Delhi High Court Allows Arbitration of Borrower Despite SARFAESI Enforcement

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  5. Delhi High Court Allows Arbitration of Borrower Despite SARFAESI Enforcement

The Delhi High Court’s recent decision in a case between M/S Diamond Entertainment Technologies Private Limited & Ors. Vs. Religare Finvest Limited (Arb Pet 62/2022), Order dated 14th October 2022 involving the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) permits arbitration despite the bank’s commencement of enforcement proceedings under this act. The judgment is significant considering the increasing preference for creditor claims over defenses raised by defaulting borrowers.

In this particular case, the borrower/guarantor invoked an arbitration clause under the Loan Facility Agreement with the bank to address outstanding disputes. The bank had already initiated SARFAESI proceedings, arguing that the arbitration could undermine their ability to take possession of the borrower’s secured assets. However, the borrower argued that they were not in default and had in fact paid excess amounts. The bank refused to appoint a nominee arbitrator, leading the borrower/guarantor to file section 11 proceedings under the Arbitration & Conciliation Act, 1996.

The bank challenged the jurisdiction of the court under section 11 of the Arbitration Act, arguing that an arbitral award had previously been passed under the same agreement, and that the present proceedings were barred by res judicata. The bank also contended that the disputes in question were non-arbitrable as they fell under a special statute.

The High Court ruled that the earlier arbitral award did not operate as res judicata and that SARFAESI mainly provided procedural remedies for securing interests without recourse to lengthy court proceedings. The court found that the SARFAESI Act and the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 were complementary statutes that permitted concurrent proceedings before the DRT and an Arbitral Tribunal. The Section 11 petition was allowed, and the review petition filed by the bank was dismissed.

This decision is significant as it is a deviation from the usual cases in which the claimant is the bank or financial institution, and it raises doubts on their ability to maintain accurate account statements relating to debts. Banks may have to ensure their statements are reliable, especially with the information utility provisions under the Insolvencyand Bankruptcy Code, 2016, which offers credibility when presented in court. This decision also permits banks to carry on with multiple litigation options while providing only arbitration as the sole remedy for borrowers. It remains to be seen whether this judgment withstands further judicial scrutiny.