There Can Be Simultaneous Proceedings Under SARFAESI And Arbitration Act For Recovery Of Loan Arrears [Read Judgment]

The Supreme Court has held that NBFC is entitled to initiate both arbitration proceedings and SARFAESI proceedings with respect to a loan account, and that the ‘doctrine of election’ was not attracted in such a scenario. It was further clarified that there was no illegality  in an Non-Banking Financial Company(NBFC) invoking SARFAESI Act for recovery of loan arrears with respect to an account classified as Non-Performing Asset(NPA) before the NBFC got notified under the Act. It was also clarified that the

The issue was considered by a bench comprising Justices R.F Nariman and Sanjay Kishen Kaul. In the case, the lender Hero Fincorp Ltd., was an NBFC, which had advanced loan to one M.D Frozen Foods Exports Pvt.Ltd. The lender had initiated arbitration proceedings on 16.11.2016.  The lender was also notified under Sec.31(2)(1)(m)(iv) of the SARFAESI Act. Once an NBFC gets notified under the said provision, it becomes entitled to invoked proceedings under SARFAESI Act.

Thereupon, notice under Section 13(2) was issued by the lender. The legality of the arbitration proceedings was challenged by the borrower in view of the invocation of SARFAESI Act. The challenge being repelled both by the Arbitrator, and later by the Delhi High Court, the matter reached the Supreme Court at the instance of the borrower.

The Court considered the following issues :-

1. Whether the arbitration proceedings initiated by the 4 respondent can be carried on along with the SARFAESI proceedings simultaneously?


2. 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?


3. 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?

Answering the first issue, the Court held both proceedings can be maintained simultaneously. It was explained that the doctrine of election was attracted only in cases where both remedies available are mutually repugnant or inconsistent. SARFAESI Act provided an additional remedy for enforcement of claim against secured asset as opposed to an adjudicatory process for realization of dues. Hence, it was open for the lender to invoke the same. It was held as follows :-

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.

The Supreme Court also noted that there was a cleavage of judicial opinion amongst the High Court. While the Allahabad and Delhi High Courts had held that both proceedings were maintainable, Orissa and Andhra Pradesh High Courts had held otherwise. The view expressed by Allahabad and Delhi High Courts were approved by the Supreme Court.

Coming to the next issue, the Court held that the principle of retrospective operation of law was not applicable in the case. There was no retrospective operation involved, because as on the date of notification the claim was alive and operative. Hence, it was held that the provisions of the SARFAESI Act would become applicable qua all debts owing and live when the Act became applicable to the borrowing, provided the following factors existed :-

• Existence of a present actionable debt;


• Status of the person invoking the jurisdiction is that of a secured creditor;


• Assets have been secured in satisfaction of the debt; and


• That the debtor/borrower should have been declared an NPA.