Does Arbitration bars remedy under SARAFESI Act

Effect of Arbitration Clause.

Loan agreements contained arbitration clauses which were invoked by the appellant with the filing of cases under Section 9 of the Arbitration and Conciliation Act, 1996. In view thereof, initiation of any other proceedings under the SARFAESI Act if impermissible in law?

Because arbitration is an alternative to the proceedings under the RDB Act, it would not be obligatory on the Bank/Financial Institution to withdraw the proceedings pending before the arbitrator, prior to resorting to secure its interest under the SARFAESI Act. The Bank/financial institution can simultaneously proceed before the Arbitral Tribunal for adjudication of disputes and also take recourse to Section 13 of the SARFAESI Act for enforcement of its security interest. Both the proceedings can continue parallel to each other.

The SARFAESI Act is enacted to enforce the interest in the financial assets which belongs to the bank/ Financial Institutions by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of SARFAESI Act is recovery by non-adjudicatory process. A secured asset under SARFAESI Act is an asset in which interest is created by the borrower in favour of the bank/ Financial Institutions and on that basis alone the SARFAESI Act seeks to enforce the security interest by non-adjudicatory process. Essentially, the SARFAESI Act deals with the rights of the secured creditor. Withdrawal of the O.A. pending before the DRT under the DRT Act is not a pre-condition for taking recourse to SARFAESI Act.

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. To accept the argument of the appellants would imply that they have an inherent right to delay the enforcement against the security interest!

[Source: M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd. ]

Application where lender is not notified “financial institution” on the date of lending:

Thus, on sanction of the scheme of amalgamation, all loans, recoveries, security, interest, financial documents, etc. in favour of IBFSL got transferred to and stood vested in the appellant including the loans given by IBFSL to respondent borrowers, debts recoverable by IBFSL from respondent borrowers in favour of IBFSL, security documents executed by respondent borrowers in favour of IBFSL, etc. On the sanctioning of the scheme, the respondent borrowers became the borrower of the appellant as if the financial assistance was granted by the appellant to the respondent borrowers.

There is a force in the contention by the appellant that the debt with underlying securities is the asset of IBFSL and that IBFSL had right to transfer/assign its assets to any person without seeking consent of the borrower. Such transfer/assignment is recognized and that this Court in the case of Official Liquidator of APS Star Industries has recognised and upheld such an assignment.

In the aforesaid backdrop, the factor which assumes importance and has to be kept in mind is that the appellant is an assignee of a debt through the amalgamation of original lender with the appellant which was effected invoking the statutory provisions of the Companies Act. Once this is kept in mind, there would not be any difference as far as consequences in law are concerned from the case of M.D. Frozen Foods and this case. Therefore, M.D. Frozen Foods case would apply to the facts of this case in all force.

[Source: Indiabulls Housing Finance Ltd. vs M/S Deccan Chronicle Holdings Ltd., decided by SC on 23 February, 2018]

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