TaxTMI 
TaxTMI 
2025 (5) TMI 1744
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....me of the SARFAESI Act. .......33 ii. Scope of Section 11 and expression "dispute" thereunder. .......39 a. Various Decisions on the subject. .......39 b. Scope and ambit of Section 11 of the SARFAESI Act. .......52 c. Meaning of the expression "non-payment of any amount due including interest". .......62 d. Section 11 will not apply to disputes between Bank(s), Financial Institution(s), ARC(s) or Qualified Buyer(s), who are otherwise a Borrower. .......68 iii. There is no requirement of existence of a written arbitration agreement under Section 11 of the SARFAESI Act. .......74 iv. Section 11 of the SARFAESI Act is mandatory in nature. .......83 G. FINAL CONCLUSION .......96 1. Leave granted. 2. This appeal arises from the judgment and order passed by the High Court of Punjab and Haryana at Chandigarh dated 07.10.2020 in CWP No. 13538 of 2020 (O&M) (hereinafter referred to as the "Impugned Order") by which the High Court upheld the decision of the Debt Recovery Tribunal-I, Delhi (for short, the "DRT") which inter-alia held that since the dispute in the present is between two banks, the DRT has no jurisdiction to adjudicate the same and accordingly directed the parties he....
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....s, the Borrower will not without the previous written consent of the Bank create or attempt to create in favour of any other person, lien, charge, pledge or encumbrance over all or any of the Securities' whatsoever and further undertakes not to create any lien, charge or other encumbrance over all or any of the properties the Borrower may acquire hereafter, ranking either in priority to or pari passu with or subsequent to the Security in favour of the Bank, arid will not borrow at monies against such subsequently acquired without the previous consent in writing with the Bank. 4.16 BORROWER NOT TO REMOVE THE SECURITY WITHOUT BANK'S CONSENT: So long as any money remains due in respect of Sanctioned Credit Facilities, the Borrower shall not remove or cause or permit to be removed the goods or properties charged to the Bank from the Borrower's premises, where the same are represented to have been kept, without the consent in writing of the Bank or the same may be removed except in the manner and to the extent permitted by the Bank. The Bank shall be entitled to put up and the Borrower consents to the Bank to put up the Bank's name Board at the place where the goods ....
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.... the borrower, on 22.11.2013 by way of a loan application proceeded to simultaneously avail one another credit facility from the respondent bank. Pursuant thereto, an Agreement of Advance / Pledge Agreement dated 06.12.2013 was executed between the borrower and the respondent bank, by which the warehouse receipts of certain goods including stocks of paddy and rice, were pledged in favour of the respondent bank as security, with the respondent no. 3 acting as the collateral manager. 7. As per the aforesaid Agreement of Advance, various stocks of paddy and rice of the borrower herein were deposited in the godown of the respondent no. 3 herein and the loan amount was sanctioned by the respondent bank herein against the warehouse receipts issued by the respondent no. 3 in respect of the aforesaid goods as security. As per the terms and conditions of the said Agreement of Advance, the sale proceeds realized from the said stock of paddy and rice were required to be credited directly to the borrower's loan account, in discharge of the instalments due thereunder. 8. Between 2006 and 2014, the credit facilities sanctioned by the appellant bank to the borrower were enhanced from time to ti....
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....ails of the credit facilities against which the said stocks of paddy and rice had purportedly been pledged, along with the balance outstanding in the accounts of the borrower, in order to ascertain whether the pledging of securities was anterior or posterior to the credit facility agreement 23.09.2006 that was executed by it with the borrower herein. In response, the respondent bank vide its letter dated 20.04.2015 furnished the details of the various Agreement of Advance / Pledge Agreements that were executed with the borrower for sanction of loans, along with the credit information report relating to the warehouse receipts in respect of the said pledged goods. 13. Upon perusal of the information furnished by the respondent bank, the appellant bank addressed one another letter dated 23.05.2015 to the respondent bank, inter-alia stating that in all previous stock audits conducted by the appellant bank, no pledge tags of the respondent bank were found affixed on the said security and that as per the records even the charge created by the appellant bank over the said stocks of rice and paddy, by way of hypothecation, was prior in time to the pledge created in favour of the responden....
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....re hereby put to notice that our hypothecation charge is prior to your pledge and hence all credit proceeds should be routed through company cash credit account maintained at our branch. Please send us the whole credit proceeds since inception immediately to us failing which we shall take up the matter with Reserve Bank of India and also it is fit case of initiating filing of FIR with concerned authority. You are requested to reply us immediately. Thanking you, Yours faithfully, Sd/- 14. In response to the above, the respondent bank sent a letter dated 04.06.2015 inter-alia denying that its pledge tags had not been affixed at the time of sanctioning the credit facilities and stated that the stocks of rice and paddy pledged with it were duly tagged and earmarked all throughout. It further clarified that the credit facilities extended by it, sometime in 2013, were against the warehouse receipts of the stock of rice and paddy pledged in its favour, and that the said security had no concern or connection with the goods allegedly hypothecated to the appellant bank. The respondent bank also stated that it had, vide letter dated 16.09.2014, duly intimated the appellant bank of its....
