Though Borrower Can File Civil Suit Despite The Remedy Of Counter Claim In DRT, In Light Of Section 8 Of The A&C Act, Bombay High Court Refers The Parties To Arbitration

The Bombay High Court has reiterated that the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) bars the jurisdiction of the Civil Court only in respect of the applications filed by banks/ financial institutions for recovery of debt, however, it does not bar the jurisdiction of the Civil Court to try a suit filed by the borrower. The bench of Justice Bharati Dangre remarked that even though a remedy is available to the borrower to file a counterclaim in the application filed by the bank/financial institution before the Debt Recovery Tribunal (DRT), the same does not bar the borrower to file a civil suit raising an independent claim against the bank/financial institution. While dealing with an application filed under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) by the borrower, the Court held that since the borrower has an option to file a civil suit, Section 8 of the A&C Act will immediately come into picture, in view of the arbitration clause existing between the parties. The Court thus referred the parties to arbitration. The applicant, Mantras Green Resources Ltd, availed credit facility from the respondent, Canara Bank. Alleging that the respondent committed numerous breaches because of which it suffered a huge loss amounting to over Rs.14 Crores, the applicant invoked the arbitration clause contained in the hypothecation Agreement executed between them. The applicant filed an application under Section 11 of the A&C Act before the Bombay High Court seeking appointment of a Sole Arbitrator. The respondent, Canara Bank, argued before the Court that, in view of the Apex Court’s decision in Vidya Drolia & Ors. vs. Durga Trading Corporation (2020), the dispute between the parties was non-arbitrable since a special forum has been created by the RDB Act, i.e., the DRT, to resolve the said disputes. To this, the applicant, Mantras Green Resources, while placing reliance on the decision of the Supreme Court in Bank of Rajasthan Ltd. vs. VCK Shares & Stock Broking Services Ltd (2022), submitted that the remedy available to a bank for recovery of its dues under the RDB Act, will not preclude the applicant, who is a borrower, to initiate proceedings before a Civil Court against the bank or financial institution. It added that if a civil suit is filed by the applicant in its capacity as a borrower, in terms of Section 8 of the A&C Act, the Court is duty bound to take cognizance of the arbitration agreement entered between the parties and in such a case, it would have to refer the parties to arbitration unless it finds that, prima facie, no valid arbitration agreement exists between them. Amongst the choice available to the applicant between the Civil Court and arbitration, the latter being a forum chosen by the parties under the Agreement, the applicant is entitled to invoke arbitration, it argued. The Court reckoned that the RDB Act has created a special forum in the form of DRT, for expeditious adjudication and recovery of debts due to the banks and the financial institutions. Perusing to the RDB Act, the Court observed that Section 19 contemplates an application at the instance of the bank or financial institution before the DRT, to recover any debt from any person, which would be adjudicated by the Tribunal in the manner prescribed by the statute. It referred to the decision of the Supreme Court in Bank of Rajasthan Ltd. vs. VCK Shares & Stock Broking Services Ltd (2022), where it was held that Section 17 of the RDB Act bars the jurisdiction of the Civil Court only in respect of applications filed by the bank or financial institution. This provision does not bar the jurisdiction of the Civil Court to try a suit filed by the borrower, the Apex Court had held. Thus, even after establishment of the DRT, no jurisdiction has been conferred on it to try independent suits or proceedings initiated by the borrower or others against banks/financial institutions. The DRT is only permitted to entertain a cross-action in the form of counterclaim made by the borrower in the application pending before the DRT, the Supreme Court in Bank of Rajasthan Ltd (2022) had ruled. The High Court further noted, that the question whether a suit filed by the borrower against a bank/ financial institution is liable to be transferred and tried along with an application filed by the said bank/ financial institution before the DRT, was answered in the negative by the Supreme Court, since it is a matter of option of the defendant/borrower to institute a claim under the RDB Act. “In the wake of the guidance provided in the case of the Bank of Rajasthan Ltd. (supra), one aspect is now clear and that is, the bar created under the RDB Act, which has been clearly spelt out in the decision of the Hon’ble Supreme Court in the case of Vidya Drolia (supra), will operate against the bank/financial institution and it has...

Though Borrower Can File Civil Suit Despite The Remedy Of Counter Claim In DRT, In Light Of Section 8 Of The A&C Act, Bombay High Court Refers The Parties To Arbitration

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Though Borrower Can File Civil Suit Despite The Remedy Of Counter Claim In DRT, In Light Of Section 8 Of The A&C Act, Bombay High Court Refers The Parties To Arbitration

Parina Katyal

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Parina Katyal

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