Cholamandalam Investment and Finance Company Ltd vs HOTCHAND KISHINCHAND TALREJA on 2 August 2022

1. Cholamandal Investment & Finance Ltd. is a Banking Company within the meaning of the Banking Regulation Act, 1949, and is a secured creditor under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act for short). On 16.07.2021 the Appellant moved the Chief Metropolitan Magistrate and obtained an order u/s 14 of the SARFAESI Act to take physical possession of the secured movable assets belonging to the Respondents who are the principal borrowers and co-borrowers who had obtained a credit facility from the Appellant after creating a security interest over the secured assets viz. Tenement no. B/28 (655/1/28) as a Member of Bhai Prabhuram Co-operative Society Ltd. situated in Mouje Naroda, Taluka In the District of Ahmedabad. A Home Loan facility of Rs.60 Lakhs was taken by the

Respondents. They defaulted on payment and the debt was classified as Non-Performing Assets (N.P.A.). Thereafter the Appellant initiated measures under the SARFAESI Act. A demand notice dated 05.10.2020 was issued to the Respondents u/s 13 (2) of the SRAFESI Act claiming a sum of Rs.1,10,37,247.31 as on 31.08.2020 with future interest to be paid within 60 days. The Respondents did not respond and, therefore, the Appellant proceeded under the provisions of Section 13 (4) of the SARFAESI Act and took symbolic possession on 22.01.2021. Thereafter proceedings u/s 14 of the SARFAESI Act were initiated as mentioned above.

2. The Appellant simultaneously proceeded against the Respondents under the provisions of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’ for short), for adjudicating and recovering the amount due from the Respondents. An Award was passed on 12.10.2017 and the liabilities of the Respondents were determined and crystalised by the said Arbitration Award.

3. It is at this stage that the Respondent challenged the Sarfaesi measures taken by the Appellant u/s 17 of the SARFAESI Act before the DRT-I, Ahmedabad, on 22.11.2021 as S.A. No. 217 of 2021. The Appellant filed a reply contesting the Securitisation Application.

4. The Respondent wanted an interim order of stay of the Sarfaesi measures taken by the Appellant before the Chief Metropolitan Magistrate u/s 14 of the SARFAESI Act. An application for stay was filed. The Ld. P.O. after hearing both sides at length passed the impugned order dated 19.03.2022 retraining the Appellant from taking any coercive action with respect to the secured asset against the Respondents till the final disposal of the aforesaid S.A. No. 217 of 2021. The Appellant has, therefore, come up with an Appeal challenging the said impugned order.

5. The main contention that was raised by the Respondents before the D.R.T. is regarding the dispute between the Appellant and the Respondents about the arbitrability of the claim pertaining to the Sarfaesi measures. The learned Presiding Officer relied upon the decision of the Hon’ble Supreme Court in Vidya Drolia & Ors. Vs. Durga Trading Corporation (2021) 2 SCC 1 and observed that he is prima facie of the opinion that the action of the Appellant in referring the claim to Arbitration is prima facie not sustainable, and therefore, the demand notice dated 05.10.2020 cannot be prima facie said to be legal and valid. The Ld. P.O. also relied upon the decision of the Hon’ble Gujarat High Court in Punjab National Bank Vs. M/s. Mithilanchal Industries Private Ltd. MANU/GJ/1069/2020 to hold that the notice u/s 13 (2) of the SARFAESI Act is not in accordance with the statutory requirement. The Ld. P.O. has also found fault with the arbitration proceedings being held at Chennai to the inconvenience of the borrower and thereby securing an Arbitration Award, ex-parte.

6. Heard the learned counsel Mr. Sanjay Anabhawane, for the Appellant and the learned counsel Mr. Raj Dani, for the Respondents. Records perused.

7. The main issue of contention in this Appeal is whether the Appellant is entitled to avail the remedy u/s 14 of the SARFAESI Act in view of the existence of the Arbitration clause in the loan agreement and thereby proceeding under the provision under the Arbitration Act. It is for this purpose that the Respondents relied upon the decision of the Hon’ble Supreme Court of India in Vidya Drolia (supra).

8. The two crucial points that arise for determination in this Appeal are, first, whether the Ld. P.O. was justified in holding that prima facie the arbitration proceedings and Award passed ex-parte were defective and secondly, whether the Appellants were justified in moving the C.M.M. Court u/s 14 of the SARFAESI Act despite having resorted to the Arbitration Proceedings.

