Supreme Court of India
M. D. FROZEN FOODS EXPORTS PVT. LTD. & ORS.versusHERO FINCORP LTD.
- Citation
- 2017 INSC 976
- Decided
- 21 September 2017
- Disposal
- Dismissed
- Bench
- R F NARIMAN
Holding
The SARFAESI Act offers a procedural remedy that may be invoked concurrently with arbitration, and its provisions apply to existing secured debts without constituting a retrospective substantive change.
Summary
The appellants borrowed money from the respondent, securing the loan with seven immovable properties. Their loan account was declared a non‑performing asset and the parties’ contract contained an arbitration clause, leading the respondent to initiate arbitration while also issuing notices under Section 13 of the SARFAESI Act after being notified as an NBFC. The appellants argued that the SARFAESI provisions were substantive and could not be applied retrospectively to a pre‑existing debt, and that invoking arbitration precluded simultaneous SARFAESI proceedings. The Supreme Court held that the SARFAESI Act provides a procedural remedy that can be pursued alongside arbitration, that the Act applies to existing debts without creating new substantive rights, and that there is no doctrine of election of remedies in this context. Consequently, the appeal was dismissed with costs.
Issues considered
- Whether arbitration proceedings can be pursued simultaneously with SARFAESI Act proceedings.
- Whether Section 13 of the SARFAESI Act can be invoked for debts arising before the Act was applied to the respondent.
- Whether the lender can invoke SARFAESI provisions when the NBFC notification was issued after the account became an NPA.
- Whether the SARFAESI Act is a substantive or procedural law for the purpose of retrospective application.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 37(2)(b)
- Companies Act, 1956
- Recovery of Debts Due to Banks and Financial Institutions Act, 1993
- Reserve Bank of India Act, 1934s. 45-I
- Securities and Exchange Board of India Act, 1992
- Securities Contracts (Regulation) Act, 1956
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002s. 13(2), s. 2(1)(l), s. 2(1)(m)(iv), s. 2(1)(o), s. 2(1)(zd), s. 2(f), s. 31A, s. 35, s. 37
- Transfer of Property Act, 1882s. 69, s. 69A
Subjects
ArbitrationSARFAESI ActSimultaneous proceedingsElection of remediesNon‑performing assetProcedural vs substantive lawNBFCSecurity interestDebt recovery
Judgment
[2017] 13 S.C.R. 800
A M. D. FROZEN FOODS EXPORTS PVT. LTD. & ORS.
v.
HERO FINCORP LTD.
(Civil Appeal No.l5147 of2017)
B SEPTEMBER 2 I, 2017
[R. F. NARIMAN AND SANJAY KISHAN KAUL, JJ.]
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act) -
C ss.2(l)(m)(iv),(o),(zd) and 13(2), 31A, 35, 37- Simultaneous
proceedings for recovery under the Arbitration and Conciliation
Act, 1996 and the SARFAESI Act - Permissibility of- Appellants
borrowed monies from respondent, against security of immovable
properties by creating equitable mortgage of seven properties -
Account of appellants became a 'Non-Pe1jorming Asset' ('NPA ') -
D Agreement between the parties contained an arbitration clause and
thus, the lender/respondent invoked arbitration clause - Prior to
such invocation, a notification was issued specifying 'Non-Banking
Financial Companies' as financial institutions and directing that
provisions of SARFAESI Act shall apply to such financial institutions
E - Respondent, a Non-Banking Financial Company was notified as
a financial institution - Respondent issued a notice uls. 13(2),
SARFAESI Act for one of the seven properties of the appellants - In
the arbitration proceedings, interim orders granted by the Arbitrator
restraining appellant from creating any third party interest over the
properties - Another notice issued by respondent u!s.13(2),
F SARFAESI Act for two more properties of the appellant - Interim
order passed in arbitration proceedings, later confirmed- In order
to remove any impediment in the SARFAESI proceedings, application
filed by respondent to substitute the order of status quo qua parties
with the name of the appellants/borrowers- Application allowed-
G Appeal filed by appellants u/s.37(2){b), Arbitration Act, dismissed
by High Court - Plea of appellants before Supreme Court that
respondent elected its remedy by seeking recovery through
arbitration process and, thus, could not subsequently and
simultaneously initiate proceedings under SARFAESI Act - Held:
The present is not a case of election of remedies - Provisions of the
H
800
M. D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 801
FINCORP LTD.
SARFAESI Act are a remedy in addition to the provisions of the A
Arbitration Act. 1996 - SARFAESI proceedings and arbitration
proceedings. thus, can go hand in hand - Impugned order is well-
reasoned order giving cogent reasons- Costs ofRs. 20,000/- imposed
- Arbifration and Conciliation Act, 1996- s.37(2}(b) -Recovery
of Debts Due to Banks and Financial Institutions Act. 1993 -
B
Banking/Banks.
Securitisation and Reconstruction of Financial Assets and
Enjorcement of Security Interest Act, 2002- History of- Discussed.
