ARBITRATION IN BANKING LAW: MOLLSHREE PAREEK

CASE ANALYSIS/NOTE

NAME OF THE CASE:

Indiabulls Housing Finance Limited

v.

Deccan Chronicle Holdings Limited & Ors.

“At all events arbitration is more just, rational and humane than the resort to sword.”[1]

-Richard Cobden

INTRODUCTION:

यतो धर्मस्ततो जयः॥[2]

The above-mentioned is a Sanskrit Shloka and also the motto of Indian Judiciary. The meaning of this shloka is ‘where there is righteousness, there is victory’. Indeed, the holy grail of all judicial systems round the world is to build a society where justice and harmony prevail. However, as it is repetitively affirmed, justice must not only be done but also seen to be done, and this justice loses its significance when not delivered within a certain reasonable period of time. Alternative Dispute Resolution mechanism is an efficient alternative to judicial proceedings. Arbitration is one of the methods through which parties can settle their disputes without opting for court proceedings.

The case to be analyzed here deals with the concepts of arbitration and SARFAESI Act,2002. The SARFAESI Act, 2002 stands for Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This Act primarily deals with the power of banks and other financial institutions to auction properties be it residential or commercial for the recovery of loans.

FACTS:

In this case the two contesting parties are Indiabulls Housing Finance Limited (appellants) and M/s. Deccan Chronicle Holdings Limited (respondents). As per the information provided loans were advanced by the appellants to respondents in two installments of Rs. 50 crores each. These loans were secured by equitable mortgages with respect to the properties of respondents. In the year 2012 both the appellant and respondent merged as per the sanction of the High Court of Andhra Pradesh. After this sanction the respondent company got dissolved and all the assets/ liabilities of respondent merged with the appellant.

In the meantime, the respondent(borrowers) were unable to repay the loans advanced by appellant(lenders). The appellant issued several loan recall notices to respondent (borrowers) and also classified the loan accounts of respondent as Non- Performing Assets. A petition was filed by the appellant under Section 9, Arbitration and Conciliation Act, 1996 in order to recover the loans advanced. Notices were issued by the appellants under SARFAESI Act, 2002 also.

ISSUE:

(There were several issues raised in this case. However, the issue relevant to the concerned theme is only mentioned below.)

1-    Whether provisions of SARFAESI Act,2002 and Arbitration and Conciliation Act, 1996 can be invoked simultaneously?

RULE:

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[3].

-Section 2(1) - Definitions.

-Section 6(1) - Power of bank or a financial institution to issue notice of acquisition of assets to the obligor.

-Section 13- Power of creditor to recover the loan granted. This section empowers the secured creditor (any bank/ financial institution) who has classified the advanced loan as non-performing assets to recover the loan by taking over the properties of the borrower.

-Section 15- Manner and effect of takeover of management of business (of a borrower) by a securitization of a company.

-Section 18- Provision of appeal to the appellate tribunal against any order passed by the Debt Recovery Tribunal.

-Section 37- Application of laws other than the laws and rules under this Act are applicable. The other laws are not in derogation or subservient to the SARFAESI Act, 2002.

Arbitration and Conciliation Act, 1996[4]

-Section 8- Power to refer to arbitration whenever there is an agreement for arbitration.

-Section 9- Provision for interim measures by the court.

APPLICATION/ ANALYSIS:

The Supreme court of India in this case decided this case on the basis of a number of regulations and landmark case laws. This case was first heard before the High Court of Andhra Pradesh.

Before approaching the High Court of Andhra Pradesh:

First the case was referred by the respondents to the Debt Recovery Tribunal, Chandigarh but it was later withdrawn. A writ petition was filed before the Chief Metropolitan under Section 14 of the SARFAESI Act, 2002. This petition was filed to challenge the classification of respondent’s accounts as Non-performing assets. In the meantime, the appellant had issued a notice to the respondents informing that the concerned properties are to be auctioned. This notice was challenged by the respondent before the High Court of Andhra Pradesh.

Decision of the High Court of Andhra Pradesh:

The High Court had allowed the Writ- petition filed by the respondent. This court had allowed the writ-petition. It held that the provisions of SARFAISI Act, 2002 cannot be invoked. The court also held that the provisions of SARFAESI Act, 2002 and the Arbitration and Conciliation Act, 1996 cannot be invoked.

Decision of the Supreme Court:

The appeal was then preferred by the appellants before the Supreme court of India. Supreme court had mentioned plethora of landmark case laws and regulations in order to arrive at a decision. With respect to the SARFAESI Act, 2002 court mentioned the following points:

Taking reference from Section 2 it was held that Respondent Company is a borrower and the appellant is a secured creditor.