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....the information if any is to provided to you. 5. We have given you a letter dt. 16.09.2014 for our intension to provide finance to party advising you to send your observation. The limit is considered against WHR as pledge. CIR from the CIBIL & Equifax are checked for getting status of party. This is for you to respond within stipulated time. However, the information of our finance/intended finance has been freely shared with your goodself and also with Sh. Sham Lal Sr. Manager, during visit of these officials to our office in Oct/Nov/Jan. to pay that you have no knowledge of our finance is not acceptable. The sanctioned limit might also be checked from the CIBIL, Experian, Equifax but you have ignored all these online information. 6. The information of our limits was always shared with you when ever you visited our office. Also CIR was sent you on 20.04.2015 in response to your letter. Further, if appears that you have never checked CIR available online and also the stock was not checked seriously by you officials and the information shared with Sh. Harjinder Singh & Sh. Sham Lal Sr. Manager during their visit to our office was not taken for consideration. 7. Your use of base....
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....tively, i.e., prior to the appellant bank classifying the loan account of the borrower as NPA, and one another meeting thereafter on 22.08.2015. During the course of these joint meetings discussions were held in respect of the credit facilities extended to the borrower by both banks, the outstanding liabilities thereunder, the revenue streams of the borrower and the total value of the stocks of rice and paddy lying with it including those that were pledged in favour of the respondent bank. 18. It is the case of the respondent bank herein that during the course of the aforementioned joint meetings, the appellant bank did not raise any dispute in respect of the stocks of rice and paddy that had been hypothecated and simultaneously also pledged with the appellant and respondent bank, respectively, and that the said issue was raised for the first time only after the borrower defaulted in repayment of the loan dues and the account was classified as NPA by the appellant bank herein. 19. On 14.10.2015, the appellant bank herein instituted a suit being CS No. 127 of 2015 against the respondent bank inter-alia seeking a decree of permanent injunction to restrain the respondent bank from s....
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....llant bank from taking physical possession of the secured assets purportedly pledged with the respondent bank. The High Court vide its order dated 26.05.2017 directed the appellant bank to approach the DRT instead, and thereby dismissed the writ petition as withdrawn. i. First round of proceedings before the DRT. 22. Accordingly, the appellant bank filed a securitization application being S.A. No. 285 of 2017 before the DRT-I, Chandigarh challenging the aforesaid order dated 12.10.2016 passed by the District Magistrate. 23. The Debts Recovery Tribunal, vide its interim order dated 14.06.2017, observed that although a dispute subsists between the appellant and respondent banks regarding their respective claims over the security comprising of stocks of paddy and rice, yet there is no dispute insofar as the selling of the secured asset is concerned against the outstanding dues. Furthermore, in view of the perishable nature of the said secured asset the DRT held that the same should be disposed expeditiously notwithstanding the dispute to eschew any risk of depreciation or monetary loss to the public funds. Accordingly, the DRT permitted the appellant and respondent banks to conduct....
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.... for the purpose of selling as per their own procedure. Except with the joint written permission of these officers, no one shall be allowed access or to sell the stocks for which full inventory shall be made in details and be kept preserved. The whole process shall be completed within 45 days from the date of receipt of this order. It is made clear that the process of disposing of these stocks will be maintained by all three parties jointly under their signatures and the sale proceeds received shall be deposited with the main Branch of State Bank of India, Gurdaspur in the shape of FDR with accruing maximum interest and the in charge of the concerned SBI Branch shall keep the same in its custody till the adjudication of the matter or as directed by this Tribunal." The Applicant as well as Resp. Bank No.1 shall supervise all these actions and shall undertake necessary formalities to be completed keeping national interest over Institutional Interest, and expenses incurred shall be borne equally by both of the Banks, i.e. Applicant Bank and Resp. No.1 Bank. Thus the interim prayer is disposed of." (Emphasis supplied) 24. Thereafter, the DRT vide its final order dated 10.11.20....
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....It also transpired that no proper verification has been carried out either by Resp. No.1 PNB or Resp. No.3 NHBC for non-encumbrance of immoveable property and nothing is placed on record to prove that except few letters being exchanged between the Banks. [...] Further, it seems that Resp. No.2 and 3 using their good office has managed and manipulated by getting the stocks pleadged with Resp. No.1 which were duly hypothecated with the Applicant Bank. The involvement of officers of both the Banks along with handiwork of NBHC and Resp. No.2 cannot be ruled out. The Scheme under which the Resp. No.1 Bank has financed has been found to be defective and there is nothing on record produced by the Resp. Bank that they had verified the encumbrance/ charge upon the stocks and the properties where these stocks were kept. [...] Once the Applicant Bank has duly proved that the stocks are lying in the properties mortgaged with them and are hypothecated whatever Resp. No.1 has claimed by tagging through NHBC but kept on changing stance is "subsequent" to "hypothecation" since it had not verified the encumbrance on both immoveable and moveable stocks. The Applicant Bank at the very first ins....