9. The question as to whether in view of an Arbitration Agreement between the parties, the creditor could resort to the provision so the SARFAESI Act is now settled by the Hon’ble Supreme Court of India in M.D. Frozen Foods Export Pvt. Ltd. & Ors. Vs. Hero Fincorp Ltd. (2017) 16 SCC 741 which was relied upon by the Hon’ble Apex Court in another decision Indiabulls Housing Finance Ltd. Vs. Deccan Chronicle Holdings Ltd. (2018) 14 SCC 783, where it is held thus:

“32. The aforesaid is not a case of election of remedies as was sought to be canvassed by learned senior counsel for the appellants, since the alternatives are between a Civil Court, Arbitral Tribunal or a Debt Recovery Tribunal constituted under the RDDB Act. Insofar as that election is concerned, the mode of settlement of disputes 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 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 through a more expeditious procedure is what has been envisaged under the SARFAESI Act and the two Acts 13 HDFC Bank Limited v. Satpal Singh Bakshi - 2013 (134) DRJ 566 (FB) 14 2013 (134) DRJ 566 (FB) 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 creditor can proceed against other assets in execution against the debtor, after determination of the pending outstanding amount by a competent forum.”

10. In Indiabulls (Supra) what was considered was whether the creditor which was not a banking company or a financial institution within the meaning of Section 2 (1) (d) and (m) of the SARFAESI Act had jurisdiction to take any steps by invoking the provisions of the SARFAESI Act. M/s. Indiabulls Financial Services Ltd. was not a financial institution but had merged with Indiabulls Housing Finance Ltd. which was a financial institution under the SARFAESI Act. The Hon’ble High Court of Andhra Pradesh held that where Section 9 of the Arbitration Act was invoked by the creditor, initiation of proceedings under the SARFAESI Act was impermissible. The Hon’ble Apex Court, after appreciating Section 35 and 37 of the SARFAESI Act held that Arbitration Proceedings and proceedings under the SARFAESI Act can be resorted to simultaneously relying upon the judgment of the Hon’ble Apex Court in M.D. Frozen Foods (Supra).

11. Non-arbitrability may arise in case of the implicit provision in a statute conferring and creating special rights to be adjudicated by the Courts/public fora, which right includes enforcement of order/provisions that cannot be enforced and applied in case of arbitration. The Ld. P.O. was probably carried away by the observation of the Hon’ble Apex Court in Vidya Drolia (Supra) wherein it was held thus:

“58. … … … To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.”

12. The Ld. P.O. did not comprehend the decision in Vidya Drolia (Supra) appropriately. The findings in M.D. Frozen Foods and Indiabulls (Supra) have been upheld in Vidya Drolia (Supra) indicate that even prior arbitration proceedings are not a bar to proceedings under the N.P.A. Act. The N.P.A. Act sets out an expeditious, procedural methodology enabling the financial institutions to take possession and sell secured properties for non-payment of dues. Such powers, it is obvious, cannot be exercised through arbitral proceedings.

13. What is to be understood is that arbitral proceedings are a form of adjudication of the dispute between the appellant and the respondents whereas Sarfeasi measures are provided for expeditious action against the debtors. It is true that R.D.B. Act does not provide the option to the creditor to go for relief before a Civil Court and the adjudicatory process has to be adjudicated by the D.R.T. alone. Simultaneous proceedings before the D.R.T. under the R.D.B. Act as well as proceedings under the SARFAESI Act without approaching the D.R.T. or the Civil Court are also maintainable. In the instant case, the Appellant is a financial institution coming under the provisions of the SARFAESI Act. But, at the same time, it is not a financial institution coming under the provisions of the R.D.B. Act. Under the circumstances, the Appellant could not have moved the D.R.T. with an Original Application seeking an adjudication of the dispute pertaining to the debt with the Respondents. The only adjudicatory process that is available to the Appellant is by way of arbitration and, therefore, the appellant rightly resorted to the provisions of the Arbitration provided in the loan agreement. Whether the Arbitration Award passed ex-parte is questionable is a matter for challenge under Section 34 of the Arbitration & Conciliation act, 1996. The D.R.T. cannot decide on the subject and has no jurisdiction to do so.

14. The Ld. Presiding Officer has in the impugned order overstepped his jurisdiction in deciding that prima facie the arbitration proceedings were at fault. The Ld. P.O. also went into error in deciding that Sarfaesi measures are not available to the Appellant in view of the Arbitration Proceedings resorted to by the Appellant. Even though the Ld. P.O. relied upon the decision in Mithilanchal Industries (Supra), it has not been pointed out as to what the defect in the notice issued by the Appellant u/s 13 (2) of the SARFAESI Act was.

15. Under the circumstances, I find that the impugned order is erroneous and requires to be set aside.

16. In view of the infirmity of the order which has been put to challenge in this Appeal, instead of disposing of the application for a stay I find it appropriate that the Appeal itself be disposed of by setting aside the impugned interlocutory order of the Ld. P.O. dated 19.03.2022 in S.A. No.217/2021. The Ld. P.O., D.R.T.-I, Ahmedabad, is directed to dispose of S.A. No. 217/2021 itself on merits keeping in view the aspects mentioned above, as expeditiously as possible.

17. The Appeal is allowed as above, though without costs.

18. All Miscellaneous Applications, if any, are dismissed as infructuous. Sd/- Chairperson dpj-2