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Lalit Mohan Madhan and Ors. Vs. Reliance Capital Ltd. - (High Court of Delhi) (07 Dec 2017)

Arbitration proceedings and SARFAESI Act proceedings can go hand in hand for recovery of loans

MANU/DE/5154/2017

Arbitration

In facts of present case, the Petitioners had availed loan from the Respondent for a sum of Rs. 3.35 crores. As a security for this loan, the Petitioners created an equitable mortgage in their commercial property. Certain disputes and differences arose between the parties and the same were referred to the arbitration resulting in an arbitration award. The same has been challenged by the Petitioners before present Court and the petition has been admitted for hearing vide order.

During the pendency of the above objection petition, the Respondent has issued a notice dated 28th June, 2017 under Section 13(2) of The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) against the property. In the said notice, the Respondent claims the amount outstanding as Rs. 6,47,64,476. The respondent has also issued a possession notice dated September, 2017 claiming possession of the said property.

The Petitioners submits that the impugned notices under Section 13(2) and 13(4) of the SARFAESI Act are liable to be stayed by this Court as, the liability under the loan agreement has been adjudicated in form of an arbitral award, which is pending challenge before this Court in the above mentioned OMP. Till the above objection petition is decided by this Court, no further action for recovery of the alleged loan amount can be taken by the Respondent.

In M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Limited, the Supreme Court has held that 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 and Conciliation Act, 1996. 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.

In Transcore v. Union of India, while discussing the interplay between the Debt Recovery Act and the SARFAESI Act, the Supreme Court emphasized that the remedies for recovery under the Debt Recovery Act and SARFAESI Act are complementary to each other and, therefore, doctrine of election has no application.

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, especially 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.

In the present case, the arbitral award has not become enforceable because of pendency of the objection petition under Section 34 of the Act. The adjudicatory process is therefore, still not complete. The Respondent, having initiated its remedies under the SARFAESI Act, which are complementary in nature, therefore, cannot be faulted. The Petitioners have not been able to make out any prima facie case in its favour for the relief as claimed. There is no merit in the present petition and the same is dismissed.

Relevant : M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Limited MANU/SC/1244/2017, Transcore v. Union of India MANU/SC/5319/2006

Tags : OUTSTANDING AMOUNT   NOTICE   LEGALITY  

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