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....FAESI Act cannot be invoked for claiming any reliefs against another bank. Accordingly, the DRAT remanded the matter to the DRT for deciding the matter afresh after considering the preliminary objections of the respondent bank. The relevant observations read as under: - "6. The main grievance of PNB raised by its learned counsel and also in his written submissions and which grievance, in my view, is well justified is that the learned DRT has not focussed himself on the objection raised by PNB whether respondent no.1 bank could invoke Section 17(1) of SARFAESI Act at all for claiming the reliefs sought for in the S.A. against another bank which was claiming itself to be a pledgee/pawnee of some of the rice/paddy/wheat stocks stored in some godowns which respondent no.3, PNB's collateral manager, had taken on lease from the bank's borrower. Learned counsel for PNB had submitted that Section 17(1) of SARFAESI Act can be invoked by a person including a borrower who is aggrieved by any of the measures taken by a secured creditor under Section 13 of SARFAESI Act which while in the present case the Bank of India had not even claimed in its S.A. that PNB had initiated any measures under ....
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....of the present appeal." (Emphasis supplied) ii. Second round of proceedings before the DRT. 27. On remand, the DRT-I, Chandigarh vide its order dated 12.02.2020, held that it has no jurisdiction to adjudicate the dispute since the controversy pertained to competing claims between two banks over the same secured asset. Placing reliance on the decision of the DRAT in Oriental Bank of Commerce & Anr. v. Canara Bank & Ors. reported in (2011) SCC OnLine DRAT 8, it held that where the dispute in respect of the secured asset is inter-se between two banks or creditors, the same must be adjudicated by way of arbitration in terms of Section 11 of the SARFAESI Act by approaching the competent authority for seeking appointment of arbitrator by way of an application under Section 11 of the Arbitration and Conciliation Act, 1996 (for short, the ("Act, 1996"). In light of the foregoing, the DRT directed the parties to approach the High Court for the same and further ordered that until final adjudication of the dispute the sale proceeds from the sale and auction of the security shall remain in deposit with the SBI. The relevant observations read as under: - "I have heard the arguments on mai....
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....rt is here before this Court with the present appeal. D. SUBMISSIONS OF THE PARTIES i. Submissions on behalf of the Appellant Bank. 30. Mr. Dhruv Mehta, the learned senior counsel appearing for the appellant bank submitted that Section 11 of the SARFAESI Act is inapplicable to the present case, as there is no legitimate dispute between the appellant and the respondent bank in view of Section 31(b) of the SARFAESI Act. It was submitted that the appellant bank's charge over the secured asset in question was created by way of hypothecation, whereas the respondent bank's charge was purportedly created through pledge. Since, Section 31(b) of the SARFAESI Act explicitly excludes 'pledge' from the scope and purview of the Act, the respondent bank herein possesses no rights in terms of the SARFAESI Act that may be decided under Section 11 thereof. 31. It was submitted that the appellant bank holds a prior charge as, the said security was created by way of credit facilities sanctioned to the borrower in 2003 and thereafter duly registered by way of the Credit Facility Agreement dated 23.09.2006, executed between it and the borrower. Whereas the respondent bank had purportedly created a ....
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.... his appeal, the same be allowed and the impugned judgment and order of the High Court be set aside. ii. Submissions on behalf of the Respondent Bank. 36. Ms. Ekta Choudhary, the learned counsel appearing for the respondent bank also placed reliance on Section 31(b) of the SARFAESI Act, however to contend that since the said provision stipulates that the SARFAESI Act shall not apply to the pledge of movable goods as defined under Section 172 of the Indian Contract Act, 1872 (for short, the "Contract Act"), as a natural consequence, Section 11 of the SARFAESI Act would be inapplicable to such cases. She submitted that since in the present case, the charge in favour of the respondent bank was created through pledging of the security in the form of stocks of rice and paddy, the same falls beyond the scope and purview of the SARFAESI Act, and such dispute can neither be adjudicated under Section 11 or 17 of the SARFAESI Act. 37. In the alternative she submitted that if Section 11 of the SARFAESI Act is found to be applicable, then no error not to speak of any error of law could be said to have been committed by the High Court whilst passing the impugned order. She would submit that,....
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....consideration: - I. What is the scope of Section 11 of the SARFAESI Act? In other words, what is the meaning of the expression "any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest" occurring in Section 11 of the SARFAESI Act? II. What is the significance of the expression "arises amongst any of the parties, namely, the bank or financial institution or asset reconstruction company or qualified buyer" used in Section 11 read with Section 2 of the SARFAESI Act? What is the underlying object behind prescribing arbitration for the adjudication of disputes between a bank, financial institution, asset reconstruction company or qualified buyer, in Section 11 of the SARFAESI Act? III. Whether the existence of a written arbitration agreement between the parties is required for the purpose of resolution of disputes under Section 11 of the SARFAESI Act, 2002? In other words, is there any conflict between the decisions of Oriental Bank of Commerce (supra) and Federal Bank (supra)? IV. Whether Section 11 of the SARFAESI Act, 2002 should be construed as mandatory or directory in its nature? F. ANALYSIS i. Legislative History and S....
