A bench of Supreme Court comprising of Justice R.F. Nariman and Justice Sanjay Kishen Kaul in the case of M.D. Frozen Foods Exports Pvt. Ltd. And Ors. Vs Hero Fincorp Ltd., in Civil Appeal No. 15147 of 2017 dealt with the issue that whether an NBFC is entitled to initiate proceedings under SARFAESI Act and arbitration proceedings, simultaneously, with respect to a loan account.

The appellant had borrowed monies from the respondent/lender against security of immovable properties by the creation of an equitable mortgage by deposit of title documents on 30.09.2015 and 21.10.2015. The lender had initiated arbitration proceeding on 16.11.2016 and prior to which a notification had been issued on 05.08.2016, where by the lender was a notified NBFC under section 31A(2)(1)(m)(iv) of the SARFAESI Act.

In respect of the above notification, the lender issued a notice under section 13(2) of the SARFAESI Act. The borrower aggrieved by this act challenged the legality of the arbitration proceedings along with invocation of the SARFAESI Act. The said challenged was dismissed by the Arbitrators as well as Delhi High Court.

Hence the appeal lied before the Supreme Court of India. The issues framed were as under:

  1. Whether the arbitration proceedings initiated by the respondent can be carried on along with the SARFAESI proceedings simultaneously?
  2. Whether resort can be held 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 respondent?
  3. 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?

“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”

“37. Application of other laws not barred

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.”

The Supreme Court held that

30…. 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.13 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.

32… The aforesaid is not a case of election of remedies as was sought to be canvassed by learned senior counsel for the appellants, 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.”

The court further held that:

38The 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’…. 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.”

41….the date on which a debt is declared as an NPA would again have no impact. We are, thus, of the view that the provisions of the SARFAESI Act would become applicable qua all debts owing and live when the Act became applicable to the respondent.”

The decision of the Supreme Court in the above case of M.D. Frozen Foods Exports Pvt. Ltd. And Ors. Vs Hero Fincorp Ltd. thus, clearly conveys the legislative intent behind the SARFAESI Act.

The proceedings under the SARFAESI Act and the Arbitration proceedings are different in nature, and a combined reading of sections 37 and 35 of the SARFAESI act makes it crystal clear that the provisions of this act are in addition to and not in derogation of any other law for the time being in force.

Lastly, in order to invoke the provisions of SARFAESI Act for a debt in praesenti, following factors are to be considered:

  • Existence of a present actionable debt;
  • Status of the person invoking the jurisdiction is that of a secured creditor;
  •  Assets have been secured in satisfaction of the debt; and
  • That the debtor/borrower should have been declared an NPA.

This decision will also lead to further academic discussion as to whether provisions under Insolvency and Bankruptcy Code, 2016 can be invoked when an agreement provides an arbitration clause. The analogy behind this is the existence of a similar Non-Obstante clause under Section 238 of the Code, 2016. In case of an arbitration clause existing in the agreement, if there is an absence of any dispute/existing dispute in respect to the debt amount i.e. it is a non-disputed debt, then the party can directly invoke the insolvency resolution proceedings under the Code, 2016.”