Delhi High Court Upholds Cumulative Application of Arbitration Act and SARFAESI Act

Introduction

The case of M.D Frozen Foods Exports Private Limited & Others Petitioners v. Hero Fincorp Limited adjudicated by the Delhi High Court on July 13, 2017, addresses the interplay between arbitration proceedings under the Arbitration & Conciliation Act, 1996 (Arbitration Act) and enforcement actions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The appellants, M.D Frozen Foods Exports Pvt. Ltd. and others, sought to quash an arbitral order and preserve mortgaged properties during ongoing arbitration. The respondent, Hero Fincorp Limited, contended the cumulative application of both Acts is permissible.

Summary of the Judgment

The Delhi High Court, delivered by Justice Sanjeev Sachdeva, dismissed the appellants' appeal to quash the arbitral order. The court held that financial institutions like Hero Fincorp Limited can concurrently pursue enforcement under the SARFAESI Act while arbitration proceedings are ongoing. The judgment emphasized that the SARFAESI Act and arbitration processes are cumulative remedies, not mutually exclusive options. Consequently, the appellants' attempt to halt enforcement actions pending arbitration was unsuccessful.

Analysis

Precedents Cited

Deccan Chronicles Holdings Limited v. Union of India (Andhra Pradesh High Court): This case was cited by the appellants to argue that invoking arbitration should preclude simultaneous enforcement actions under the SARFAESI Act.
Hdfc Bank Ltd. v. Satpal Singh Bakshi (Full Bench, Delhi High Court, 2013): The appellants referenced this judgment to support the notion that arbitration acts as an alternative to the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDB Act), thereby negating the applicability of the SARFAESI Act during arbitration.
Transcore v. Union Of India (Supreme Court, 2008): The respondent relied on this decision to assert the cumulative application of the SARFAESI Act alongside arbitration proceedings.
SARTHAK BUILDERS PRIVATE LIMITED v. ORISSA RURAL DEVELOPMENT CORPORATION LIMITED (Orissa High Court, 2014): This case supported the respondent's stance that provisions of the SARFAESI Act apply to existing debts, reinforcing the permissibility of concurrent enforcement actions.
Mardia Chemicals Ltd. v. Union of India (Supreme Court, 2004): This judgment was pivotal in explaining the scope and enforcement mechanisms under the SARFAESI Act.

Legal Reasoning

The court meticulously analyzed the relationship between the Arbitration Act and the SARFAESI Act. It concluded the following:

Arbitration as an Alternate Forum: The court recognized arbitration as a legitimate alternative to civil courts for dispute resolution, aligning with the principle of "tribunalization of justice."
Cumulative Remedies: The Supreme Court's judgment in Transcore was instrumental in establishing that the SARFAESI Act provides additional remedies rather than substituting the Arbitration Act. Thus, financial institutions retain the right to enforce security interests under the SARFAESI Act while arbitration is pending.
Doctrine of Election: The court addressed the doctrine of election, which prevents parties from choosing inconsistent remedies. It held that since the SARFAESI Act and arbitration are not mutually exclusive and do not present inconsistencies, the doctrine does not apply.
Nature of Claims: The judgment clarified that claims under the SARFAESI Act are "right in personam" and do not involve "right in rem," thereby making them arbitrable and compatible with ongoing arbitration.
SARFAESI Act's Objectives: Emphasis was placed on the SARFAESI Act's intent to expedite debt recovery and manage non-performing assets efficiently, objectives that coexist with arbitration proceedings.

Impact

This landmark judgment has significant implications for financial institutions and borrowers alike:

For Financial Institutions: Banks and financial institutions can now pursue enforcement actions under the SARFAESI Act without being restrained by ongoing arbitration proceedings. This ensures that their rights to enforce security interests are not unduly hampered.
For Borrowers: While arbitration remains a viable avenue for dispute resolution, borrowers must be aware that enforcement actions can proceed concurrently, potentially complicating the resolution process.
Legal Precedence: The decision reinforces the cumulative nature of legal remedies available under different statutes, providing clarity and reducing jurisdictional conflicts between arbitration tribunals and enforcement authorities.
Future Case Law: This judgment sets a precedent that will guide future litigations involving the simultaneous application of arbitration and statutory enforcement mechanisms.

Complex Concepts Simplified

Doctrine of Election

The doctrine of election in law posits that when a party is faced with two or more conflicting remedies, it must choose one, thereby relinquishing the others. In this case, the court clarified that since arbitration and the SARFAESI Act remedies are not conflicting and can coexist, the doctrine does not compel the party to choose between them.

Right in Personam vs. Right in Rem

Right in Personam: A personal right enforceable against a specific individual, often arising from contracts. Claims under the SARFAESI Act, which pertain to contractual obligations between borrower and lender, fall under this category.

Right in Rem: A right enforceable against the world at large, typically involving property rights. These rights are not dependent on personal obligations and usually cannot be subjected to the doctrine of election.

Conclusion

The Delhi High Court's judgment in M.D Frozen Foods Exports Pvt. Ltd. & Others v. Hero Fincorp Limited reaffirms the compatibility of arbitration proceedings with statutory enforcement mechanisms under the SARFAESI Act. By upholding the cumulative application of both Acts, the court ensured that financial institutions retain robust tools for debt recovery without being restricted by ongoing arbitration. This decision delineates the boundaries and interplay between private dispute resolution and public enforcement frameworks, fostering a more efficient judicial and quasi-judicial environment for resolving financial disputes.