Securitisation and Reconstruction of Financial As.wts and
Enforcement of Security Interest Act, 2002 - s.2(f) - Remedy llnder c
- Nature of- Substantive or procedural - Loan borrowed by
appellants- Account of appellants became a 'Non-Performing Asset'
('NPA ') - Said loan was borrowed by appellants, prior to the
application of the SARFAESI Act to the respondent - Plea of
appellants that it was impermissible for respondents to take recourse
to provisions of SARFAESI Act in respect of an account already D
declared an NPA, as that would amount to retrospective application
of a substantive law - Held: Scheme of SARFAESJ Act sets out an
expeditious, procedural methodology, enabling the bank to take
possession of the property for non-payment of dues, without
intervention of the court - Mere fact that a more expeditious remedy E
is provided under the SARFAESI Act, does not mean that it is
substantive in character or has created an altogether new right -
Scheme of the SARFAESI Act, is really to provide a procedural remedy
against securit)J interest already created- Therefore, an existing
borrower, who was granted financial assistance was covered u/s.2(/)
as a 'borrower' - Thus, SARFAESI Act applies to all existing F
agreements irrespective of the fact whether the lender was a not{fied
'jlnancial institution' on the date of the execution of the agreement
with the borrower or not - Interpretation of Statutes.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 - Whether parallel G
recovery proceedings could go on under the RDDB Act; 1993 and
the SARFAESJ Act! 2002 - Held: The two Acts are complimentary to
each other and simultaneous proceedings can go under both the
Acts - Recovery of Debts Due to Banks and Financial Institutions
Act, 1993.
H
802 SUPREME COURT REPORTS [2017] 13 S.C.R.
A Interpretation of Statutes - Issue of retroactidty -- What is -
Discussed
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 - Proceedings under -
Nature of- Discussed.
B Dismissing the appeal, the Court
HELD: J. An endeavour towards banking sector reforms,
was the setting up of Expert Committees known as 'The
Andhyarujina Committee', and 'The Narasimham Committee I
and IP. To facilitate the disposal of the claims of recovery made
c by various banks and financial institutions, the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 ('RDDB Act')
was enncted, 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
D 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. The 'Statement of
Objects and Reasons' for bringing in the SARFAESI Act, itself
E shows that the absence of legal provisions for facilitating
securitisation offinancial assets of banks and financial institutions
was the reason for its enactment. !Pans 3, 4)[807-G-H; 808-A-
C}
2.1 A claim by a bank or a financial institution, before the
F specified laws came into force, would ordinarily have been filed
in the Civil Court having the pecuniary jurisdiction. The setting
up of the Debt Recovery Tribunal under the RDDB Act resulted
in this specialised Tribunal entertaining such claims by the banks
and financial institutions. In fact, suits from the civil jurisdiction
G were transferred to the Debt Recovery Tribunal. The Tribunal
was, thus, an alternative to a Civil Court recovery proceedings.
On the SARFAESI Act being brought into force seeking to
recover debts against security interest, a question was raised
whcthc•· parallel proceedings could go on under the RDDB Act
and the SARFAESI Act. This issue was clearly answered in favour
H
M. D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 803
FINCORP LTD.
of such simultaneous proceedings in Transcore and Mathew A
Varghese case. The aforesaid two Acts are, thus, complimentary
to each other and it is not a case of election of remedy. [Para 26,
27 and 291[813-F-G; 814-A-B; 815-H]
Transcore V. Union of India & Anr. (2008) 1 sec 125:
(2006} Suppl. SCR 785; Mathew Varghese v. M Amritha B
Kumar (2014) 5 SCC 610 : [2014] 2 SCR 736 - relied
on.
2.2 The only twist in. the present case is that, instead of
the recovery process under the RDDB Act, the concern herein
is with respect to an arbitration proceeding. It is trite to say that c
arbitration is an alternative to the civil proceedings. In fact, when
a question was raised as to whether the matters which came within
the scope and jurisdiction of the Debt Recovery Tribunal under
the RDDB Act, could still be referred to ar-bitration when both
parties have incorporated such a clause, the answer was given in
the affirmative. That being the position, the appellants can hardly 0
be permitted ·to contend that the initiation of arbitration
proceedings would, in any manner, prejudice their rights to seek
relief under the SARFAESIAct. The jurisdiction of the Civil Court
is barred for matters covered by the RDDB Act, but the parties
still have freedom to choose a forum, alternate to, and in place of E
the regular courts or judicial system for deciding their inter se
disputes. All disputes relating to the "right in personam" are
arbitrable and, therefore, the choice is given to the parties to
choose this alternative forum. A claim of money by a bank or a
financial institution cannot be treated as a "right in rem", which
has an inherent public interest and would thus not be arbitrable. F
[Paras 30, 31][816-A-B, D-E)
HDFC Bank Limited v. Satpal Singh Bakshi 2013 (134)
DRJ 566 (FB) - approved.
