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SUPREME COURT OF INDIA
Rohinton Fali Nariman, Sanjay Kishan Kaul, JJ.
M.D. Frozen Foods Exports Pvt. Ltd. & Ors. - Appellants
Versus
Hero Fincorp Ltd. – Respondents
Civil Appeal No. 15147 of 2017 (Arising out of SLP(C) No.19559 of 2017).
Decided On : 21-09-2017
(2004) 4 SCC 311; (2010) 8 SCC 110 – Relied upon
(b) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 37 and 13 – Simultaneous initiation of proceedings under the Act and before arbitrator – Cannot prejudice rights of the borrower under the Act because proceedings under the Act are in the nature of enforcement proceedings, while arbitration is an adjudicatory process – Hence permissible – Not a case of election of remedies – Proceedings under the Act and arbitration proceedings can go hand in hand. (Para 30, 32, 33, 34)
(2008) 1 SCC 125 (2014) 5 SCC 610 – Relied upon
2013 (134) DRJ 566 (FB); 2014 SCC OnLine Ori 75; AIR 2010 All 3 – Cited with approval
AIR 2014 Andhra Pradesh 78; AIR 2008 Ori 88 – Overruled
(2005) 7 SCC 584; (1983) 1 SCC 305; (2004) 8 SCC 1; (1976) 1 SCC 906; (2015) 1 SCC 1; (2001) 8 SCC 24; (1957) SCR 488; (1994) 4 SCC 602 – Referred
(c) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 13 – Applicability – Held, would be applicable to all debts alive at the time of the Act coming into force – Further held, respondent could invoke the Act for recovery of alive debts on the date it became under the Act (Para 37, 38, 41)
1962 Supp (1) SCR 700 – Relied upon
(2004) BC 241 (DB) – Cited with approval
Facts of the case:
The appellants borrowed monies for their business against security of immovable properties by the creation of an equitable mortgage by deposit of title documents (seven such properties). The account of the appellants became a 'Non-Performing Asset' ('NPA').
The matter went to arbitration on the lender/respondent invoking the arbitration clause. However, prior to this invocation, by a notification the respondent was declared a financial institution.
In view of the aforesaid notification, the respondent issued a notice under Section 13(2) of the SARFAESI Act on 24.11.2016 and filed the statement of claim before the Arbitrator and interim orders were granted by the Arbitrator restraining the appellant from creating any third party interest over the properties.
The interim order was confirmed.
An application was filed by the respondent to substitute the order of status quo qua parties with the name of the appellants/borrowers, which was allowed on 19.05.2017.
The appellants filed an appeal which has been dismissed by the impugned order of the High Court.
Finding of the Court:
The High Court has taken a correct view.
Result: Appeal dismissed with cost.
Key Points: - A liberal policy for granting loans must be accompanied by a quick and effective recovery process (!) [1000598970004]. - Proceedings under the SARFAESI Act and arbitration proceedings can be conducted simultaneously without prejudicing the borrower's rights (!) (!) [1000598970032][1000598970033]. - The SARFAESI Act is applicable to all debts that were alive at the time the Act came into force (!) (!) [1000598970023]. - The SARFAESI Act provides a procedural remedy for enforcing security interests that already exist (!) . - The Act's application to a respondent at a later date does not make it retrospective in operation concerning past debts (!) . - The SARFAESI Act and the Recovery of Debts Due to Banks and Financial Institutions Act (RDDB Act) are complementary, and the doctrine of election of remedies does not apply (!) (!) (!) [1000598970028]. - Arbitration is an alternative to civil proceedings and can be pursued alongside SARFAESI proceedings (!) [1000598970029][1000598970031]. - SARFAESI proceedings are enforcement proceedings, while arbitration is an adjudicatory process (!) [1000598970032]. - The appeal was dismissed with costs (!) . - The High Court's view was considered correct (!) .
JUDGMENT
Sanjay Kishan Kaul, J.
Leave granted.
Prologue:
2. Borrowers want to see the colour of their money in haste. The problem arises when loans have to be repaid. All kinds of techniques were and are deployed, to prolong the legal endeavours to recover the debts by lending institutions. Thus, the procedure became cumbersome and time consuming, affecting the lending activity.
3. An endeavour towards banking sector reforms, was the setting up of Expert Committees known as 'The Andhyarujina Committee', and 'The Narasimham Committee I and II'. To facilitate the disposal of the claims of recovery made by various banks and financial institutions, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the 'RDDB Act') was enacted, providing for specialized tribunals, exclusively dealing with the jurisdiction of the civil courts. This was followed up by the implementation of the suggestions of the aforesaid two Committees, for bringing in a law empowering financial institutions to take possession of the securities and to sell the same without the intervention of the Court - thus the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the 'SARFAESI Act').
4. The 'Statement of Objects and Reasons' for bringing in the SARFAESI Act, itself shows that the absence of legal provisions for facilitating securitisation of financial assets of banks and financial institutions was the reason for its enactment. The legal framework relating to commercial transactions had not kept pace with the changing commercial practices and financial sector reforms. The slow pace of recovery of defaulting loans and the mounting levels of non-performing assets of banks and financial institutions had resulted in the setting up of the aforesaid two Committees.
5. It need be emphasized that any impetus to the industrial development of the country by encouraging banks and other financial institutions to formulate a liberal policy for grant of loans had to be necessarily coupled with a quick and efficacious recovery process. The background and salient features of the SARFAESI Act have been extensively analysed by this Court in Mardia Chemicals Ltd. & Ors. v. Union of India & Ors., (2004) 4 SCC 311 and in United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110.
The Facts:
6. The appellants borrowed monies for their business against security of immovable properties by the creation of an equitable mortgage by deposit of title documents (seven such properties) on 30.09.2015 and 21.10.2015. The financial discipline was not adhered to, apparently almost from the inception, and the account of the appellants became a 'Non-Performing Asset' ('NPA') within the meaning of Section 2(1)(o) of the SARFAESI Act on 6.7.2016 itself.
7. The agreement inter se the parties contained an arbitration clause and thus, the matter went to arbitration on the lender/respondent invoking the arbitration clause on 16.11.2016. However, prior to this invocation, a notification was issued on 05.08.2016 in exercise of powers conferred under sub-clause (iv) of clause (m) of sub-section (1) of Section 2 read with Section 31A of the SARFAESI Act, specifying certain 'Non-Banking Financial Companies' (hereinafter referred to as 'NBFC') covered under clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 (hereinafter referred to as the 'RBI Act'), having assets of Rs. 500 crore and above, as financial institutions and directing that, in public interest, the provisions of the SARFAESI Act shall apply to such financial institutions, with the exceptions of provisions of Sections 13 to 19, which shall apply only to such security interest which is obtained for securing repayment of secured debt with principal amount of Rs. 1 crore and above. The respondent is at serial No.68 of the said notification.
8. In view of the aforesaid notification, the respondent issued a notice under Sec
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