Application Under SARFAESI: Supreme Court’s Liberal Approach

[Guest post by Richa Saraf, Assistant Legal Advisor at Vinod Kothari & Co.]

In the case of M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd.,[1] the Supreme Court held that there was no illegality in a non-banking finance company (“NBFC”) invoking the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) for recovery of loan arrears with respect to an account classified as non-performing asset (NPA) before the NBFC was notified under the Act. It also clarified that an NBFC is entitled to initiate both arbitration proceedings and SARFAESI proceedings with respect to a loan account, and that the ‘doctrine of election’ was not attracted in such a scenario. There was a division of judicial opinions among the High Courts: while the Full Bench of the Orissa High Court, as also the Delhi High Court and the Allahabad High Court, have taken a view favourable in terms of the simultaneous legal processes under the SARFAESI Act and arbitration recovery proceedings, the Andhra Pradesh High Court has taken a divergent view. After careful scrutiny of the rival contentions and the judicial precedents cited, the Supreme Court has finally settled the law on the point.

Background and Facts

M.D. Frozen Foods Exports Pvt. Ltd. (the appellant) borrowed monies for their business against security of immovable properties by the creation of an equitable mortgage by deposit of title documents. The account of M.D. Frozen was classified as a NPA.

The agreement between the parties contained an arbitration clause, and thus the matter went to arbitration on Hero Fincorp Ltd. (the respondent) invoking the arbitration clause. However, prior to this invocation, a notification was issued in exercise of powers conferred under section 2(1)(m)(iv) read with section 31A of the SARFAESI Act, wherein Hero Fincorp was notified as a financial institution (the “Notification”).

In view of the aforesaid Notification, Hero Fincorp issued a notice under section 13(2) of the SARFAESI Act. The statement of claim was filed by Hero Fincorp before the arbitrator and interim orders were granted by the arbitrator restraining M.D. Frozen from creating any third party interest over the properties. The legality of the arbitration proceedings was challenged by M.D. Frozen in view of the invocation of SARFAESI Act. After the challenge was repelled both by the arbitrator and later by the Delhi High Court, the matter came up before the Supreme Court.

Issues Resolved

1. Whether resort can be had 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 lender?

The SARFAESI Act was brought into force to solve the problem of recovery of large debts in the form of NPAs. Thus, the very rationale for the Act to be brought into force was to provide an expeditious procedure where there was a security interest created in favour of the lender. It certainly did not apply retrospectively from the date when it came into force. The question is whether the Act is applicable to the lender at a subsequent date, and thereby allowing the lender to utilize its provisions with regards to a past debt, would make any difference to this principle. The Supreme Court answered in negative. The Act applies to all the claims which would be alive at the time when it was brought into force. Thus, as against Hero Fincorp or other NBFCs, it would be applicable similarly from the date when it was so made applicable to them.

In Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Ltd.[2] the Supreme Court has succinctly set out this aspect. No doubt, till the time the lender was not a ‘financial institution’ within the meaning of section 2(1)(m)(iv) of the SARFAESI Act, it was not a ‘secured creditor’ as defined under section 2(1)(zd) of the SARFAESI Act, and thus could not have invoked the provisions of the SARFAESI Act. However, the right to proceed under the SARFAESI Act accrued once the Notification was issued.

The case of Unique Engineering Works v. Union of India[3] dealt with the issue of retrospectivity and retroactivity. In case of retroactivity, the Parliament takes note of the existing conditions and promulgates the remedial measures to rectify those conditions. In fact the SARFAESI Act, in our view, was to remedy such a position and provide a measure against secured interests. The 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’. Not only this expression, but 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 whether the lender was a notified ‘financial institution’ on the date of the execution of the agreement with the borrower. The scheme of the SARFAESI Act sets out an expeditious, procedural method, 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; if this view is accepted, it would imply that there is an inherent right to delay the enforcement against the security interest!

In a similar vein, there are observations made in the case of In re Athlumney Ex parte Wilson[4], where the question posed before the Queen’s Division Bench was whether section 23 of the Bankruptcy Act, 1890 was retrospective in its operation. In the aforementioned context, Wright, J., speaking for the bench, illuminatingly opined:

Perhaps no rule of construction is more firmly established than this – that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only… it is a general rule that when the Legislature alters the rights of parties by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them. It is said that there is one exception to that rule, namely, that, where enactments merely affect procedure and do not extend to rights of action, they have been held to apply to existing rights, and it is suggested here that the alteration made by this section is within that exception.

2. 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?

The Supreme Court held that the date on which a debt is declared as an NPA would have no impact. The provisions of the SARFAESI Act would become applicable qua all debts owing and live when the Act becomes applicable, provided the following factors existed:

– 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.

