The Delhi High Court held that If the Secured Creditor takes action under section 17 of the SARFAESI Act, it would not bar the arbitration proceeding.
The Single judge bench of the Delhi High Court comprising Justice V. Kameswar Rao, recently held that If the petitioner intends to take action under Section 17 of the SARFAESI Act, 2002 by filing a petition before DRT that would still not preclude the initiation of arbitration proceedings by the petitioner in accordance with the law.
The petitioner was a Non-Financial Company incorporated under the provisions of the Companies Act, 1956. The petitioner company is engaged inter-alia in the business of rendering finance/loan facilities, to the intending borrowers.
Facts:
The Directors and authorised representatives of respondent No.1 approached the petitioner requesting the grant of a Secured Term Loan. The petitioner inter-alia sanctioned a Loan Facility namely Loan against Property (hereinafter, LAP) for an amount of ₹ 32.00. Crore (also known as Secured Term Loan) and another loan namely Lease Rental Discounting Loan Facility ( hereinafter, LRD) for an amount of ₹ 55.00 Crore in favour of respondent No.1, vide Sanction Letters bearing Reference No. 2692023 and Reference No.2691828 dated December 20, 2017, respectively. Two Master Facilities Agreements and two Supplementary Agreements with regard to LAP and LRD were executed between respondent No.1 as the borrower and the petitioner as lender on December 26, 2017. Arb. P. 1105/2021 has been filed with respect to LAP of ₹ 32 Crore and Arb. P. 1186/2021 has been filed with respect to LRD of ₹55 Crore.
Respondent Nos.2 to 4 agreed to guarantee the due repayment of the loans as well as to adhere to the terms, conditions and covenants envisaged in the Agreements by respondent No.1, in their personal and individual capacity and respondent Nos. 5 to 7 in their respective corporate capacities. Respondent Nos.2 to 7 agreed to guarantee inter-alia the repayment of the said loan facilities as well. Consequently, respondents Nos. 2 to 7 executed separate Deeds of Guarantee; all dated December 26, 2017, in favour of the petitioner, thereby guaranteeing both loan facilities.
The respondent failed to adhere to the terms of repayment of the loan facilities and committed defaults, which qualified as an Event of Default, which entitled the petitioner to recall the loan facilities. And the petitioner vide notice dated June 03, 2021, called upon the respondents to pay to the petitioner, jointly/ severally, the total outstanding dues of ₹35,75,84,376.20/- and ₹60,82,54,537.33/- as on May 31, 2021, in respect of the said loan facilities.
The respondents failed to pay the amount, despite receipt the notice. Thereafter the petitioner invoked the Arbitration Clauses vide Notice dated June 22, 2021, sent to the respondents by the petitioner as contemplated in Clause 12.10 of the Master Facilities Agreements dated December 26, 2017, and in Clause 31 of the Deeds of Guarantee also dated December 26, 2017.
Petitioner's Submission:
The Counsel for the Petitioner stated that the petitioner was an NBFC and is not covered under the provisions of the RDB Act. The SARFAESI Act, 2002, Arbitration and Conciliation Act, 1996, Recovery of Debts and Bankruptcy Act, 1993 and the doctrine of election have no applicability in the present cases. In support of his submission, he has relied upon the judgment of the Supreme Court in the case of Transcore v. Union of India, REED 2006 SC 11201, wherein it was held that there are three elements to the doctrine of election, namely, the existence of two or more remedies; inconsistencies between such remedies and a choice between one of them. If any one of the three elements is not present, the doctrine will not apply.
The Counsel for the Petitioner also relied upon the judgment of the Supreme Court in the case of M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited, REED 2017 SC 09201, wherein it was held that 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 SARFAESI proceedings and arbitration proceedings, thus, can go hand in hand. Reliance is also placed on the judgment of the Supreme Court in the case of Indiabulls Housing Finance Limited v. Deccan Chronicals, REED 2018 SC 02202.