2.3 The present is not a case of election of remedies as G
was sought to be canvassed by appellants,,since the alternatives
are between a Civil Court, Arbitral Tribunal or a) Debt Recovery
Tribunal constituted under the .RDDBAct. Insofar.as that election
is concerned, the mode of settlement of disp.utes to an arbitral
tribunal has been elected. The provisions of the SARFAESI Act
H
804 SUPREME COURT REPORTS [2017] 13 S.C.R.
A are thus, a remedy in addition to the provisions of the Arbitration
Act. The SARFAESI Act was enacted to regulate securitisation
and reconstruction of financial assets and enforcement of security
interest and for matters connected therewith. Liquidation of
secured interest through a more expeditious procedure is what
has been envisaged under the SARFAESI Act and the two Acts
B
are cumulative remedies to the secured creditors. rPara 32] [816-
G-H; 817-AJ
2.4 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
C 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. [Para 33Jl817-
BJ
3.1 The issue of whether resort can be had to Section 13 of
D 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, though urged before this Court,
appears really not to have been canvassed before the High Court.
At least, it finds no substantive mention. However, in the larger
E interest of settling the question of law, this issue is also required
to be dealt with. The SARFAESI Act was brought into force to
solve the problem of recovery of large debts in NPAs. Thus, the
very rationale for the said Act to be brought into force was to
provide an expeditious procedure where there was a security
interest. It certainly did not apply retrospectively from the date
F when it came into force. The question is whether, the Act being
applicable to the respondent at a subsequent date and thereby
allowing the respondent to utilize its provisions with regards to a
past debt, would make any difference to this principle. The answer
to the same is in the negative. The Act applies tu all the claims
G which would be alive at the time when it was brought into force.
Thus, qua the respondent or other NBFCs, it would be applicable
similarly from the date when it was so made applicable to them.
[Paras 35-37](817-E-G; 818-A-B]
3.2 No doubt~ till the respondent was not a 'financial
H institution' within the meaning of Section 2( 1)(m)(iv) of the
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 805
FINCORP LTD.
SARFAESI Act, it was not a 'secured creditor' as defined under A
Section 2(1)(zd) of the SARFAESI Act and, thus, could not invoke
the provisions of the SARFAESI Act. However, the right to
proceed under the SARFAESI Act accrued once the Notification
was issued. In case of retroactivity, the Parliament takes note of
the existing conditions and promulgates the remedial measures
B
to rectify those conditions. In fact the SARFAESI Act, was to
remedy such a position and provide a measure against secured
interests. The scheme of the SARFAESI Act, is really to provide
a procedural remedy against security interest already created.
Therefore, an existing borrower, who had been granted financial
assistance was covered under Section 2(f) of the said Act as a c
'borrower'. Not only this expression, the definition clauses
dealing with 'debt securities', 'financial assistance', 'financial
assets', etc., clearly convey the legislative intent that the
SARFAESl Act applies to all existing agreements irrespective
of the fact whether the lender was a notified 'financial institution'
D
on the date of the execution of the agreement with the borrower
or not. The scheme of the SARFAESI Act sets out an expeditious,
procedural methodology, enabling the bank to take possession
of the property for non-payment of dues, without intervention of
the court. The mere fact that a more expeditious remedy is
provided under the SARFAESI Act does not mean that it is E
substantive in character or has created an altogether new right.
Similarly, the date on which a debt is declared as an NPA would
again 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 terms of the parameters
F
contended by the respondent, namely (i) Existence of a present
actionable debt; (ii) Status of the person invoking the jurisdiction
is that of a secured creditor; (iii) Assets have been secured in
satisfaction of the debt; and (iv) That the debtor/borrower should
have been declared an NPA. [Paras 18, 38 and 41)[818-C-G; 81-
A; 820-B-C; 812-B-Cj G
Sarthak Builders Pvt. Ltd. v. Orissa Rural Development
Corporation Limited 2014 SCC OnLine Ori 75;
Pradeep Kumar Gupta v. State of U.P AIR 2010 All
3 - approved.
H
806 SUPREME COURT REPORTS [2017] 13 S.C.R.
A Mls. Deccan Chronicles Holdings Limited v. Union of
India AIR 2014 Andhra Pradesh 78- not approved.
Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.
(2004) 4 SCC 311 : [20041 3 SCR 982; United Bank
ofindia v. Satyawati Tondon (2010) 8 SCC 110 : [2010]
B 9 SCR 1; State Bank's Staff Union (Madras Circle) v.
Union of India & Ors. (2005) 7 SCC 584 : {2005]
3 Suppl. SCR 200; D.S. Nakara v. Union of India
(1983) 1 SCC 305 : [19831 2 SCR 165; Zile Singh vs.
State of Haryana (2004) 8 SCC 1 : [2004] 3 Suppl.
SCR 400; Govind Das v. ITO (1976) 1 SCC 906 :
c [1976) 3 SCR 44; CIT v. Vatika Township (P) Ltd. (2015)
1 SCC l : [2014) 12 SCR 1037; Shyam Sundar & Ors.
v. Ram Kumar & Ors. (2001) 8 SCC 24: [2001] l Suppl.
SCR 115; Garikapatti Veeraya v. N. Sttbbayah
Chowdhary (1957) SCR 488; Hitendra Vishnu Thakur
D v. State of Maharashtra (1994) 4 SCC 602 : [1994] 1
Suppl. SCR 360; Subash Chandra Panda v. State of
Orissa AIR 2008 Ori 88; Unique Engineering Works
v. Union of India II (2004) BC 241 (DB); Trimbak
Damodhar Raipurkar v. Assaram Hiraman Patil & Ors.
