In a recent landmark judgment of the Hon’ble Andhra Pradesh High Court in the matter of Deccan Chronicle Holdings Ltd. (DCHL) &Ors. Vs. Union of India &Ors., the Hon’ble Court has laid down an important principal of law to the effect that SARFAESI Action can be taken by an assignee/ successor in interest only if the original lender had SARFAESI power.

DCHL had been aggrieved by an action taken by Indiabulls Housing Finance Ltd. (IBHFL) under the SARFAESI Act against DCHL and the properties of its promoters, which were being put to action. DCHL had preferred a writ petition before the Andhra Pradesh High Court challenging the action of IBHFL on account of the fact that IBHFL was not the original lender of the company and was not entitled to take the action under the SARFAESI Act since the original lender viz. Indiabulls Financial Services Ltd.(IBFSL) a NBFC, was not an entity empowered to take action under the SARFAESI Act. IBFSL had accordingly invoked the arbitration proceedings against the company and its promoters prior to its merger with IBHFL.

The Hon’ble High Court after hearing the matter declared the action initiated by IBHFL as illegal and void on the premise that “what cannot be done directly cannot be done indirectly”. The Hon’ble High Court while passing this judgment has also observed that IBFSL was merged into IBHFL with the intent of bringing all loans of IBFSL within the ambit of the SARFAESI Act.

Further the Hon’ble High Court has also held that “Section 8 of the Arbitration Act makes it amply clear that if the agreement between the parties contains an arbitration clause, institution of other proceedings is prohibited. When a suit cannot be instituted by a party to an agreement, which contains an arbitration clause, the initiation of proceedings before other fora becomes equally untenable. The proceedings under the SARFAESI Act cannot be placed on a higher pedestal. The borrower of a secured financial institution, as defined under Section 2(f) of the SARFAESI Act cannot be treated as a super Court, to be kept on a higher pedestal in the context of Section 8 of the Arbitration Act”.

Alok Dhir, Managing Partner of Dhir & Dhir Associates represented Deccan Chronicle.