When Financial Institution Is A 'Borrower' It Can't Invoke Arbitration Under Section 11 Of SARFAESI Act: Delhi High Court

The High Court of Delhi has held that a borrower which also happens to be a financial institution cannot resort to arbitration provided under Section 11 of SARFAESI Act. The bench of Justice Anup Jairam Bhambhani held that Section 11 of SARFAESI Act provides for remedy by way of arbitration only in cases of inter se dispute between the financial institution but does not cover a simple lender-borrower dispute, even if the borrower is a financial institution. Facts The parties entered into a Rupee Facility Agreement dated 26.04.2019 by which the respondent (A bank) had provided the petitioner (NBFC) with a loan of Rs. 10 Crores against a security interest created in respondent's favour. Thereafter, a dispute arose between the parties and the account of the petitioner was declared an NPA. Accordingly, the respondent filed the proceedings under Section 13 SARFAESI Act for the enforcement of Security Interest before DRT Jaipur. Aggrieved thereby, the petitioner issued the notice of arbitration and requested the respondent to choose an arbitration from a panel of three names given by it. On failure of the parties to mutually appoint the arbitrator, the petitioner filed the present petition for the appointment of the arbitrator. Contention of the Parties The petitioner sought the appointment of the arbitrator on the following grounds: The petitioner is a Non-Banking Finance Company (NBFC) and qualifies as a financial institution under Section 2(1)(m)(iv) of the SARFAESI Act which entitles it to invoke arbitration under Section 11 of the SARFAESI Act as it provides for arbitration when the dispute is between two financial institutions. The arbitration arises not out of a contract but out of a statute. Consequently, the proceedings file before DRT and any consequent decision taken therein is of no consequence as the DRT has no jurisdiction.Since the respondent has failed to agree to the appointment of arbitrator, the petitioner has approached the Court to appoint the arbitrator. The respondent objected to the maintainability of the petition on the following grounds: The respondent's claim is simply for the recovery of its dues, the petitioner is a borrower and is squarely covered by the definition of 'borrower' as provided under Section 2(1)(f) of the Act. The appropriate remedy for the petitioner lies under Section 17 of the Act and not under Section 11. Section 11 has consciously omitted the word 'borrower' and provides for reference to arbitration, only the inter se disputes between the financial institutions.Merely because the borrower is a also a financial institution that would not make it entitled to claim arbitration under Section 11 of the Act. The present dispute is non-arbitrable and the petitioner cannot apply the doctrine of election (reliance placed on Vidya Drolia)The agreement between the parties confers exclusive jurisdiction upon the Courts at Jaipur and no-cause having been arisen within the jurisdiction of this Court, it does not have the territorial jurisdiction to decide the application. Analysis by the Court Firstly, the Court decided the objection regarding the territorial jurisdiction of the Court. The Court held that since the present arbitration is not out of an agreement, therefore, the concept of seat would have no application and the jurisdiction would be decided on the basis of Section 2(1)(e) of the A&C Act r/w Section 20 of CPC. The Court held that the principal branch of the respondent is in New Delhi, moreover, the agreement was stamped and executed in New Delhi, therefore, it has the jurisdiction to decide the application. Next, the Court decided the issue regarding applicability of Section 11 of SARFAESI Act to the dispute between the parties. The Court referred to certain clauses of the agreement and held that the petitioner is surely a borrower and falls squarely within the definition of borrower under the Act. It held that the word 'any person' has been used in the context of 'borrower' that is very wide and also takes within its fold a financial institution. The Court held that Section 11 of SARFAESI Act provides for remedy by way of arbitration only in cases of inter se dispute between the financial institution but does not cover a simple lender-borrower dispute, even if the borrower is a financial institution. The Court held that Section 13 of the A&C Act provides a right to the lender to enforce the security. The Court held that the Act provides for a special forum i.e., DRT, to decide a controversy between the lender-borrower, therefore, in view of the ruling in Vidya Drolia and Transcore v. UOI, 2008 the dispute is non-arbitrable. Consequently, the petitioner also cannot invoke the doctrine of 'election' to choose arbitration over the remedy before DRT. Accordingly, the Court dismissed the petition. Case Title:...

When Financial Institution Is A 'Borrower' It Can't Invoke Arbitration Under Section 11 Of SARFAESI Act: Delhi High Court

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When Financial Institution Is A 'Borrower' It Can't Invoke Arbitration Under Section 11 Of SARFAESI Act: Delhi High Court

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