Determination Of Debt/ Adjudication Of Liability, Under SARFAESI, No Need To Refer To Arbitration: Delhi High Court

The Delhi High Court has ruled that the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) do not lay down an omnibus bar to arbitration. In each case, the Court would have to consider the nature of the dispute and determine whether the said statutes require the dispute to be tried exclusively by the Debt Recovery Tribunals (DRTs), the Court held. The bench of Justice Yashwant Varma noted that the dispute between the parties, relating to whether the petitioner/debtor had made a default in repaying the loan, empowering the respondent/creditor to proceed under Section 13 of the SARFAESI Act, involved the determination of debt. Thus, the dispute fell within the scope of adjudication contemplated under Section 13 of the SARFAESI Act and it cannot be referred to arbitration, the Court said. Section 13 of the SARFAESI Act provides a procedure for seeking enforcement of security interest by a secured creditor, if a default is made by the debtor. The respondent- Indiabulls Housing Finance Ltd. extended a loan to the petitioner- M/s Fermina Developers Pvt. Ltd. under a Loan Agreement executed between the parties. Thereafter, the petitioner made a settlement with the respondent under a One Time Settlement (OTS), which charted out a repayment schedule. Alleging that the petitioner had failed to adhere to the repayment schedule, the respondent issued a recall notice to the petitioner, which was followed by a notice under Section 13(2) of the SARFAESI Act against the petitioner. The petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court, seeking to restraint the respondent from disposing off the securities furnished by the petitioner under the loan agreement. The petitioner- Fermina Developers, submitted before the High Court that the recall notices were illegal and arbitrary since the sum settled under the OTS was paid by the petitioner in full. The respondent- Indiabulls Housing Finance, argued that the petitioner had failed to adhere to the repayment schedule fixed under the OTS. The respondent added that since proceedings against the petitioner under the SARFAESI Act were initiated, the dispute between the parties was not arbitrable. Thus, the petition under Section 9 of the A&C Act was not maintainable, it argued. The High Court noticed that it was faced by two statutes, namely, the RDB Act and the SARFAESI, both of which incorporate specific ouster provisions, which bar the jurisdiction of Civil Courts. The Court noted that an application seeking to challenge any measure taken by a secured creditor under Section 13 of the SARFAESI Act would lie before the DRT under Section 17. Also, the non-obstante clause in Section 34 barred the jurisdiction of Civil Courts in matters which the DRT or the Appellate Tribunal (DRAT) is empowered to determine. Referring to the decision of the Bombay High Court in State Bank of India versus Sagar (2011), the Court observed that the pleas raised by the borrowers or guarantors in respect of enforcement of security interest, would have to be determined exclusively by the DRT. The Civil Court would have the right to try only such matters which fell outside the ambit of Sections 13 and 17 of the SARFAESI Act. Further, the Supreme Court in Indian Bank versus ABS Marine Products (P) Ltd. (2006) had ruled that the civil court's jurisdiction under the RDB Act is barred only in regard to applications made by the banks or financial institutions for recovery of its debts. The right of the borrower to approach the civil court for any other relief is not barred under the RDB Act, the Apex Court had held. Thus, the Court opined that the provisions of the RDB Act or the SARFAESI do not lay down an omnibus bar to arbitration, adding that: “The Court would in each case have to consider the nature of the dispute which stands raised and examine whether it is one which those two statutes mandate being tried only by the DRTs in accordance with their respective provisions.” Referring to the facts of the case, the bench noted that the respondent had alleged that the petitioner had defaulted on the terms and conditions for repayment of loan, which was disputed by the petitioner. The bench ruled that adjudication of the said dispute between the parties would require an evaluation of the terms of the OTS as well as the payments made by the petitioner, in order to determine whether a default had occurred on the date the notice under Section 13 of the SARFAESI Act was issued. The Court held that since the dispute essentially involved a question relating to determination of debt, it was linked to the adjudication of liability and thus, it fell within the scope...

Determination Of Debt/ Adjudication Of Liability, Under SARFAESI, No Need To Refer To Arbitration: Delhi High Court

Parina Katyal

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Determination Of Debt/ Adjudication Of Liability, Under SARFAESI, No Need To Refer To Arbitration: Delhi High Court

Parina Katyal

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