Mortgage, Enforcement And Related Declaratory Reliefs Are Non-Arbitrable: Bombay High Court

The Bombay High Court Bench of Justice Sandeep V Marne has observed that enforcement of mortgage is a right in rem and any dispute seeking enforcement of mortgage cannot be referred to arbitration. Civil suit will lie for enforcement of such a right in rem. Facts Defendant No.1 and his partners are developers appointed for redevelopment of Defendant No.5 – Society under Development Agreement dated February, 2014 and Supplemental Development Agreement dated March 16, 2021. The Plaintiff had extended various credit facilities to Defendant No.1 under various loans/facility agreements as security. Defendant No.1 created mortgage in favour of the Plaintiff in respect of certain rights derived under the Development Agreement. Certain loan accounts were identified as Non-Performing Assets, notices under SARFESI Act were issued by the Plaintiff. Plaintiff also discovered sale of some of the mortgaged flats by Defendants Nos. 1 to 4. In this backdrop the Plaintiff filed the present suit seeking recovery of outstanding amounts from Defendants Nos.1 to 4 under various loan facilities. Additionally, Plaintiff also sought enforcement of mortgage rights over unsold flats of the project and a declaration that the charge created in its favour is valid and subsisting. The Defendants, relying on the fact that the Loan Agreements and Indenture of Mortgage contain arbitration clause for resolution of disputes, filed the present Application under Section 8, ACA for reference of the dispute to the Arbitrator. Contentions The Counsel for the Respondents relied upon the judgment of M.D. Frozen Foods Exports Private Limited and Others v. Hero Fincorp Limited (M.D. Frozen Foods) to contend that a claim of money by bank or a financial institution cannot be treated as a 'right in rem' which has an inherent public interest and would thus not be arbitrable. The Plaintiffs alleged right to recover money from Defendant Nos. 1 to 4 is a right in personam and clearly arbitrable. Further, the Counsel cited the judgment of the Apex Court in Vidya Drolia and Others v. Durga Trading Corporation, to contend that though rights in rem are not arbitrable, subordinate rights that arise from right in rem are arbitrable. The Counsel submitted that the Plaintiff was seeking enforcement of a subordinate right in relation to right of redemption of mortgage which is a right in rem. The Counsel for the Plaintiff submitted that no arbitration would lie in respect of a suit for enforcement of a mortgage and that the suit can be tried only by a civil court. Observations The Court observed that the issue for consideration in the present application was whether the dispute between the two parties could be referred to arbitration in exercise of power under Section 8, ACA. The Court discussed the nature of prayers sought in suit by the Plaintiff. The Plaintiff had prayed for the following reliefs – Recovery of amount of Rs. 17.31 crores from Defendant Nos.1 to 4. Declaration that the right, title and interest created in its favour by Defendant Nos. 1 to 4 in the mortgaged properties are legal, valid, subsisting and binding. Declaration that its claim is secured by legal and valid charge on mortgaged properties. Redemption of mortgage created by Defendant Nos. 1 to 4 in respect of the certain portions of the project. Restrain Defendant No.5 – Society from facilitating any further sale of units in the project. The Court noted that the indenture of mortgage as well as loan agreement contained an arbitration clause. The presence of the arbitration clause was not in controversy. The primary defence of the Plaintiff in the present application was that the dispute involved in the suit for redemption of mortgage was not arbitrable and therefore reference under Section 8 could not be made. The Court highlighted that so far as the Plaintiff's prayer in the suit for recovery of amount of Rs. 17.31 crore was concerned there was no dispute between the parties regarding the arbitrability. However, the Plaintiff had also sought redemption of mortgages executed in its favour and this was where the controversy regarding arbitrability arose. The Court discussed the ratios in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. (Booz Allen) and Vidya Drolia and Others v. Durga Trading Corporation (Vidya Drolia) and concluded so far as the issue of non-arbitrability of disputes involving redemption of mortgage is concerned, even in Vidya Drolia reiterated the view expressed in Booz Allen. The Court had held that a suit for foreclosure or redemption of mortgage property can be dealt with by a public forum and not by a private forum. The Court also clarified that the Defendants' reliance on M.D. Frozen Foods was misplaced since it was overruled in Vidya Drolia where the Apex Court had observed that the claims of banks and financial institutions are...

Mortgage, Enforcement And Related Declaratory Reliefs Are Non-Arbitrable: Bombay High Court

Arpita Pande

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