A bar cannot be created on the rights of a secured creditor under SARFAESI Act merely because an arbitration proceeding has been initiated.

[Case Brief] Indiabulls Housing Finance Limited v/s Deccan Chronicle Holdings Limited and others

Case name Indiabulls Housing Finance Limited v/s Deccan Chronicle Holdings Limited and others
Case number Civil Appeal Numbers 18 of 2018
Court Supreme Court of India
Bench Justice A.K. Sikri & Justice Ashok Bhushan
Decided on  February 23, 2018
Relevant Act/Sections SARFAESI Act, 2002 – Section 2, Section 13

The Arbitration & Conciliation Act, 1996 – Section 8

Author of the case brief  Bhavisha Sharma ([email protected])

Brief Facts and Procedural History:

The Respondent had borrowed a sum of Rupees 100 crores from the Indiabulls Financial Services Limited (IBFSL) and the transaction was secured by an equitable mortgage. The Respondent defaulted on payment and IBFSL issued a notice calling upon repayment. After this issuance, IBFSL merged into Indiabulls Housing Finance Limit(the Appellant). Though IBFSL was not a financial institution or banker under SARFAESI Act, 2002, the Appellant was a financial institution and thus, invoked the Section 13(2) of the Act. Additionally, a notice under Section 9 of the Indian Arbitration and Conciliation Act, 1996 was also issued to the Respondent with respect to the arbitration clause governing the terms of their contract.

The Respondent filed a petition against the notice received by it under SARFAESI Act with the Debt Recovery Tribunal, Chandigarh under Section 17 of the Act. The Appellant issued an auction notice for two properties of the Respondent, after which the Respondent withdrew their petition with the DRT and filed a writ petition with the Andhra Pradesh High Court at Hyderabad. The HC ruled in favour of the Respondent, holding that if the contract governing the relationship of the parties provides for recourse through arbitration, the parties are impliedly barred by Section 8 of the Arbitration and Conciliation Act, 1996 to resort to any other remedies. Further, as the original creditor, IBFSL is not a secured creditor under the Act, the Appellant company only steps in its shoes and will therefore, have no rights under the Act against the Respondent. The Appellants filed an appeal with the Supreme Court of India.

Issues before the Supreme Court:

1) Can a secured creditor invoke the provisions of SARFAESI Act, 2002 if the machinery envisaged by Arbitration & Conciliation Act, 1996 has already been invoked?

2) Can the Appellant company invoke the provisions of SARFAESI Act, 2002, even though the original creditor before the merger of the two entities was not legally eligible to do so?

Ratio of the Court:

  1. Yes. SC observed that the Arbitration & Conciliation Act, 1996 provides a remedy general in nature to all transactions alike. In contrast to that, SARFAESI Act is a special enactment to empower the secured creditors to exercise their right without judicial intervention. Thus, the special enactment shall prevail and a bar cannot be created on the rights of a secured creditor under SARFAESI Act merely because an arbitration proceeding has been initiated. The Doctrine of Election will not apply here as the two different remedies are not repugnant to each other and can be proceeded with together. 
  2. SC observed that this act and the provisions thereof do not create any new rights in the creditor, but only provides for an effective remedy for their realization. The court compared this situation to that of an assignee, i.e. in case the debt would have been transferred in favour of a third party who was a secured creditor under the SARFAESI Act, 2002, then it would have the right to invoke the provisions of the Act irrespective of whether the assignor was a secured creditor or not. Similarly, as the current entity holding the loans is entitled as provided under the Act, it will not be precluded to do so merely because its predecessor was not entitled to the same. Further, retroactivity of the statute will not be in concern as the act is merely procedural and not substantive – it merely provides for a more effective remedy of the already existing rights of a secured creditor and nothing else.

Decision Held:

Relying extensively on its decision in the case of M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd., the Supreme Court held that the Appellant can invoke the provisions of SARFAESI Act, 2002. As the current creditor in the case is entitled to a remedy under SARFAESI Act, 2002, the predecessor and its eligibility under the same will not cause a difference.

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