SARFAESI and the RDDB Act: Two Tracks, Not Two Choices

What the Delhi High Court did in Magnum Steels Ltd v. Asset Reconstruction Company (India) Ltd, W.P.(C) 5278 of 2024

Decided 10 April 2024

The argument that a secured creditor must pick a lane between the SARFAESI Act, 2002, and the RDDB Act, 1993, has been raised on and off for almost two decades, ever since the Supreme Court in Transcore v. Union of India, (2008) 1 SCC 125, supposedly closed the door on it. The Delhi High Court's order of 10 April 2024 in Magnum Steels Ltd v. Asset Reconstruction Company (India) Ltd is a useful reminder that Transcore did close the door. The two statutes run on parallel tracks. A secured creditor moving under Section 13 of the SARFAESI Act is not, by that act alone, electing out of the RDDB route. The reverse is also true.

The Facts

In August 2015, Magnum Steels Ltd took a loan of Rs. 2.97 crores from Bajaj Finance Ltd, secured by a mortgage over commercial property at P.P. Tower, Pitampura. The loan was eventually assigned to Asset Reconstruction Company (India) Ltd (ARCIL) on 24 June 2021. The account having been classified as a non-performing asset, ARCIL moved on two fronts.

The Petitioner's Case

Magnum Steels' core argument was the familiar one. By initiating SARFAESI proceedings, the creditor had elected its remedy. It could not now also pursue recovery under the RDDB Act. The doctrine of election, the petitioner said, barred the parallel proceeding before the DRT.

What the Court Did

The Court treated the question as already answered. Transcore lays down the three conditions on which the doctrine of election operates. There must be two or more remedies, those remedies must be inconsistent, and the party must be required to choose between them. The Supreme Court in Transcore found that the second condition does not exist in the SARFAESI/RDDB context. The two Acts are not inconsistent. They do different things.

The textual hook is Section 37 of the SARFAESI Act. Section 35 gives SARFAESI an overriding effect over inconsistent laws. Section 37 then carves the RDDB Act, the Companies Act and certain securities legislation out of that override. SARFAESI applies, in its own words, 'in addition to, and not in derogation of,' those statutes. Read together, the two sections tell the reader that Parliament was not interested in making secured creditors choose. SARFAESI was added to the existing toolkit, not a substitute for it.

The Court drew on Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610, and M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd., (2017) 16 SCC 741, for the functional distinction the Supreme Court has consistently drawn between the two Acts. SARFAESI is enforcement. The RDDB Act is adjudication. The first lets the secured creditor act on the security without coming to court for permission. The second produces a recovery certificate that fixes the liability with the borrower's input on the merits. There is no reason both cannot be in motion at the same time.

On the writ jurisdiction, the Court declined to entertain the Article 226 petition. The borrower had a statutory route available, namely a securities application before the DRT under Section 17 of the SARFAESI Act and an appeal to the DRAT under Section 18 of the SARFAESI Act and Section 20 of the RDDB Act. ITC Ltd. v. Blue Coast Hotels Ltd. is the standard reminder that the High Court does not act as an alternative forum where the statute has built one of its own.

What the Court Actually Held, in Plain Terms

1.  SARFAESI Act and RDDB Act proceedings can run concurrently. The initiation of one does not extinguish the other.

2.  The doctrine of election does not apply, because the two remedies are not inconsistent.

3.  SARFAESI is the enforcement track. The RDDB Act is the adjudication track. They are designed to do different work.

4.  Section 37 of the SARFAESI Act is the textual basis for both Acts coexisting. SARFAESI does not override the RDDB Act.

5.  A writ under Article 226 will not lie where the statutory remedies under Section 17 and 18 of the SARFAESI Act and Section 20 of the RDDB Act have not been exhausted.

What This Means in Practice

For ARCs and secured creditors

The order is reassurance more than novelty. The dual-track approach was always available after Transcore. Magnum Steels is one more authority to put on the brief when a borrower tries to slow things down with the election argument. The practical sequencing remains what it was. File the original application before the DRT to fix liability. Run SARFAESI in parallel to monetise the security. Let the two tracks converge in execution.

For borrowers

The room to manoeuvre on this point has narrowed. The statutory remedy is the right place to fight on the merits. A securities application under Section 17 of the SARFAESI Act, and an appeal under Section 18 to the DRAT, are the proper routes for grievances on the SARFAESI side. Section 20 of the RDDB Act provides the appeal route on the adjudicatory side. Article 226 is not a shortcut. Pre-deposit conditions under Section 18 of the SARFAESI Act and the DRAT framework apply on their own terms.

For the system

The order does not change the law. It does, however, remove a recurring point of friction. Borrowers who raise the election doctrine as a stalling tactic will continue to lose, and the cases will move faster as a result. That is a small but real gain for asset recovery in a system where time is the most expensive resource.

Conclusion

Magnum Steels does not break new ground. Transcore did that work in 2008. What the Delhi High Court has done is apply the Transcore principle cleanly to a 2024 set of facts and dispose of an Article 226 challenge that should not have been entertained on the merits in the first place. The order is worth keeping in the file as authority that the parallel-tracks position is settled, and as a useful reply to the next borrower who frames the election argument in fresh language.