India: Sarfaesi & Arbitration

That the Hon'ble Supreme Court of India in its recent judgment titled as M.D.Frozen Foods Exports Pvt. Ltd. & Ors. vs Hero Fincorp Limited numbered as Civil Appeal No. 15147 of 2017 arising out of SLP (C) No. 19559 of 2017 have decided the issues as laid down as under:

  • Whether the arbitration proceedings initiated by the respondent can be carried on along with the SARFAESI proceedings simultaneously?
  • 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 respondent?
  • A linked question to question (ii), 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?


M.D. Frozen Foods Exports Pvt. Ltd. aka Appellants borrowed monies for their business against security of immovable properties by the creation of equitable mortgage (seven properties) by deposit of title documents 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 06.07.2016 itself.

The agreement executed between the parties contained arbitration clause and thus, the matter went to arbitration on the lender / respondent invoking the arbitration clause on 16.11.2016.

Prior to the invocation of the arbitration clause, notification was issued on 05.08.2016, whereby, Hero Fincorp Limited aka Respondent were conferred the rights under section 13 to section 19 of the SARFAESI

Act, 2002. In view of the notification, the Respondent issued notice under Section 13 (2) of the SARFAESI Act, 2001 on 24.11.2016 for one of the seven properties.

Statement of claim was filed by the Respondent on 14.12.2016 and interim orders were granted by the Arbitrator on 05.01.2017 restraining the Appellant from creating any third party interest over the properties. Respondent had again issued another Section 13(2) notice for two more properties. The arbitration order dated 05.01.2017 were confirmed on 03.03.2017. In order to remove any possible impediment in the SARFAESI proceedings, 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. Being aggrieved by the order the Appellant had filed an appeal under Section 37(2)(b) before the Hon'bel Delhi High Court and which came to be dismissed and henceforth the instant petition was filed by the Appellant.


  • Respondent cannot take benefit of notification dated 05.08.2016, as it is impermissible to take recourse to the provisions of the SARFAESI Act in respect of an account already declared an NPA, as that would amount to retrospective application of a substantive law.
  • Respondent qualifies with the requirement of the notification dated 05.08.2016 and is entitled to initiate SARFAESI proceeding.
  • Rights of SARFAESI and RDDBFI can be invoked by the Respondent as the same are complimentary to each other.


The observation of the Hon'ble Supreme Court of India is laid down as under:

  • Matter which came within the scope and jurisdiction of the Debt Recovery Tribunal under the RDDBFI Act, 1993, can be referred to arbitration.
  • The provisions of the SARFAESI Act are a remedy in addition to the provisions of the Arbitration and Conciliation Act, 1996 (as amended on 2015).
  • 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.
  • Hon'ble Supreme Court of India affirmed the view of the full bench of the Orissa High Court in Sarthak Builders Pvt. Ltd. vs Orissa Rural Development Corporation Limited, the full bench of the Delhi high Court in HDFC Bank Limited vs Satpal Singh Bakshi and the Division bench of the Allahabad High Court in Pradeep Kumar Gupta vs State of UP.
  • 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 became applicable to the Respondent.


In view of the aforementioned observation of the Hon'ble Supreme Court of India it can be concluded that remedy under Arbitration and Conciliation Act, 1996 (as amended in 2015) is an addition and not in derogation with the Debt Recovery laws, hence, the Banks/Financial Institutions would have the option to invoke either or both the remedies. Further, the date of classification of NPA would have no impact and the provisions of the SARFAESI Act would be applicable qua all debts which are still payable by the borrower, live and enforceable under law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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