the difference between retrospective operation and interference with existing rights.
• Trimbak Damodhar Raipurkar vs. Assaram Hiraman Patil & Ors. [1962 Supp (1) SCR 700] – Supreme Court of India. This case discussed the principle of retrospective operation of statutes.
• In re Athlumney. Ex parte Wilson [1898] 2 Q.B. 547 – Queen’s Division Bench. This case discussed retrospective operation of statutes.

Legal Provisions Considered by the Court:

• Section 2(1)(o) of the SARFAESI Act – Defines a Non-Performing Asset (NPA).
• Section 2(1)(m) of the SARFAESI Act – Defines a financial institution.
• Section 13 of the SARFAESI Act – Deals with enforcement of security interest.
• Section 35 of the SARFAESI Act – States that the SARFAESI Act overrides other laws.
• Section 37 of the SARFAESI Act – Clarifies that the Act is in addition to other laws.
• Section 69 & 69A of the Transfer of Property Act, 1882 – Deals with the power of sale by a mortgagee.
• Section 45-I of the Reserve Bank of India Act, 1934 – Defines Non-Banking Financial Companies (NBFCs).
• Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 – Deals with appeals from orders of the Arbitral Tribunal.

Judgment

How each authority was viewed by the Court:

• The Supreme Court followed Transcore vs. Union of India & Anr. [(2008) 1 SCC 125]* which held that the SARFAESI Act is an additional remedy to the RDDB Act.
• The Supreme Court also followed Mathew Varghese vs. M. Amritha Kumar [(2014) 5 SCC 610]* which clarified that the SARFAESI Act is in addition to the RDDB Act.
• The Court relied on the Full Bench judgment of the Delhi High Court in HDFC Bank Limited vs. Satpal Singh Bakshi [2013 (134) DRJ 566 (FB)]* which stated that arbitration is an alternative to the RDDB Act.
• The Court agreed with the Full Bench of the Orissa High Court in Sarthak Builders Pvt. Ltd. vs. Orissa Rural Development Corporation Limited [2014 SCC OnLine Ori 75]* and the Division Bench of the Allahabad High Court in Pradeep Kumar Gupta vs. State of U.P [AIR 2010 All 3]* which held that SARFAESI and arbitration can proceed simultaneously.
• The Court distinguished the judgment of the Andhra Pradesh High Court in M/s. Deccan Chronicles Holdings Limited vs. Union of India [AIR 2014 Andhra Pradesh 78]* which followed the overruled decision of the Orissa High Court in Subash Chandra Panda vs. State of Orissa [AIR 2008 Ori 88]*.

What weighed in the mind of the Court?

The Supreme Court emphasized the need for an expeditious recovery process for banks and financial institutions. The court noted that the SARFAESI Act was enacted to address the issue of mounting non-performing assets. The court also considered that the SARFAESI Act provides a procedural remedy against security interest already created, and that it does not create new rights. The court also noted that the Act applies to all existing agreements, irrespective of whether the lender was a notified financial institution on the date of the agreement.

Logical Reasoning

Key Takeaways

• ✓ Banks and financial institutions can pursue both arbitration and SARFAESI proceedings simultaneously for debt recovery.
• ✓ The SARFAESI Act applies to all debts that are alive when the Act becomes applicable to a financial institution, even if the loan was taken before the Act’s application.
• ✓ The date on which a debt is declared as an NPA does not impact the applicability of the SARFAESI Act.
• ✓ The SARFAESI Act provides a procedural remedy against security interest already created.

Directions

The Supreme Court dismissed the appeal with costs of Rs. 20,000.

Development of Law

The ratio decidendi of this case is that SARFAESI proceedings and arbitration proceedings can go hand in hand. The SARFAESI Act applies to all debts that are alive when the Act becomes applicable to a financial institution. This clarifies the legal position and settles the conflict between different High Courts. This also reiterates the position that the SARFAESI Act is a remedy in addition to other remedies available for debt recovery.

Conclusion

The Supreme Court’s decision in M.D. Frozen Foods Exports Pvt. Ltd. vs. Hero Fincorp Ltd. clarifies that lenders can use both SARFAESI and arbitration to recover debts. The court also clarified that the SARFAESI Act applies to all existing debts when it becomes applicable to a financial institution. This decision provides clarity for financial institutions and borrowers alike.