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....in India is progressively complying with the international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial in....
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....er recovery of NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field, namely, the Recovery of Debts Due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and the Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another Expert Committee was constituted, then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth-oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. xxx xxx xxx 36. In its Second Report, the Narasimham Committee observed that NPAs in 1992 were uncomfortably high for most of the public sector banks. In Chapter VI....
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.... India v. Satyawati Tondon & Ors. reported in (2010) 8 SCC 110. The relevant observations read as under: - "1. [...] With a view to give impetus to the industrial development of the country, the Central and State Governments encouraged the banks and other financial institutions to formulate liberal policies for grant of loans and other financial facilities to those who wanted to set up new industrial units or expand the existing units. Many hundred thousand took advantage of easy financing by the banks and other financial institutions but a large number of them did not repay the amount of loan, etc. Not only this, they instituted frivolous cases and succeeded in persuading the civil courts to pass orders of injunction against the steps taken by banks and financial institutions to recover their dues. Due to lack of adequate infrastructure and non-availability of manpower, the regular courts could not accomplish the task of expeditiously adjudicating the cases instituted by banks and other financial institutions for recovery of their dues. As a result, several hundred crores of public money got blocked in unproductive ventures. 2. In order to redeem the situation, the Government ....
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.... initiated under Section 13(4) of the SARFAESI Act, it was discovered that the respondent therein, had also taken possession of the same property under Section 13(4), pursuant to a subsequent mortgage suppressed by the borrowers. The Andhra Pradesh High Court held that the dispute between the two banks admittedly concerning priority of claims fell within the ambit of Section 11 of the SARFAESI Act, which mandates resolution through arbitration or conciliation. The relevant observations read as under: - "Any dispute among the bank, or financial institution, or securitization company or reconstruction company or qualified institutional buyer, shall have to be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996. For doing so, the parties to the dispute have to consent in writing for reference to the conciliation or arbitration. Under Section 17(3) of the Act, if the DRT comes to the conclusion that the action taken under Section 13(4) of the Act by the secured creditor is not in accordance with the provisions of the Act, DRT may require restoration of the management of the business to the borrower or restoration of possession of the secur....
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....ng the private treaty sale conducted by the appellant therein. The appellant in turn contended that such an inter-se dispute over apportionment of proceeds between secured creditors is governed by Section 11 of the SARFAESI Act and ought to be referred to arbitration. The DRAT held that since both the parties were secured creditors under the SARFAESI Act, the dispute squarely fell within the scope of Section 11, which provides for resolution of such disputes through conciliation or arbitration in terms of the Act, 1996, even in the absence of a specific arbitration agreement. It was further held that the SARFAESI Act contemplates statutory arbitration and that in such cases and the DRT would have no jurisdiction to entertain the dispute under Section 17. The relevant observations read as under: - "16. Unfortunately, the Learned PO has not discussed the scope of section 11 or its purport... The said section which is extracted above provides for a statutory arbitration. It raises a presumption of the existence of an arbitration agreement in respect of a dispute relating to securitisation or reconstruction on non-payment of any amount including interest between bank or financial ins....
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....ore, such of those parties, who fall within the definition of parties mentioned in Section 2(c), (m), (za), (v) and (u) of the Securitization Act, namely the "bank" or "financial institution" or "securitization company" or "reconstruction company" or "qualified institutional buyer", as appearing in Section 11 of the Securitization Act, are entitled to invoke the provisions of Section 11 of the Arbitration Act, for resolution of disputes by an Arbitrator... The applicant, according to his own admission, is a borrower and a loanee of the Bank, and he, not being a "bank" nor "financial institution" nor "securitization company" nor "reconstruction company" nor "qualified institutional buyer", is not entitled to invoke the provisions of Section 11 of the Securitization Act and consequently the provisions under Section 11 of the Arbitration." 56. In Bell Finvest India Ltd. v. AU Small Finance Bank Ltd., reported in 2002 DHC 004654, the petitioner therein, an NBFC, sought appointment of an arbitrator under Section 11 of Act, 1996, in terms of Section 11 of the SARFAESI Act to argue that the said provision stipulated a statutorily mandate arbitration between financial institutions. The De....