(19621 Supp 1 SCR 700- referred to.
E
West v. Gwynne 1911 2 Ch l; In re Athlumney. Ex parte
Wilson (1898] 2 Q.B. 547 - referred to.
Case Law Reference
[2004] 3 SCR 982 referred to Para 5
F (2010] 9 SCR 1 referred to ParaS
(2005] 3 Suppl. SCR 200 referred to Para 13
(1983) 2 SCR 165 referred to Para 13
(20041 3 Suppl. SCR 400 referred to Para 14
G [1976] 3 SCR 44 referred to Para 14
{2014) 12 SCR 1037 referred to Para 14
(2001) 1 Suppl. SCR 115 referred to Para 14
(1957) SCR 488 referred to Para 14
H
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 807
FINCORP LTD.
[1994] 1 Suppl. SCR 360 referred to Para 14 A
[2006] Suppl. SCR 785 relied on Para 27
[2014] 2 SCR 736 relied on Para 27
2013 (134) DRJ 566 (FB) approved Para 31
2014 SCC OnLine Ori 75 approved Para 34 B
AIR 2010 All 3 approved Para 34
AIR 2014 AP 78 not approved Para 34
AIR 2008 Ori 88 referred to Para 34
(2004) BC 241 (DB) referred to Para 38
c
[1962] 1 Suppl. SCR 700 referred to Para 39
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 15147
of2017.
From the fmal Order and Judgment dated 13.07.2017 of the High
Court of Delhi at New Delhi in ARB. A. (Cornm.) No.l5 of2017. D
D. K. Devesh, U.P. Singh, Balakishore, S. K. Roshan, Ms. Khyali,
Advs. for the Appellant.
C.A. Sundaram, Sr. Adv., Venancio D'costa, Faisal Sherwani,
Divij Kumar, Ms. Astha, Damandeep Singh Bhalla, Ms. Rohini Musa,
Abhishek Gupta, Apoorva Tripathi, Zafar Inayat, Advs. for the E
Respondent.
The Judgment ofthe Court was delivered by
SANJAY KISHAN KAUL, J. 1. Leave granted.
Prologue: F
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. G
3. An endeavour towards banking sector reforms, was the setting
up of Expert Committees known as 'The Andhyaruj ina Committee', and
'The Narasimham Committee I and II'. To facilitate the disposal of the
H
808 SUPREME COURT REPORTS [20 17] 13 S.C.R.
A 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 'RDDBAct') 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
B
financial institutions to take possession of the securities and to sell the
same without the intervention of the Court- thus the Securitisation and
Reconstruction ofFinancial 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
c 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
D recovery of defaulting loans and the mounting levels of non-performing
assets ofbanks 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
E 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.
vs. Union ofIndia & Ors. 1 and in United Bank ofIndia vs. Satyawati
Tondon 2 •
F
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
G 21.1 0.2015. 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.
'(2004) 4 sec 311
2(20 10) ~ scc 110
H
M. D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 809
FINCORP LTD. [SANJAY KISHAN KAUL, J.]
7. The agreement inter se the parties contained an arbitration A
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 31Aofthe SARFAESIAct, specifying certain 'Non- B
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.SOO crore and above, as financial institutions and directing that, in
public interest, the provisions ofthe SARFAESIAct shall apply to such
financial institutions, with the exceptions of provisions of Sections 13 to C
19, which shall apply only to such security interest which is obtained for
securing repayment of secured debt with principal amount of Rs.l crore
and above. The respondent is at serial No.68 of the said notification.
8. In view of the aforesati.d notification, the respondent issued a
notice under Section 13(2) of the SARFAESIAct on 24.11.20\6 for one D
of the seven properties. The statement of claim was filed by the
respondent before the Arbitrator 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. On 16.02.2017, the
respondent issued another notice under Section 13(2) of the SARFAESI
Act for two more of the seven properties. E
9. Insofar as the arbitration proceedings are concerned, the interim
order of05.01.2017 was 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 F
on 19.05.2017.
10. The appellants, aggrieved by this order, filed an appeal under
Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as the 'Arbitration Act'), which has been dismissed by the
impugned order dated 13.07.2017 of the learned Single Judge of the G
Delhi High Court.
H
810 SUPREME COURT REPORTS [2017] 13 S.C.R.
A Legal Issues:
11. A pemsal of the impugned order and the submissions made by
learned counsel for the parties have thrown up the following legal issues
for determination:
A. Whether the arbitration proceedings initiated by the respondent
B can be carried on along with the SARFAESI proceedings
simultaneously?
B. 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
SA:RFAESI Act to the respondent?
c
C. A linked question to question (ii), whether the lender can invoke
the SARFAESIAct provision where its notification as financial
institution under Section 2(1)(m) has been issued after the
account became an NPA under Section 2(l)(o) of the said
Act?
