On Thursday, 7th December, 2017 the Delhi High Court in the case of Lalit Mohan Madhan and Ors. vs. Reliance Capital Ltd., held that arbitration and SARFAESI proceedings can be carried simultaneously for recovery of loan arrears.
Justice Navin Chawla ruled that “As the SARFAESI Act and the Arbitration /Debt Recovery Act are held to be complementary in nature and the doctrine of election has been held to be not applicable, it cannot be said that if a party has invoked one remedy, it is debarred from invoking the other during the pendency of the first one. Under the SARFAESI Act, specially under Section 13 thereof, the secured creditor will proceed against the security given for the loan. If the amount recovered from the secured asset is less than the amount claimed as due by the financial institution, it would necessarily have to go for an adjudication proceeding before proceeding against the other assets of the debtor. However, that does not mean that if it has invoked the adjudicatory process for determination of its loan amount, it stands denuded of recovering its loan from the secured assets in accordance with law i.e. SARFAESI Act,”.
The Court was hearing a Petition filed under Section 9 of the Arbitration and Conciliation Act, 1996, demanding that the Respondent, Reliance Capital Ltd., be debarred from taking any coercive action through notices issued under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of the alleged amount of Rs. 6.4 crore.
The Petitioner had contended that the impugned notices under Section 13(2) and 13(4) of the SARFAESI Act should be stayed as the liability under the loan agreement has been adjudicated through arbitration. The arbitral award had not attained finality, as the same was under challenge before the Court.
It had further submitted that since the bank had taken recourse to the Arbitration and Conciliation Act, it cannot now resort to the SARFAESI Act for making any recovery.
The Bank, on the other hand, had contended that the SARFAESI Act provides for an alternate remedy to financial institutions for recovering loan amount. The Bank further contended that the Act itself does not bar the application of other legislations that the remedies can simultaneously sustain.
The Court relied on the decision rendered by the Supreme Court in the case of M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Ltd., AIR 2017 SC 4481, “the arbitration proceedings and SARFAESI Act proceedings can go hand in hand. It has held that the provisions of SARFAESI Act are a remedy in addition to the provisions of the Arbitration Act. The two Acts are cumulative remedies to the secured creditors. While SARFAESI Act proceedings are in nature of enforcement proceeding, the arbitration proceedings would be in form of an adjudicatory process. In the event that the secured assets are insufficient to satisfy the debt, the secured creditor can proceed against other assets in execution against the debtor, after determination of pending outstanding amount by a competent forum i.e. in this case the arbitration.”
The Court ruled that the Petitioner had failed to make out any prima facie case in its favour and dismissed the Petition allowing the Bank to initiate proceedings under the SARFAESI Act.