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....trable; and therefore, the remedies available to a lender for enforcing a security interest cannot be encroached upon by any arbitral mechanism." 57. In Diamond Entertainment Technologies (P) Ltd. v. Religare Finvest Ltd. reported in 2023 SCC OnLine Del 95, the dispute in the said case arose between two financial entities pursuant to the restructuring of a loan under a facility agreement. The petitioner borrower had defaulted on repayments, leading to measures being initiated by the respondent lender under the SARFAESI Act, 2002 including issuance of demand and possession notices. While the lender sought to proceed under SARFAESI, the borrower invoked arbitration under the same facility agreement. In this backdrop, a review petition was filed by the lender seeking recall of the order passed under Section 11 of the Act, 1996, on the ground that the disputes were non- arbitrable being governed exclusively by the framework of the SARFAESI Act. The Delhi High Court whilst dismissing the review petition, held as under: - (i) First, that Section 11 of the SARFAESI Act, which provides a statutory recognition of arbitration as a mode of dispute resolution under SARFAESI where any disput....
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....nt of non-payment by the borrower post-assignment, and the assignment deed carried over the arbitration clause in the original loan agreement, the High Court held that such assignment binds the borrower to the same arbitration mechanism. 59. In Federal Bank (supra) the DRAT held that in the absence of a written consent for arbitration, Section 11 of the SARFAESI Act will not apply even if a dispute is between two financial institutions concerning competing security interests in the same immovable property. The relevant observations read as under: - "7. I am unable to subscribe to the view propounded by the Counsel for the respondents. There is no agreement between the parties. The appellant does not want that this matter to be decided by arbitration. The provisions of Section 11 of the SRFAESI Act have a crystalline clarity. It clearly, specifically, unequivocally mentions that parties to dispute must have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly. There is no such written consent. 60. In Oriental Bank of Commerce (supra) the dispute therein was between three banking institutions,....
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.... conditions of existence an arbitration agreement under Section 7 of the Act, 1996 was not fulfilled. However, the Calcutta High Court held that Section 11 of the SARFAESI Act creates a statutory fiction of an arbitration agreement, negating the need for a written agreement under Section 7. It further observed that since prima facie, the jural relationship between the parties based on the payment and correspondence was one as contemplated under Section 11 of the SARFAESI Act, the High Court proceeded to refer the dispute to arbitration and appoint an arbitrator. The relevant observations read as follows: - "Section 11 of the Act of 2002 raises a deemed statutory fiction of the existence of an arbitration agreement, provided the other parameters are fulfilled, and does not require an agreement in writing to be entered into between the parties in terms of Section 7 of the Act of 1996. The deeming provision for existence of an arbitration agreement will appear from the user of the words 'as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly' in Section 11 of t....
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.... or other means provided thereunder. It is to ensure that discord among secured creditors should not impede, derail, or stall the recovery proceedings under the SARFAESI Act, which are designed with the idea of time-bound adjudication with minimal interference. 65. In the absence of any such mandate as enshrined in Section 11 of the SARFAESI Act, every conflict between secured creditors over a security interest would ultimately just prolong the recovery proceedings against the borrower and thwart any possibility of a meaningful recovery of bad debts. By requiring such disputes to be referred to arbitration, the legislature has effectively sought to avoid a situation where squabbles between secured creditors obstruct or delay the realization of the value of the secured assets. Both the RDBFI Act and the SARFAESI Act envision the DRTs and DRAT as specialized forum for or facilitating and effectuating recovery against defaulting borrowers, and not for resolving disputes inter se secured creditors. Their jurisdiction is primarily directed toward the adjudication of recovery certificates, enforcement of security interest, and addressing borrower objections under Section 17. The nature ....
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....ght and upon which issue is joined, and in relation to which jurors are called and witnesses examined." 68. The High Court of Madhya Pradesh in its decision in Dilip Construction Company v. Hindustan Steel Ltd., reported in 1973 SCC OnLine MP 22 was called upon to examine the question of existence of a dispute in order to raise the jurisdiction of arbitration. In the case, a contractual dispute arose between appellant and respondent therein under a contract which included an arbitration clause. The appellant therein completed part of the contracted work but raised a claim for additional payment, which the respondent contested. The respondent argued that no dispute existed as the claims were still under examination, and certain claims fell outside the contract's purview. Despite this, both parties nominated arbitrators, and the matter proceeded to an umpire, who made an award in favour of the appellant therein. The core issue was whether a genuine 'dispute' existed at the time of invoking the arbitration clause, as its pre-existence was a condition precedent for invoking arbitration in terms of the contract. The High Court held that: - "10. There was no jurisdiction either in....
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....a, 24 Cal WN 775 : (AIR 1920 Cal 808 (2)). 18. In Dawoodbhai Abdulkader v. Abdulkader Ismailji, AIR 1931 Bom 164 the plaintiff was the sub-partner of the defendant in a certain business. The deed of sub-partnership incorported all the articles, covenants, conditions and obligations contained in the principal partnership agreement between the defendant and his partner which were not inconsistent with the terms of the agreement. There was a clause in the deed of principal partnership which provided, inter alia, that any dispute or difference arising between partners with regard to the construction of any of the articles contained in the agreement or to any divisions of goods or things, related to the said Partnership or the affairs thereof, shall be referred to arbitration in the manner therein mentioned. The plaintiff called upon the defendant to make up the accounts and to pay him the amount found due at the foot thereof. The defendant did not pay and the plaintiff filed a suit praying that the defendant may be ordered to render a true and complete account of the profits earned by the partnership business and of the amount due to the plaintiff, and to pay the same to him. The def....
