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Challenge U/S 17 Of The Sarfaesi Act Against Action Taken By Secured Creditor Will Not Bar Arbitration Proceedings.

By - Charanya CV on December 5, 2022

The Delhi High Court has reaffirmed that the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act) and arbitration processes can coexist. Even if a party planned to contest the action taken by the secured creditor under Section 13(4) of the SARFAESI Act by bringing a petition before the Debt Recovery Tribunal (DRT), it would not be sufficient.

In accordance with the Master Facilities Agreements and Supplementary Agreements signed by the parties, the Petitioner, Hero Fincorp. Limited, issued loan facilities to Respondent no. 1 Techno Trexim (I) Pvt. Ltd. The loans advanced to the 1st Respondent were also guaranteed by Deeds of Guarantee signed by Respondents 2-7. The Petitioner triggered the arbitration clause when the respondents failed to pay back the loan balance and then filed a petition with the Delhi High Court under Section 11(5) of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking the appointment of an arbitrator.

Before the High Court, the Respondent Techno Trexim stated that the Petitioner had already started legal action under the SARFAESI Act to collect the loan amount. Additionally, it claimed that the immovable property that was supposedly mortgaged in the petitioner's favour had been taken into symbolic ownership by the petitioner. It further stated that the aforementioned immovable property’s value was more than sufficient to cover the purported outstanding debt asserted by the Petitioner.

The Respondent contested the petition before the Debt Recovery Tribunal (DRT) u/s 17 of the SARFAESI Act. Therefore, it was argued that the DRT had sole authority to decide all matters pertaining to the purported unpaid debts. Additionally, it was contended that under Section 34 of the SARFAESI Act, the Civil Court lacks jurisdiction over any cases in which the DRT has the authority to rule on questions pertaining to claimed unpaid debts. Furthermore, any subjects over which DRT has authority are barred from the Civil Court's jurisdiction under Section 34 of the SARFAESI Act.

The Respondent made the argument that disputes involving banks and financial institutions covered by the Recovery of Debts and Bankruptcy Act, 1993 are not subject to arbitration because there is a restriction against the waiver of DRT’s jurisdiction by necessary implication. The respondent cited the Supreme Court's ruling in Vidya Droliyav. Durga Trading Corporation (2020).As a result, the respondents argued that the petitioner’s claim could not be resolved through arbitration and that calling for arbitration could not be used to circumvent the respondents’ legal entitlement to pursue remedies under the SARAFAESI Act.

The Respondent Nos. 2-4 and the guarantors claimed that the Union Bank of India had filed a petition under the Insolvency and Bankruptcy Code, 2016 (IBC) against them before the NCLT, and that an interim moratorium under Section 96 of the IBC was currently in effect. As a result, it was asserted that no legal action could be taken against them while the temporary moratorium was in effect.

The court stated that because Hero Fincorp is a Non-Banking Financial Company (NBFC) and has not received notification from the Central Government in accordance with the RDB Act's provisions, the petitioner is unable to begin RDB Act proceedings. It concluded that the Supreme Court’s decision in Vidya Droliya (2020), which said that claims made by banks and other financial institutions fall under the RDB Act and are not subject to arbitration, was not relevant.

The court noted that the Apex Court had determined in M.D. Frozen Foods Exports Pvt. LTD. versus Hero Fincorp Ltd. (2017) that the SARFAESI Act’s provisions give a remedy in addition to the one afforded by the A&C Act. The Supreme Court had ruled that while arbitration is an adjudicatory procedure, SARFAESI proceedings are more like enforcement proceedings.

Furthermore, it had held that secured creditors could use additional assets in execution against the debtor if the secured assets were insufficient to pay off the debts, provided that the amount still owing had been determined by a competent forum. The court considered the fact that the DRT’s task under Section 17 of the SARFAESI Act is restricted to determining whether the petitioner’s or secured creditor’s initial course of action complies with Section 13(4) of the SARFAESI Act and nothing else. Additionally, it decided that the SARFAESI Act, not the RDB Act, applied to the proceedings.

The bench came to the conclusion that even if the respondent intended to file a petition before the DRT in accordance with Section 17 of the SARFAESI Act, that would not prevent the petitioner/secured creditor from initiating arbitration procedures. The court further stated that the respondent's argument that the value of the real estate in the petitioner’s symbolic possession was more than sufficient to pay the purported unpaid sums claimed by the petitioner would not preclude the start of arbitration procedures.

The bench decided that if the petitioner received any compensation through the SARFAESI Act, the arbitrator should be made aware of this information. Furthermore, it was decided that there might be a situation in which the entire amount that was owed and payable might not be recovered using the procedure started under the SARFAESI Act. Therefore, the court-appointed an arbitrator and referred the borrower/ Respondent No. 1 and the other corporate guarantors, i.e., Respondent Nos. 5-7, to arbitration while ruling that Respondent Nos. 2 to 4 could not be sent to arbitration due to the temporary moratorium placed in place under IBC.


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