D
Appellants' case:
12. The appellants appearing through Mr. Guru Krishna Kumar,
Senior Advocate sought to contend that Section 13(2) of the SARFAESI
Act was a substantive provision and imposed a new burden affecting an
existing obligation, thus repelling the plea of the respondent that the said
E provision was only procedural in nature. The security interest was capable
of being enforced under the SARFAESI Act without the intervention of
the court or the tribunal, and this right was available notwithstanding any
provisions contained in Sections 69 & 69A of the Transfer of Property
Act, 1882 [Section 13( l) containing the notwithstanding provision]. It
F was thus pleaded that it was 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. The appellants sought to dispute the plea of the absence
of any new obligation or additional burden as advanced by the respondent,
since the debts had to be repaid within 60 days from the date of issuing
G the notice under Section 13 of the SARFAESI Act.
13. The appellants also pleaded that the expression "retrospective"
and "retroactive" are almost synonymous and in that behalf referred to
the definition of these expressions as found in the 'Black's Law
Dictionary' and 'Wharton's Law Lexicon' treating the provisions as
1-1 synonymous. A reference was also made to the judgment in State Bank's
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 811
FINCORP LTD. [SANJAY KISHAN KAlJL, J.]
Staff Union (Madras Circle) vs. Union of I11dia & Ors. 3 and D.S. A
Nakara vs. Union of India 4 to advance a proposition that the statute
could have only prospective application, unless it states in clear terms, to
be expressly retrospective.
14. The appellants referred to a catena of judgments for the legal
proposition that a statute which effects substantive rights is presumed to B
be prospective in operation unless made retrospective and the basis of
the same is the principle of' fairness' - (Zile Singh vs. State ofHaryana5;
Govind Das vs. ITO 6 ; CIT vs. Vatika Township (P) Ltd/; Shyam
Sundar & Ors. vs. Ram Kumar & Ors. 11; Garikapatti Veeraya vs.
N. Subbayah Chowdhary 9; Hitendra Vishnu Thakur t•s. State of
Maharashtra 10.) C
15. The reason why the appellants claimed that it was a case of
substantive law, and not procedural law, is that more stringent provisions
in terms of the entitlement of debtors to liquidate a secured asset, without
the intervention of the Court, are brought into force.
D
16. Another plea which was sought to be advanced is that the
NBFCs stand on a different footing, and that it is not as if ipso.facto. all
NBFCs are included within the ambit of the Act, but only such of the
NBFCs as are notified by the Central Government. Further, it was
stated that the RDDB Act does not include in its term the NBFC. These
factors were stated to be material to exclude the security interest created E
prior to the application of the Act.
17. On the first legal issue referred to aforesaid, it has been
contended that a 'notice seeking arbitration was issued first, and that too
after the provisions of the SARFAESIAct had been made applicable to
the respondent and thus, the respondent had elected its remedy by seeking F
recovery through the arbitration process and, therefore, could not
subsequently and simultaneously initiate proceedings under the
SARFAESI Act.
3 (2005) 1 sec s&4
4
(1983) 1 sec 3os G
s (2004) 8 sec 1
6 (1976) 1 sec 906
1
(2015) 1 sec 1
s (2oo I) 8 sec 24
9
( 1957) SCR 488
•u (1994) 4 sec 602
H
812 SUPREME COURT REPORTS [2017] 13 S.C.R.
A Respondent's case:
18. On behalf of the respondent, Mr. C.A. Sundaram, Senior
Advocate contended that the effect of notifying the respondent as an
NBFC to which the SARFAESI Act applies, would imply that the
provisions of the said Act can be used to take recourse to any live and
B actionable debt, i.e., a debt in praesenti. In order to invoke the provision,
it was submitted, four factors are of significance:
i. Existence of a present actionable debt;
ii.Status of the person invoking the jurisdiction is that of a secured
creditor;
c
iii. Assets have been secured in satisfaction of the debt; and
iv. That the debtor/borrower should have been declared an NPA.
19. Learned senior counsel contended that the Act itself was
brought into force to eliminate the problem of recovery of the debts by
D means of the sale of security interest and thus, obviously applied to all
the past debts which were still due and pending. The only difference
was that qua the respondent, it came into force when the notification
was issued. It was stated that a contrary interpretation, if taken to the
logical conclusion, would imply that when the Act was brought into force,
none of the existing security interests would be affected, thereby defeating
E
the very objective of the SARFAESI Act.
20. It was further submitted that insofar as the respondent is
concerned, a common notification dated 05.08.2016 specifies the financial
parameters in respect of which the said Act would apply. Those
F parameters are met in the present case and there is no differentiation in
the enforcement mechanism contained in Section 13 of the said Act
between a bank and an NBFC, as both these institutions are similarly
placed.
21. It was contended that the SARFAESI Act did not create any
new obligation on the appellants, who are the borrowers required to
G repay debts secured by mortgaged properties, but only provides a
procedure, without the intervention of the Courts to enforce the rights
which have already accrued to the lender, by virtue of having lent monies.
It is only a new remedy in terms of the manner of such recovery. The
legislation itself is procedural in nature.
H
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 813
FINCORP LTD. [SANJAY KISHAN KAUL, J.)