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....ra) was examined in McDermott International Inc. v. Burn Standard Co. Ltd., reported in (2006) 11 SCC 181, wherein this Court clarified and held that the term "dispute" does not necessarily imply that a claim asserted by one of the party must be followed by a denial from the other party. A "dispute" would said to exist where the other party has denied or disputed his claim or in instances where it has feigned ignorance or is not otherwise interested in resolving it. The relevant observations read as under: - "117. In Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority [(1988) 2 SCC 338], whereupon Mr Mitra placed strong reliance, an award made under the old Act was in issue. A dispute had arisen whether there was a claim and denial or repudiation thereof. In that context, it was held: (SCC p. 340, para 4) "There should be dispute and there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion of denying, not merely inaction to accede to a claim or a request. Whether in a particu....
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....ding interest". c. Meaning of the expression "non-payment of any amount due including interest". 75. The scope and meaning of the phrase "non-payment of any amount due including interest," used in Section 11 of the SARFAESI Act warrants careful examination. It is pertinent to note that the statute employs the term "any" amount, thereby refraining from limiting its application to a specific category of amounts that may be owed to a party mentioned in the provision. The expression "any amount due, including interest," must be construed in light of the purpose of the Act and the provisions contained therein. The plain meaning of the term "any amount due" encompasses amounts that remain unpaid beyond the due date. However, the aforesaid is only one element of the meaning of the said expression. 76. In Nanalal M. Varma and Co. Ltd. v. Alexandra Jute Mills Limited, reported in 1987 SCC OnLine Cal 100, the Calcutta High Court whilst discussing the scope and meaning of the expression "non-payment of price" held that non- payment may arise from a myriad of reasons. It may be due to one's inability to pay while not disputing liability thereof or it may be due to repudiation or denial of i....
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....the provision. In cases, involving two banks acting as creditors, a dispute may not arise directly between the banks due to the "non-payment of any amount" they owe to each other. Instead, disputes typically emerge because of the borrower's failure to discharge their debt obligations. For instance, if a borrower defaults on repayment after availing of credit facilities extended by two banks, issues of non-payment of loan amounts (including interest) owed by the borrower, the same may lead to a dispute. Such a dispute is likely to concern the priority of charges over the borrower's assets, especially in situations where the borrower has secured loans from both banks by mortgaging the same property. In the present case, the question of priority arises due to the simultaneous loans extended by the appellant and respondent banks and the creation of charges over the same security. 78. In cases such as the present one, the authority to determine which bank holds the prior charge over the borrower's assets becomes a significant issue for consideration. There have been instances where such disputes have been referred to the DRT or civil courts for adjudication. The question of determining....
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....apply. Consequently such, disputes being those which fall squarely within the ambit of the said provision, would mandate the resolution of such disputes through the mechanisms of conciliation or arbitration as provided under the Act, 1996. This interpretation aligns with both the language, the legislative intent behind Section 11 and the avowed object and spirit of the SARFAESI Act. 83. In the present case, a dispute has arisen between the appellant and the respondent banks regarding their respective claims over the stocks of the borrower company. The controversy primarily on the surface entails the method of creation of charge on the stocks. The appellant bank asserts its claim based on a hypothecation agreement, whereby the stocks of the borrower company were hypothecated in its favour. On the other hand, the respondent bank claims a superior right by virtue of a pledge created over the same security, in terms of Section 172 of the Contract Act. It is pertinent to note that, Section 31(b) of the SARFAESI Act, stipulates that the provisions of the SARFAESI Act will not apply to movables that have pledged. 84. However, a closer look would reveal, that the dispute in substance, is....
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....templated under Section 11 of the NPA Act is not with the borrower [...] 30. The point to be noted is that the scheme of the NPA Act does not deal with disputes between the secured creditors and the borrower. On the contrary, the NPA Act deals with the rights of the secured creditors inter se. The reason is that the NPA Act proceeds on the basis that the liability of the borrower has crystallised and that his account is classified as non- performing asset in the hands of the bank/FI." 87. In Bell Finvest India (supra), the petitioner therein an NBFC and a financial institution had entered a rupee facility agreement with the respondent therein who was a bank for taking a loan, against which a security interest was created in favour of the respondent bank therein. Under the said agreement, the petitioner therein was defined as that of a 'borrower' and the respondent as the 'lender'. The petitioner therein had defaulted in repayment of loan to the respondent therein under the said agreement and the account of the petitioner was classified as NPA. The petitioner therein moved an application for seeking appointment of arbitrator under the Act, 1996 before the High Court, contending t....
