India: Can Arbitration & SARFAESI Proceeding Run Parallelly?

Overview

The Hon'ble Delhi High Court in a recent judgment¹ has permitted an arbitration despite the bank having commenced enforcement under the Securitisation & Reconstruction of Financial Assets & Enforcement of Security interest Act, 2002 ("SARFAESI Act"). This judgment is in the face of evolving jurisprudence on the primacy of creditor claims in preference to (often frivolous) defences invoked by defaulting borrowers.

Brief Facts

In this case, the Borrower/Guarantors (Petitioners), invoked arbitration under the Loan Facility Agreement with the Bank (Respondent) for referring the disputes in relation to the outstanding amount. These proceedings were initiated after SARFAESI proceedings had already been initiated by the bank. The Bank's contention was, inter alia, that the invocation of arbitration by the borrower would undermine its ability to take possession of the Borrower's secured assets that had been mortgaged to the Bank. The Borrower on the contrary contended that it was not in any default in repayment, and that in fact, paid certain excess amounts to the Bank. The Bank refused to appoint their nominee arbitrator and the Borrower/Guarantor filed proceedings under section 11 of the Arbitration & Conciliation Act, 1996 ("Arbitration Act"). Pertinently, an Arbitral Award dated 09.06.2015 was passed under separate arbitral proceedings and this Award remained unchallenged by the Borrower.

Issues

The Bank, inter alia, challenged the jurisdiction of the court under section 11 of the Arbitration Act. The Bank argued that since an Arbitral Award had already been passed under the same Loan Facility Agreement in 2015, the present proceedings were barred by res judicata. It was also contended that since 'recovery proceedings' under the SARFAESI Act were pending, arbitration for the same dispute would not be maintainable. The Bank also contended that the disputes herein were non-arbitrable as they were covered under a special statute.

Court's decision under section-11 proceedings

On the issue of res judicata, the High Court relied on the decision in Dolphin Drilling Ltd vs. ONGC² wherein the Supreme Court held that invocation of arbitration was not a one-time measure and the remedy under the arbitration clause was available if the cause of action arose subsequent to the completion of the first arbitration proceeding. The Court was of the view that the issue of whether the earlier Arbitral Award would operate as res judicata, was a mixed question of facts and law which was in the purview of the Arbitral Tribunal's jurisdiction. The Court under section 11 was only required to look at a prima facie existence of arbitrable disputes.

Further, SARFAESI Act mainly provided procedural remedies for enforcement of security interests without resorting to lengthy court proceedings. In fact, section 37 of the SARFAESI Act mentioned that the provisions of the act were in "addition to and not in derogation of" the other prevailing acts. The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 ("DRT Act") was the primary act for recovery proceedings by banks against borrowers was an alternate to civil court for the banks. While the SARFAESI Act contained an overriding section (section 35), a combined reading of the provisions would imply that the provisions of the DRT Act and SARFAESI Act were complementary to each other³. Notably, in the judgments relied upon in this case, the facts permitted the banks to carry on concurrent proceedings before the DRT and an Arbitral Tribunal. The Section 11 petition was accordingly allowed. The Review Petition filed by the Bank was also dismissed⁴.

Observations and conclusion

This judgment is a deviation from the usual cases wherein the claimant is the bank or financial institution whereas here the borrower sought to invoke arbitration. This judgment also raises doubts on the ability of banks/financial institutions to maintain accurate account statements in respect to all the debts. In statues such as the Insolvency and Bankruptcy Code, 2016, ("IBC"), banks have been afforded a special status, since they are heavily regulated institutions performing a public function. The IBC also provides for 'Information Utilities' for collecting and storing, collecting and validating data regarding the debts and defaults, thereby offering credibility when this data is produced before the NCLT/courts. Therefore, there is a level of presumption of correctness in terms of the calculations and accounting that is carried out by banks against the borrowers. While one can understand the genuine grievance of a borrower, one allows borrowers to litigate in this manner it would undermine the efficacy of SARFAESI and other special statutes provided to the banks.

Typically, in loan agreements, the dispute resolution mechanism agreed between the parties is for the benefit of the banks. The banks prefer having multiple options to litigate (DRT Act, SARFAESI Act etc) in case of default, providing only arbitration as the sole remedy for the borrower. This judgement allows both proceedings (SARFAESI & arbitration) to operate in autonomous domains. It would be interesting to see if this judgment stands the test of further judicial scrutiny.

Footnotes

1. M/S Diamond Entertainment Technologies Private Limited & Ors. Vs. Religare Finvest Limited (Arb Pet 62/2022), Order dated 14^th October 2022

2. AIR 2010 SC 1296

3 MD Frozen Foods Exports Pvt Ltd vs Hero Fincorp Ltd. 2017 SCC Online Del 9190

4. Order dated 10^th January 2023 in Rev Petition No. 296/2022 in Arb Pet 62/2022

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