22. On the issue of simultaneous proceedings for recovery under A
the arbitration process and the SARFAESI Act it was contended that
there is no prohibition in law from doing so. The process of recovery
could have taken place in a civil suit prior to the enactment of the RDDB
Act which provides for a specialized forum for recovery of dues. It is
settled legal position that both the RDDB Act and the SARFAESI Act B
can be resorted to simultaneously and thus the arbitration proceedings
are only an alternative to the RDDB Act. Section 37 of the SARFAESI
Act, in fact, makes it clear that the provisions of the Act are in addition
to and are not in derogation of any other law for the time being in force.
Cleavage o[iudicia/ opinions:
c
23. The opinions of various High Courts, as cited before us, show
that while the Full Bench of the Orissa High Court, as also the Delhi
High Court and the Allahabad High Court have taken a view favourable
to the respondent in terms of the simultaneous legal processes under the
SARFAESI Act and arbitration recovery proceedings, the Andhra
Pradesh High Court has taken a divergent view. D
Conclusion:
24. We have examined the rival contentions and the judicial
precedents cited before us. The impugned order is a well-reasoned order
giving cogent reasons, but what persuaded us to grant leave and hear E
the matter finally, was this cleavage ofjudicial opinions inter se the High
Courts, requiring this court to settle the law on the point.
25. We now proceed to examine each of the three questions of
law framed:
Question A: F
26. A claim by a bank or a financial institution, before the specified
laws came into force, would ordinarily have been filed in the Civil Court
having the pecuniary jurisdiction. The setting up of the Debt Recovery
Tribunal under the RDDB Act resulted in this specialised Tribunal
entertaining such claims by the banks and financial institutions. In fact, G
suits from the civil jurisdiction were transferred to the Debt Recovery
Tribunal. The Tribunal was, thus, an alternative to a Civil Court recovery
proceedings.
H
814 SUPREME COURT REPORTS [2017] 13 S.C.R.
A 27. On the SARFAESI Act being brought into force seeking to
recover debts against security interest, a question was raised whether
parallel proceedings could go on under the RDDB Act and the
SARFAESI Act. This issue was clearly answered in favour of such
simultaneous proceedings in Trans core ••s. Union ofIndia & Anr. 11 • A
later judgment in Mathew Varghese vs. M. Amritha Kumar12 also
B
discussed this issue in the following terms:
"45. A close reading of Section 37 shows that the provisions of
the SARFAESI Act or the Rules framed thereunder will be in
addition to the provisions of the RDDB Act. Section 35 of the
SARFAESI Act states that the provisions of the SARFAESI Act
c will have overriding effect notwithstanding anything inconsistent
contained in any other law for the time being in force. Therefore,
reading Sections 35 and 37 together, it will have to be held that in
the event of any of the provisions of the RDDB Act not being
inconsistent with the provisions of the SARFAESI Act, the
D application of both the Acts, namely, the SARFAESI Act and the
RDDB Act, would be complementary to each other. In this context,
reliance can be placed upon the decision in Transcore v. Union of
India [(2008) 1 SCC 125: (2008) 1 SCC (Civ) 116] .lnpara64 it
is stated as under after referring to Section 37 of the SARFAESI
Act: (SCC p. 162)
E
"64 .... According to American Jurisprudence, 2d, Vol. 25, p. 652,
if in truth there is only one remedy, then the doctrine of election
does not apply. In the present case, as stated above. the NPA
Act is an additional remedy to the DRT Act. Together they
constitute one remedy and, therefore, the doctrine of election
F does not apply. Even according to Snell s Principles of Equity
(31st Edn., p. 119), the doctrine of election of remedies is applicable
only when there are two or more co-existent remedies available
to the litigants at the time of election which are repugnant and
inconsistent. In any event, there is no repugnancy nor
G inconsistency between the two remedies, therefore, the doctrine
of election has no application."
(emphasis added)
II (2008) 1 sec 12s
12
(2014) s sec 610
H
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 815
FINCORP LTD. [SANJAY KISHAN KAUL, J.]
46. A reading of Section 37 discloses that the application of the A
SARFAESI Act will be in addition to and not in derogation of the
provisions of the RDDB Act. In other words, it will not in any
way nullify or annul or impair the effect of the provisions of the
RDDB Act. We are also fortified by our above statement of law
as the heading of the said section also makes the position clear B
that application of other laws are not barred. The effect of Section
37 would, therefore, be that in addition to the provisions contained
under the SARFAESI Act, in respect of proceedings initiated under
the said Act, it will be in order for a party to fall back upon the
provisions of the other Acts mentioned in Section 3 7, namely, the
Companies Act, 1956, the Securities Contracts (Regulation) Act, C
1956, the Securities and Exchange Board of India Act, 1992, the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993, or any other law for the time being in force."
28. These observations, thus, leave no manner of doubt and the
issue is no more res integra, especially keeping in mind the provisions D
of Sections 35 and 37 of the SARFAESI Act, which read as under:
"35. The provisions of this Act to override other laws. -
The provisions of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the
time being in force or any instrument having effect by virtue of E
any such law."