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.... Finvest India Ltd. v. A.U. Small Finance Bank Ltd., [Special Leave Petition (C) No. 24101 of 202] observed that the interpretation of the Delhi High Court in Bell Finvest India (supra) that the disputes between two financial institutions relating to "payment of any amount due including interest", would not include borrowed and loan amount may not be correct. However, this Court in view of the peculiar facts and circumstances of the case therein deemed it unnecessary to decide the aforesaid issue. 89. We have already clarified that a dispute relating to the "non-payment of any amount due, including interest" may arise following a default in loan repayment by a common borrower. Such default can indirectly lead to a conflict between two banks that have extended loans to the same borrower. This type of dispute falls within the ambit of Section 11 of the SARFAESI Act, as it involves competing claims over the recovery of dues. Hence, Section 11 of the SARFAESI Act does include borrowed loan amount under the "non- payment of any amount due including interest". However, when a lender assumes the role of a borrower, the legal relationship between the parties undergoes a shift. In such cir....
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....cluding the potential classification of its account as NPA. A bank taking a loan from another bank is taking the loan in the capacity of a borrower rather than acting in its usual capacity as a lender, unless expressly modified and specified by the terms of the facility agreement between parties governing such transaction where they take into account the position of the lender-turned-borrower leading to any consequential advantages or disadvantages to such lender- turned-borrower. In such regard, it is important to see the purpose for which the loan and the functioning capacity of both the parties in which the loan is extended. The roles in financial transactions are thus defined by the terms of the agreement and the capacity in which a parties act, rather than their inherent nature as a lender. If every dispute between a lender and a lender-turned- borrower becomes arbitrable under Section 11 of the SARFAESI Act, then it would render the entire mechanism of the SARFAESI Act otiose. iii. There is no requirement of existence of a written arbitration agreement under Section 11 of the SARFAESI Act. 93. As discussed in the foregoing paragraphs, Section 11 stipulates that any dispute ....
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....n (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof: Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court. (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made." 96. However, Section 11 of the SARFAESI Act, apart from stipulating that any dispute between a bank or financial institution or asset reconstruction company or qualified buyer shall be resolved by way of arbitration further uses the expression "as if the parties to the dispute have consented in writing for determination of such disp....
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....R 1980 SC 1858] this Court observed as follows : (SCC p. 351, para 25) "25. It is now axiomatic that when a legal fiction is incorporated in a statute, the court has to ascertain for what purpose the fiction is created. After ascertaining the purpose, full effect must be given to the statutory fiction and it should be carried to its logical conclusion. The court has to assume all the facts and consequences which are incidental or inevitable corollaries to giving effect to the f iction. The legal effect of the words 'as if he were' in the definition of 'owner' in Section 3(n) of the Nationalisation Act read with Section 2(1) of the Mines Act is that although the petitioners were not the owners, they being the contractors for the working of the mine in question, were to be treated as such though, in fact, they were not so." (Emphasis supplied) 98. Hence, it is crystal clear, that the use of the words "as if" in conjunction with the expression "parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration" stipulates a legal deeming fiction whereby it shall be 'presumed' that there existed an arbitration agreement and a written a....
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....ion Act, 1996 ... as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly.'" 7. Consequently, it is clear that the previous view taken in this regard that DRT has the jurisdiction to try such disputes appears to be incorrect. The order passed by the learned DRT under the SARFAESI Act in this case is without jurisdiction. I, therefore, set aside the order to that extent. It is made clear that the Banks will approach the Hon'ble High Court and make a request to the Hon'ble High Court to appoint an arbitrator for the adjudication of this case." 102. It was submitted by the appellant bank that, the aforesaid decision of Oriental Bank of Commerce (supra) neither referred to the earlier decision of Federal Bank (supra) nor adverted to the issue of whether there must exists a written arbitration agreement between the parties in order to attract Section 11 of the SARFAESI Act. In such circumstances, it was contended that, the impugned order passed by the High Court directing the parties to undergo arbitration in terms of Section 11 by relying upon Oriental B....
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....on- payment of any amount due including interest amongst them, and there need not be any agreement in writing, for it is deemed that the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration as per the provisions of the Arbitration Act." ( Emphasis supplied ) 105. Thus, it appears from the aforesaid that there are divergent views expressed by various decisions as regards the necessity of an arbitration agreement under the Section 11 of the SARFAESI Act. 106. We are of the considered view that there is a "deemed agreement" between the parties specified in Section 11 of the SARFAESI Act, insofar as the dispute relates to the matters so mentioned and is between the parties so specified thereunder. Thus, there is no need for an explicit written agreement between the parties. Section 11 of the SARFAESI Act creates a legal fiction by using the word "as if," which presumes the existence of an arbitration agreement among the designated parties, namely a bank or financial institution or asset reconstruction company or qualified buyer. This provision negates the requirement for a formal written arbitration agreement, as it assum....
