Delhi High Court Imposes ₹5 Lakhs Fine For Concealing SARFAESI Order While Seeking Interim Relief Under A&C Act

Delhi High Court Imposes ₹5 Lakhs Fine for Concealing SARFAESI Order While Seeking Interim Relief under A&C Act

The Delhi High Court has levied a fine of Rs. 5 lakhs on a party for not disclosing an adverse order under the SARFAESI Act while seeking interim relief under Section 9 of the Arbitration and Conciliation Act (A&C Act).

Justice Prathiba M. Singh's has ruled that the existence of SARFAESI Act proceedings does not prohibit the initiation of proceedings under the A&C Act. Nonetheless, parties are obligated to disclose crucial facts necessary for a fair adjudication of the dispute.

On March 24, 2018, M/s. Paisalo Digital Limited (Petitioner) entered into an agreement whereby it provided loans amounting to Rs. 12 crore to M/s. Sat Priya Mehamia Memorial Educational Trust (Respondent No. 1).

The loans bore an interest rate of 17% per annum and were to be repaid in 60 monthly installments. Respondent Nos. 2 to 7 acted as guarantors for the loans, with a land measuring 30 bighas pledged as security.

Despite multiple notices, the respondents neglected their obligations, prompting the petitioner to demand repayment of the loan. Consequently, the respondents' account was declared a non-performing asset (NPA). Subsequently, the petitioner issued a notice under Section 13(2) of the SARFAESI Act and also lodged an application under Section 14 of the Act seeking possession of the mortgaged property. The district court dismissed the application filed under Section 14.

Following this, the petitioner filed a petition requesting interim reliefs under Section 9 of the Act and also submitted a petition seeking the appointment of an arbitrator under Section 11 of the Act, without disclosing the dismissal of the petition under Section 14 of the SARFAESI Act.

The submissions of the respondent are as follows:

• The petitioner has been altering the outstanding amount over time. Initially, it was stated to be approximately Rs. 15.94 crore, but later claimed to be Rs. 23.20 crore. In the notice invoking arbitration, a late payment fee of more than Rs. 54 crore was sought to be charged, resulting in the outstanding amount exceeding Rs. 76 crore, despite the initial loan being Rs. 12 crore.

• The increased amount charged as a late fee amounts to more than 125% interest per annum, which is impermissible under the law.

• The invocation of arbitration proceedings under Section 11 of the Act is barred by limitation.

• Lastly, it is contended that the Section 9 petition itself was not maintainable because SARFAESI proceedings had already been initiated concerning the same land.

The petitioner's counter-submissions are as follows:

• The debt has already been acknowledged in a letter dated 21.05.2019, hence, the benefit of Section 18 should be granted to consider the invocation within the stipulated time.

• The benefit of the Supreme Court's order extending the limitation period should also be extended in this case.

The court observed that the petitioner's failure to disclose the SARFAESI proceedings in the Section 9 petition, which is a discretionary relief, is considered crucial.

The court deliberated on whether the SARFAESI proceedings would constitute a bar to the filing of a Section 9 petition. It determined that the pendency of proceedings under the SARFAESI Act does not prohibit the initiation of proceedings under the A&C Act, particularly if the mortgaged property is inadequate to settle the outstanding amount.

The court underscored that SARFAESI proceedings and arbitration proceedings offer complementary remedies and are not mutually exclusive.

The court determined that the petitioner was obligated to disclose the SARFAESI proceedings in the Section 9 petition and found no valid reason for withholding such a significant detail.

The court interpreted the letter dated 21.05.2019 as an acknowledgment of debt, establishing a new cause of action and therefore not subject to limitation. It concluded that when one party assures repayment of debts in a letter to another party, it constitutes an acknowledgment of the debt under Section 18 of the Limitation Act. This acknowledgment initiates a fresh cause of action, resetting the limitation period from the date of acknowledgment, as outlined in Section 18 of the Limitation Act.

The court, in line with the Supreme Court's ruling, disregarded the period between March 15, 2020, and February 28, 2022, determining that the claims were not time-barred.

The court acknowledged the petitioner's exorbitant late fee and suggested addressing the matter before the arbitral tribunal. Additionally, the court levied a fine of Rs. 5 lakh on the petitioner for failing to disclose the SARFAESI proceedings.

Thus, the Court concluded the Section 9 application by authorizing the respondent to deposit 21.9 crore with the Registrar of the Court and lifting the interim injunction preventing the alienation of the mortgaged property.

Additionally, the Court granted the petition for the appointment of an arbitrator and designated Justice (Retd.) U.U. Lalit as the Sole Arbitrator.