Initiation Of Proceedings Under The SARFAESI Act Does Not Bar The Arbitration Of Disputes: Delhi High Court

The Single Bench of Justice Neena Bansal Krishna held that whether an arbitral award would operate as a res judicata, barring the second arbitration under the same agreement, must be decided by the Arbitrator since it involves mixed questions of fact and law.

A loan agreement was executed between the petitioners- including Diamond Entertainment Technologies Pvt. Ltd., and the respondent- Religare Finvest Limited. After the petitioners allegedly defaulted on paying the instalments, the respondent Bank declared the account of the petitioners as a Non-Performing Asset (NPA).

The respondent Bank issued a Notice of Demand under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), raising a demand for the balance loan amount along with the interest and charge. Thereafter, the respondent issued a Possession Notice and took symbolic possession of the subject property.

The petitioners invoked the arbitration clause contained in the Loan Agreement and filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court for appointment of the Arbitrator.

The respondent Religare Finvest submitted before the High Court that the petitioner had earlier defaulted in payment of the loan instalments and thus, arbitration proceedings were initiated under the loan agreement. It added that an arbitral award was passed in 2015 and accordingly, an order was made for recovery of the loan amount along with the interest. However, disputes again arose between the parties in respect of the outstanding loan amounts in 2021 and hence, the account of the petitioners was subsequently declared as NPA.

Thus, the respondent bank argued that since the issue had already been adjudicated and the dispute was arbitrated and adjudicated, a second arbitration in respect of the same loan account was not maintainable.

The responded added that the petitioners were in essence challenging the recovery proceedings initiated by the respondent bank under the SARFAESI Act. The bank argued that under Section 34 of the SARFAESI Act, the Civil Courts are barred from entertaining any suit or proceedings which the Debts Recovery Tribunal (DRT) is empowered to adjudicate upon. Further, it contended that in view of Section 34 of the SARFAESI Act, the remedy against any measure taken by the Secured Creditor under Section 13(4) of the SARFAESI Act is available before the DRT and not the Civil Court.

Thus, the respondent argued that the disputes raised by the petitioners was not arbitrable and the petition was not maintainable.

While observing that once a dispute has been adjudicated between the parties by a competent forum, the same would operate as res-judicata unless it is challenged, the Court noted that the petitioners had not challenged the arbitral award.

The Bench reiterated that while considering the application under Section 11 of the A&C Act, the court only has to consider whether prima facie arbitral disputes exist between the parties. Hence, the Court ruled that the issue whether the 2015 Arbitral Award would operate as res judicata, which would bar the petition under Section 11 (6) of the A&C Act, involved mixed questions of fact and law, which must be decided by the Arbitrator.

The Court referred to the decision of the Supreme Court in Mathew Varghese versus M. Amritha Kumar (2014), where the Apex Court had noted that in view of Section 35 of the SARFAESI Act, the provisions of SARFAESI Act would have an over-riding effect, notwithstanding anything inconsistent contained in any other law. However, the Supreme Court observed that as per Section 37 of the SARFAESI Act, the remedy under the SARFAESI Act is in addition to the provisions regarding the recovery of debt under the Recovery of Debts Due to Banks and Financial Act, 1993 (RDDB Act). Therefore, the provisions of the RDDB Act were held to be not inconsistent with the provisions of the SARFAESI Act and that the application of both the Acts was complementary to each other.

The bench observed that the Delhi High Court in HDFC Bank Ltd versus Satpal Singh Bakshi (2012) had held that once the remedy of recovery remains, the parties have the freedom to choose the forum alternate to the regular Court or DRT, for adjudicating their disputes. Further, the High Court ruled that all disputes relating to the "Right in Personam" are arbitrable and therefore, the choice is available to the parties to choose the alternative forum. Hence, the Court had laid down that a claim of money by a Bank or financial institution cannot be treated as a right in rem and thus, it is not outside the realm of arbitrability.

"It is thus evident that the SARFAESI Act does not oust the jurisdiction of the recovery by a Civil Court/DRT. Furthermore, a choice of forum continues to exist with the parties who may elect to approach the Civil Court/DRT as the case may be, or may choose to take their civil disputes for adjudication to the Arbitration. It may thus, be concluded that merely because the proceedings under the SARFAESI Act has been initiated, arbitration of disputes does not get per se barred", the Court said.

While holding that the provisions of the SARFAESI Act provide a remedy in addition to the adjudication under the A&C Act, as an alternate forum to Civil Court or the DRT, the Court allowed the petition and appointed an arbitrator.

Case Title: Diamond Entertainment Technologies Pvt. Ltd. & Ors. versus Religare Finvest Limited

Citation: 2022 LiveLaw (Del) 991

Dated: 14.10.2022 (Delhi High Court)

Counsel for the Petitioner: Mr. J.S. Bakshi, Sr. Advocate with Mr. Praveen K Sharma & Mr. Abhishek Mohan, Advocates

Counsel for the Respondent: Mr. Sanjeev Singh, Ms. Ridhi Pahuja, Mr. Dhruv Chawla & Ms. Garima Saxena, Advocates.

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