"37. Application of other laws not barred.- The provisions of
this Act or the rules made thereunder shall be in addition to, and F
not in derogation of, the Companies Act, 1956 ( 1 of 1956), the
Securities Contracts (Regulation) Act, 1956 (42 of 1956), the
Securities and Exchange Board of India Act, 1992 (15 of 1992),
the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (51 of 1993) or any other law for the time being in G
force."
29. The aforesaid two Acts are, thus, complimentary to each other
and it is not a case of election of remedy.
H
816 SUPREME COURT REPORTS [20 17] 13 S.C.R.
A 30. The only twist in the present case is that, instead of the recovery
process under the RDDB Act, we are concerned with an arbitration
proceeding. It is trite to say that arbitration is an alternative to the civil
proceedings. In fact, when a question was raised as to whether the
matters which came within the scope and jurisdiction of the Debt
B Recovery Tribunal under the RDDB Act, could still be referred to
arbitration when both parties have incorporated such a clause, the answer
was given in the affirmative. 13 That being the position, the appellants
can hardly be permitted to contend that the initiation of arbitration
proceedings would, in any manner, prejudice their rights to seek relief
under the SARFAESI Act.
c 31. The discussion in the impugned order refers to a judgment of
the Full Bench of the Delhi High Court in HDFC Bank Limited vs.
Satpal Singh Bakshi14 opining that an arbitration is an alternative to the
RDDB Act. In that context, the learned Single Judge has rightly held
that this Full Bench judgment does not, in any manner, help the appellants
D but, in fact, supports the case of the respondent. The jurisdiction of the
Civil Court is barred for matters covered by the RDDB Act, but the
parties still have freedom to choose a forum, alternate to, and in place of
the regular courts or judicial system for deciding their inter se disputes.
All disputes relating to the ''right in personam" are arbitrable and,
therefore, the choice is given to the parties to choose this alternative
E forum. A claim of money by a bank or a financial institution cannot be
treated as a "right in rem", which has an inherent public interest and
would thus not be arbitrable.
32. The aforesaid is not a case of election of remedies as was
sought to be canvassed by learned senior counsel for the appellants,
F since the alternatives are between a Civil Court, Arbitral Tribunal or a
Debt Recovcty Tribunal constituted under the RDDB Act. Insofar as
that election is concerned, the mode of settlement ofdisputes to an arbitral
tribunal has been elected. The provisions of the SARFAESI Act are
thus, a remedy in addition to the provisions of the Arbitration Act. In
G Transcore vs. Union of India & Anr. (supra) it was clearly observed
that the SARFAESI Act was enacted to regulate securitisation and
reconstruction of financial assets and enforcement of security interest
and for matters connected therewith. Liquidation of secured interest
u HDFC Bank Limited v. Satpal Singh Bakshi- 2013 (134) DRJ 566 (FB)
1"2013 (134) DRJ 566 (FB)
H
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 817
FINCORP LTD. [SANJAY KISHAN KAUL, J.)
through a more expeditious procedure is what has been envisaged under A
the SARFAESI Act and the two Acts are cumulative remedies to the
secured creditors.
33. 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 B
creditor can proceed against other assets in execution against the debtor,
after determination of the pending outstanding amount by a competent
forum.
34. We are, thus, unequivocally of the view that the judgments of
the Full Bench of the Orissa High Court in Sarthak Builders Pvt. Ltd. c
vs. Orissa Rural Development Corporation Limited15, the Full Bench
of the Delhi High Court in HDFC Bank Limited vs. Satpal Singh
Bakshi (supra) and the Division Bench of the Allahabad High Court in
Pradeep Kumar Gupta vs. State of U.P16 lay down the correct
proposition of law and the view expressed by the Andhra Pradesh High
Court in M/s. Deccan Chronicles Holdings Limited vs. Union of D
India17 following the overruled decision of the Orissa High Court in
St~bash Chandra Panda vs. State of Orissa'~ does not set forth the
correct position in law. SARFAESI proceedings and arbitration
proceedings, thus, can go hand in hand.
Q11estions B & C E
35. The issue of 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, though urged before us, appears really not to
have been canvassed before the learned Single Judge of the Delhi High F
Court. At least, it finds no substantive mention. We, however, are of the
view that in the larger interest of settling the question oflaw, this issue is
also required to be dealt with.
36. The SARFAESI Act was brought into force to solve the
problem of recovery of large debts in NPAs. Thus, the very rationale G
for the said Act to be brought into force was to provide an expeditious
IS2014 sec OnLineOri 75
16
AIR 2010 All 3
17
AIR 2014 Andhra Pradesh 78
18
AIR 2008 Ori 88
H
818 SUPREME COURT REPORTS [2017] 13 S.C.R.
A procedure where there was a security interest. It certainly did not apply
retrospectively from the date when it came into force. The question is
whether, the Act being applicable to the respondent at a subsequent date
and thereby allowing the respondent to utilize its provisions with regards
to a past debt, would make any difference to this principle. We are of
the view that the answer to the same is in the negative.
