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M.D. Frozen Foods Exports Pvt. Ltd. & Ors. v. Hero Fincorp Ltd.

Civil Appeal · 2017 INSC 976Decided 21 Sept 2017
Civil Appeal No. 15147 of 2017
Justice Rohinton Fali Nariman · Justice Sanjay Kishan Kaul

Background

The appellants had mortgaged seven immovable properties to secure loans from Hero Fincorp, a Non-Banking Financial Company (NBFC); when they defaulted, their loan account was declared a Non-Performing Asset (NPA) in July 2016. Hero Fincorp invoked an arbitration clause in the loan agreement, and separately, after a government notification in August 2016 brought large NBFCs like Hero Fincorp within the scope of the SARFAESI Act, also issued notices under Section 13(2) of the SARFAESI Act to directly enforce the security without court intervention. The borrowers challenged this, arguing that arbitration and SARFAESI proceedings could not run simultaneously, and that SARFAESI could not be applied to a loan/NPA that arose before the Act applied to the lender, since that would be an impermissible retrospective application of a substantive law. The Delhi High Court rejected their challenge, and they appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that arbitration proceedings and SARFAESI enforcement action are not mutually exclusive and can proceed simultaneously, since the SARFAESI Act's remedy is an additional, expeditious mechanism for enforcing security interest and does not oust other remedies, including arbitration under a loan agreement. On the retrospectivity question, the Court held that the SARFAESI Act's extension to the NBFC-respondent operated prospectively from the date of the notification, but it validly applied to all debts that were "live" (i.e., still owing and unpaid) as of that date: the date on which the account had earlier been declared an NPA, or when the loan was originally taken, made no difference, since there was no vested right of the borrower to resist enforcement merely because the loan predated SARFAESI's extension to this type of lender. Finding the appeal to be a mere attempt to delay repayment, the Court dismissed it with costs of Rs. 20,000.

Lesson Learnt

A borrower cannot use a parallel arbitration proceeding, or the fact that their loan predates a lender's formal classification as a SARFAESI-covered institution, to block the lender's fast-track enforcement of security under the SARFAESI Act: what matters is whether the debt is still outstanding on the date the Act became applicable to that lender, not when the loan or default originally occurred.

Official source (sci.gov.in)View Judgment (PDF)

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