3. Whether the arbitration proceedings can be carried on along with the SARFAESI proceedings simultaneously?

A claim by a bank or a financial institution, before SARFAESI Act and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”) came into force, would ordinarily have been filed in the civil court having the pecuniary jurisdiction. The setting up of the Debt Recovery Tribunal under the RDDB Act resulted in this specialised tribunal entertaining such claims by banks and financial institutions. In fact, suits from the civil jurisdiction were transferred to the Debt Recovery Tribunal. The Tribunal was, thus, an alternative to a civil court recovery proceeding. Upon the SARFAESI Act being brought into force seeking to recover debts against security interest, a question was raised whether parallel proceedings could go on under the RDDB Act and the SARFAESI Act. This issue was clearly answered in favour of such simultaneous proceedings in Transcore v. Union of India & Anr.[5] The relevant extract is reproduced below:

According to American Jurisprudence, 2d, Vol. 25, p. 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell’s Principles of Equity (31st Edn., p. 119), the doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.

A later judgment in Mathew Varghese v. M. Amritha Kumar[6] also discussed this issue in the following terms:

A close reading of Section 37 shows that the provisions of the SARFAESI Act or the Rules framed thereunder will be in addition to the provisions of the RDDB Act. Section 35 of the SARFAESI Act states that the provisions of the SARFAESI Act will have overriding effect notwithstanding anything inconsistent contained in any other law for the time being in force. Therefore, reading Sections 35 and 37 together, it will have to be held that in the event of any of the provisions of the RDDB Act not being inconsistent with the provisions of the SARFAESI Act, the application of both the Acts, namely, the SARFAESI Act and the RDDB Act, would be complementary to each other.

A reading of section 37 discloses that the application of the SARFAESI Act will be in addition to and not in derogation of the provisions of the RDDB Act. In other words, it will not in any way nullify or annul or impair the effect of the provisions of the RDDB Act. The Supreme Court was also pleased to fortify the above statement of law as the heading of the said section also makes the position clear that application of other laws are not barred. The effect of section 37 would therefore be that in addition to the provisions contained under the SARFAESI Act, in respect of proceedings initiated under the said Act, it will be in order for a party to fall back upon the provisions of the other legislation mentioned in section 37. These observations thus leave no manner of doubt, and the issue is no more res integra, especially keeping in mind the provisions of sections 35 and 37 of the SARFAESI Act, which read as under:

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 aforesaid two Acts are thus complementary to each other, and it is not a case of election of remedy. The only twist in the present case is that, instead of the recovery process under the RDDB Act, the concern lies with regard to the arbitration proceeding. It is trite to say that arbitration is an alternative to 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.[7] That being the position, the appellants, M.D. Frozen, 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. In HDFC Bank Limited v. Satpal Singh Bakshi,[8] it was opined that an arbitration is an alternative to the RDDB Act. The jurisdiction of the civil court is barred for matters covered by the RDDB Act, but the parties still have freedom to choose a forum, alternate to, and in place of the regular courts or judicial system for deciding their inter se disputes. All disputes relating to the ‘right in personam’ are arbitrable and therefore the choice is given to the parties to choose this alternative forum. A claim of money by a bank or a financial institution cannot be treated as a ‘right in rem’, which has an inherent public interest and would, thus, not be arbitrable.

The aforesaid is not a case of election of remedies since the alternatives are between a civil court, arbitral tribunal or a Debt Recovery Tribunal constituted under the RDDB Act. In so far 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. In Transcore v. Union of India[9] it was clearly observed that the SARFAESI Act was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith. Liquidation of secured interest through a more expeditious procedure is what has been envisaged under the SARFAESI Act, and the two Acts are cumulative remedies to the secured creditors.

SARFAESI proceedings are in the nature of enforcement proceedings, while arbitration is an adjudicatory process. In the event that the secured assets are insufficient to satisfy the debts, the secured creditor can proceed against other assets in execution against the debtor, after determination of the pending outstanding amount by a competent forum.


The Supreme Court held that the principle of retrospective operation of law was not applicable in the instant case. There was no retrospective operation involved, because as on the date of Notification, the claim was subsisting and operative. Thus, the provisions of the SARFAESI Act would become applicable to all the debts owing and existing when the Act became applicable to the lender. On perusal of the above, it can further be noted that the Supreme Court unequivocally held that the judgments in Sarthak Builders Pvt. Ltd. v. Orissa Rural Development Corporation Ltd.[10], HDFC Bank Limited v. Satpal Singh Bakshi and Pradeep Kumar Gupta v. State of U.P[11] lay down the correct proposition of law and the view expressed in M/s. Deccan Chronicles Holdings Ltd. v. Union of India[12] following the overruled decision in Subash Chandra Panda v. State of Orissa[13] does not set forth the correct position in law. SARFAESI proceedings and arbitration proceedings, thus, can go hand in hand.

– Richa Saraf

[1] Civil Appeal No. 15147 OF 2017 decided on September 21 , 2017.

[2] 2014 SCC OnLine Ori 75.

[3] II 2004 BC 241 (DB).

[4] [1898] 2 Q.B. 547.

[5] (2008) 1 SCC 125.

[6] (2014) 5 SCC 610.

[7] HDFC Bank Limited v. Satpal Singh Bakshi, 2013 (134) DRJ 566.

[8] 2013 (134) DRJ 566.

[9] (2008) 1 SCC 125

[10] 2014 SCC OnLine Ori 75

[11] AIR 2010 All 3

[12] AIR 2014 Andhra Pradesh 78

[13] AIR 2008 Ori 88

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