B
37. The Act applies to all the claims which would be alive at the
time when it was brought into force. Thus, qua the respondent or other
NBFCs, it would be applicable similarly from the date when it was so
made applicable to them.
c 38. The Full Bench of the Orissa High Court in Sarthak Builders
Pvt. Ltd. vs. Orissa Rural Development Corporation Limited (supra)
has, in fact, succinctly sets out this aspect. No doubt, till the respondent
was not a 'financial institution' within the meaning ofSection 2( l)(m)(iv)
of the SARFAESI Act, it was not a 'secured creditor' as defined under
Section 2( 1)(zd) of the SARFAESI Act and, thus, could not invoke the
D provisions ofthe SARFAESIAct. However, the right to proceed under
the SARFAESI Act accrued once the Notification was issued. The Full
Bench referred to a Division Bench judgment of the Uttarakhand High
Court in Unique Engineering Works vs. Union of India 19 which dealt
with the issue of retrospectivity and retroactivity. In case of retroactivity,
E the Parliament takes note of the existing conditions and promulgates the
remedial measures to rectify those conditions. In fact the SARFAESI
Act, in our view, was to remedy such a position and provide a measure
against secured interests. The scheme of the SARFAESIAct, is really
to provide a procedural remedy against security interest already created.
Therefore, an existing borrower, who had been granted financial
F assistance was covered under Section 2(f) of the said Act as a
'borrower'. Not only this expression, the definition clauses dealing with
'debt securities', 'financial assistance', 'financial assets', etc., clearly
convey the legislative intent that the SARFAESI Act applies to all existing
agreements irrespective of the fact whether the lender was a notified
0 'financial institution' on the date ofthe execution of the agreement with
the borrower or not. The scheme of the SARFAESI Act sets out an
expeditious, procedural methodology, enabling the bank to take possession
of the property for non-payment of dues, without intervention of the
court. The mere fact that a more expeditious remedy is provided under
1q II 2004) BC 24l (DB)
H
M.D. FROZEN FOODS EXPORTS PVT. LTD. v. HERO 819
FINCORP LTD. [SANJAY KISHAN KAUL, J.]
the SARFAESI Act does not mean that it is substantive in character or A
has created an altogether new right. To accept the argument of the
appellants would imply that they have an inherent right to delay the
enforcement against the security interest!
39. The catena ofjudgments referred to by learned senior counsel
for the appellants on substantive law not being retrospective in operation, B
unless expressly stated so in the Act would, thus, have no application to
the matter in issue, in view of what we have observed aforesaid. On the
other hand, as observed by Buckley, L.J. in West vs. Gwynne10,
retrospective operation is one matter and interference with existing rights
is another. In that context, it was ruled that the provisions of the
Conveyancing of Law and Prope11y Act, 1892 were held applicable to C
leases containing a covenant, condition or agreement against assigning,
under-letting or parting with possession or disposingofland or property
leased without license or consent to all leases whether executed before
or after the commencement of the Act. Such a construction was held
not to make the Act retrospective in operation but merely effected the D
future existing rights under all leases whether executed before or after
the date of that Act. (Discussed in Trimhak Damodhar Raip11rkar vs.
Assaram Hiraman Patil & Ors/ 1).
40. In a similar vein, are the observations made in the case of In
re Atll/umney. Ex parte Wilson 22 , where the question posed before the E
Queen's Division Bench was whether Section 23 of the Bankruptcy
Act, 1890 was retrospective in its operation. In the aforementioned
context, Wright, J., speaking for the Bench, illuminatingly opined:
"Perhaps no rule of construction is more fimlly established than
this- that a retrospective operation is not to be given to a statute F
so as to impair an existing right or obligation, otherwise than as
regards matter ofprocedure, unless that effect cannot be avoided
without doing violence to the language of the enactment. If the
enactment is expressed in language which is fairly capable of
either interpretation, it ought to be construed as prospective only ...
it is a general rule that when the Legislature alters the rights of G
parties by taking away or conferring any right of action, its ·
enactments, unless in express terms they apply to pending actions,
lO 19112Ch I :~tpp. 11,12
1
" 1962 Supp (I) SCR 700
~ 1 [ J89S] 2a Q.B. 547
H
820 SUPREME COURT REPORTS [20 17] t3 S.C.R.
A do not affect them .. .it is said that there is one exception to
tlwt rule, namely. that, where enactments merely affect
procedure and do not extend to rights of action, they have
been held to app~l' to existing rights, and it is suggested here
that the olteration made by this section is within that
exception ... " (Emphasis supplied)
B
41. Similarly, the date on which a debt is declared as an NPA
would again have no impact. We arc, thns, of the view that the provisions
of the SARFAESI Act would become applicable qua all debts owing
and live when the Act became applicable to the respondent in terms of
the parameters contended by learned sl!nior counsel for the respondent
c and enlisted at serial Nos. ito iv in para 18.
42. We are, thus, of the view that the appeal is completely devoid
of merit, and is only an endeavour to prolong the ultimate ''date of
judgment" for the appellants to meet their obligations.
D The appeal is dismissed with costs quantified at Rs.20,000/-.
Divyn Pandey Appe<1l dismissro.
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