Taking reference from Section 6 it was held that the arrangement between both these parties is a security agreement and hence Section 13 of the Act can be invoked. Section 13 empowers the lender (appellant) who has classified the assets of the borrower as Non-performing assets, to recover the loan by acquiring and auctioning the assets of the borrower.

Taking reference from Section 15 of the Act it was held that the manner of acquisition of assets was valid and hence the court had upheld the step of auctioning taken by the appellants.

Answering the major issue- Whether the provisions of SARFAESI Act, 2002 and the provisions of the Arbitration and Conciliation Act, 1996 can be invoked simultaneously?

The Apex Court in this case had affirmed the fact that the provisions of both the above-mentioned laws can be invoked simultaneously. It was stated in the judgment of this case that both the SARFAESI Act and the Arbitration and Conciliation Act, 1996 are complimentary. The court had referred to certain law provisions and a number of landmark case laws, which are as follows:

Law Provision:

Section 37, SARFAESI Act, 2002- This section clearly mentions that the application of other laws is not barred, and they are in addition to and not in derogation to any other law in force. Therefore, the arbitration proceedings can go hand-in-hand with the proceedings under this Act.

Section 8, Arbitration and Conciliation Act, 1996- This section allows the parties to bring the proceedings for arbitration. Accordingly, in this case also the appellant was allowed to pursue the proceedings w.r.t. arbitration.

Case laws-

Transcore v. Union of India[5] - it was held in this case that Section 37, SARFAESI Act, 2002 speaks volume of the fact that the provisions of  SARFAESI Act, 2002 are framed in addition to the other laws. It was mentioned in this case that a conjoint reading of Section 35 and 37 of the Act, 2002 imply that SARFAESI, RDDB Act and other laws are complimentary to each other. It was further stated that the American Jurisprudence, 2d, Vol. 25 p. 625, also states that the doctrine of election does not apply when only when there is one remedy. In this case as there is more than one remedy available the doctrine of election does not apply. Hence, the arbitration proceedings and the provisions of SARFAESI Act can go hand in hand.

Mathew Verghese v. Amritha Kumar[6]- in this case also guidelines mentioned in the case of Transcore v. Union of India were followed. It was upheld in this case also that the provisions of SARFAESI Act, 2002 can be invoked together with the other laws in force.

M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd.[7] – this case is considered to be the landmark case law for the case in hand. One of the issues in this case was also w.r.t. simultaneous application of the above-mentioned laws. It was specifically held in this case that the arbitration proceedings and the provisions of SRFAESI Act, 202 can be invoked simultaneously.

Brief Analysis:

As has been mentioned earlier arbitration is the need of the hour. It is both cost and time effective. This method of dispute resolution ensures speedy justice to mankind. Judgment of the case in hand does justice to the matter is issue up-to a great extent. This judgment in detail discusses the rationale and serves an appropriate interpretation of certain provisions of the SARFAESI Act, 2002. This judgment acts as a stepping stone for arbitration proceedings to be included in the mainstream.

This judgment has also mentioned that decision rendered by Orissa and Delhi High Court in a catena of cases w.r.t. arbitration and financial disputes is invalid. The court has declared those case laws as “bad and inappropriate in the eyes of law”. This judgment indeed has served to be the guiding light for the cases to come in future.

CONCLUSION:

This case note/analysis deals with a very important and pertinent issue in the field of banking law and arbitration. This judgment puts forth the fact that a particular law cannot be studied in isolation. All laws are intertwined and interlinked. Thus, it will be improper and inappropriate to consider/ place a particular in superiority to other laws. As has been stated in the judgment the SARFAESI Act, 2002 is complimentary to other laws in force and not in derogation.

This judgment also makes a mention of American Jurisprudence and the importance of doctrine of election w.r.t. remedies sought and available. The interpretation of various sections, provisions, law, doctrines provided in this judgment will serve and cater to the needs of the contemporary legal system.

 

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[1] Richard Cobden, Quote (Aug. 6, 2020), http://www.brainyquote.com.html

 

[2] Judiciary|National Portal of India, (Aug. 7, 2020), http://www.india.gov.in

 

[3] Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (2002)

[4] Arbitration and Conciliation Act, (1996)

[5] Transcore v. Union of India, (2008) 1 SCC 125.

[6] Mathew Verghese v. Amritha Kumar, (2014) 5 SCC 610

[7] M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd., MANU/SC/1244/2017