Learned counsel for the Petitioner stated that the entire loan transaction captured in the Facilities Agreements read with Supplementary Agreements as well as the Deeds of Guarantee executed by respondent Nos.2 to 7 are intrinsically related and arising out of the same transaction. The same has been culled out in Clause 31 of the Deeds of Guarantee executed by respondent Nos.2 to 7, which I have reproduced in paragraph 11 above which contemplates that all claims, differences, disputes or controversies arising under or out of or in connection with the said guarantees as well as transactions entered into or effected shall be adjudicated as per the mechanism of Arbitration as laid down in the Facilities Agreements.
The counsel for the Petitioner submitted that the present petitions were maintainable under Section 34 of the SARFAESI Act and there was no bar to the same. He relied on the judgment of the Supreme Court in Vidya Droliya v. Durga Trading Corporation, REED 2020 SC 12220, relied upon by the counsel for the respondents was being quoted out of context and the said judgment in fact supports the contentions of the petitioner herein.
Respondent's Submission:
The counsel for respondent No.1 submitted that the value of the immovable property is more than adequate to satisfy the alleged principal / outstanding amounts that are being claimed by the petitioner. This submission would not bar the initiation of arbitration proceedings for the simple reason that, if any recovery is made by the petitioner through the process of the SARFAESI Act, surely the factum can be brought to the notice of the Arbitrator. This I say so, because there may be an eventuality where the complete amount as due and payable may not be recovered through the process initiated under the SARFAESI Act.
The learned counsel for respondent No.1 submitted that the respondents have a right to challenge the action taken by the petitioner under Section 13 (4) of the SARFAESI Act by filing a petition before the DRT under Section 17 of the Act and that under Section 34 of the SARFAESI Act, the jurisdiction of the Civil Court is barred in relation to matters in which DRT has jurisdiction. To answer this submission, I must reiterate it is the case of the petitioner that it is an NBFC and has not been notified by the Central Government under the RDB Act. In that sense, proceedings under the RDB Act cannot be initiated by the petitioner. The reference to DRT in the submission of the counsel for respondent No.1 is with regard to the fact that SARFAESI Act under Section 17 provides DRT as a Forum. However, the mandate of the DRT under Section 17 of the SARFAESI Act is limited to examining whether the action initiated by the petitioner is in accordance with Section 13 (4) of the Act and nothing more. So, in that sense, the proceedings are not under the RDB Act, but under SARFAESI Act.
High Court's Analysis:
The High Court reiterated, "it is the case of the petitioner that it is an NBFC and has not been notified by the Central Government under the RDB Act. In that sense, proceedings under the RDB Act cannot be initiated by the petitioner. The reference to DRT in the submission of the counsel for respondent No.1 is with regard to the fact that SARFAESI Act under Section 17 provides DRT as a Forum. However, the mandate of the DRT under Section 17 of the SARFAESI Act is limited to examining whether the action initiated by the petitioner is in accordance with Section 13(4) of the Act and nothing more. So, in that sense, the proceedings are not under the RDB Act, but under SARFAESI Act."
High Court noted that even if the petitioner intended to take action under Section 17 of the Act by filing a petition before DRT that would still not preclude the initiation of arbitration proceedings by the petitioner in accordance with the law.
The High Court noted that the provisions of Clauses 12.10 and 31 of the Facilities Agreements and the Deeds of Guarantees respectively, i.e., the arbitration clauses, any dispute between the parties has to be resolved through the process of arbitration. That apart, the petitioner has invoked the arbitration clause and called upon the respondents to accord their concurrence to the appointment of the arbitrator, to which no response has been given even after the expiry of 30 days. Therefore, it was clear that disputes have arisen between the parties. Clause 12.10 of the Master Facilities Agreements binds respondent No.1 and Clause 31 of the Deeds of Guarantee bind respondent Nos. 2 to 7, and as such, they can be referred to arbitration. Since the case of the respondent, Nos. 2 to 4 is that an interim moratorium has been put in place, surely respondent Nos. 2 to 4 cannot be relegated to the process of arbitration in these petitions. But there is no impediment to refer respondent Nos. 1, 5, 6 and 7 being the borrower and corporate guarantors respectively, to the process of arbitration. As such, they were referred to arbitration.
Accordingly, the High Court appointed Justice Indu Malhotra (Retd.), a former Judge of the Supreme Court as the Arbitrator, who shall adjudicate the disputes (in these petitions) between the parties, through claims and counter-claims (if any).