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....rever the word "shall" is used in a substantive statute, it normally would indicate mandatory intent of the legislature. 123. Crawford on Statutory Construction has specifically stated that language of the provision is not the sole criterion; but the courts should consider its nature, design and the consequences which could flow from construing it one way or the other. 124. Thus, the word "shall" would normally be mandatory while the word "may" would be directory. Consequences of non-compliance would also be a relevant consideration. The word "shall" raises a presumption that the particular provision is imperative but this prima facie inference may be rebutted by other considerations such as object and scope of the enactment and the consequences flowing from such construction." (Emphasis supplied) 110. Similarly in State of Haryana v. Raghubir Dayal, reported in (1995) 1 SCC 133, this Court held that the use of the word 'shall' ordinarily be construed as mandatory except where such an interpretation would be anathema to either the scope of the enactment, or where the consequences that would flow from such construction would not demand such interpretation. The relevant observ....
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.... of the Act is to achieve speedier recovery of the dues declared as NPAs and better availability of capital liquidity and resources to help in growth of the economy of the country and welfare of the people in general which would subserve the public interest." 112. Similarly, in Satyawati Tondon (supra) this Court observed that the primary object of that Act was to facilitate creation of special machinery for speedy recovery of the dues of banks and financial institutions. It further observed that the entire purpose of establishment of DRTs and DRATs was to ensure that defaulting borrowers are not able to invoke the jurisdiction of the civil courts for frustrating the proceedings initiated by the banks and other financial institutions, by providing a one-stop forum to make summary adjudication and facilitate recovery of NPAs of the borrowers. The relevant observations read as under: - "5. An analysis of the provisions of the DRT Act shows that primary object of that Act was to facilitate creation of special machinery for speedy recovery of the dues of banks and financial institutions. This is the reason why the DRT Act not only provides for establishment of the Tribunals and the ....
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....institutions, ARCs and the qualified buyers, and not to a borrower. 114. The decision of Satyawati Tandon (supra) is particularly significant in this regard. While interpreting the provision of the SARFAESI Act, this Court observed that the primary object of the Act was to bring about "special machinery for speedy recovery of the dues of banks and financial institutions." If disputes that fall specifically under the ambit of Section 11 of the SARFAESI Act are permitted to get their disputes through DRT proceedings, it would go against the express language of the statute thereby diluting the special procedural mechanisms designed for the borrower-lender disputes under the scheme of the SARFAESI Act. Such an approach would create unnecessary litigation, frustrate the avowed object of the SARFAESI Act and undermine the efficiency of the prescribed process of resolution by arbitration or conciliation. Disputes amongst the specified financial entities related to securitization, reconstruction or non-payment of any amount due including interest must be resolved by the way of Section 11 of the SARFAESI Act in order to maintain the financial stability in the economy in furtherance of the ....
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....es examining the "text of the statute, the legislative history, and "inherent conflict" between arbitration and the statute's underlying purpose" [ Jennifer L. Peresie, "Reducing the Presumption of Arbitrability" 22 Yale Law & Policy Review, Vol. 22, Issue 2 (Spring 2004), pp. 453-462.] with reference to the nature and type of special rights conferred and power and authority given to the courts or public forum to effectuate and enforce these rights and the orders passed. When arbitration cannot enforce and apply such rights or the award cannot be implemented and enforced in the manner as provided and mandated by law, the right of election to choose arbitration in preference to the courts or public forum is either completely denied or could be curtailed. In essence, it is necessary to examine if the statute creates a special right or liability and provides for the determination of each right or liability by the specified court or the public forum so constituted, and whether the remedies beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the absence of special reason is contraindicated. The dispute is non-arbitrable. 56....
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....e contingencies are not taken care of by the DRT Act and, therefore, Parliament had to enact the NPA Act, 2002." 58. Consistent with the above, observations in Transcore [Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116] on the power of the DRT conferred by the DRT Act and the principle enunciated in the present judgment, we must overrule the judgment of the Full Bench of the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC OnLine Del 4815 : (2013) 134 DRJ 566], which holds that matters covered under the DRT Act are arbitrable. It is necessary to overrule this decision and clarify the legal position as the decision in HDFC Bank Ltd. [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC OnLine Del 4815 : (2013) 134 DRJ 566] has been referred to in M.D. Frozen Foods Exports (P) Ltd. [M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd., (2017) 16 SCC 741 : (2018) 2 SCC (Civ) 805], but not examined in light of the legal principles relating to non-arbitrability. The decision in HDFC Bank Ltd. [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC OnLine Del 4815 : (2013) 134 DRJ 566] holds that only actions in re....
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....emorandum. Ms. Ekta Choudhary, the learned counsel for the respondent bank submitted that since the dispute in the present matter is between two public sector banks, it ought to be resolved under the framework of the AMRCD Memorandum, which provides a structured mechanism for resolution of disputes inter-se CPSEs. Although, this contention was not once raised by the respondent bank either before the DRT or the High Court, yet we deem it necessary to answer the same. 120. We are of the considered opinion that the contention put forth by the learned counsel on behalf of the respondent bank is completely misconceived, meritless and deserves to be rejected for two good reasons. 121. First, a bare perusal of the aforesaid guidelines, more particularly, clause 3.3 would show that the said guidelines only apply in respect of dispute or difference relating to the interpretation and application of provisions of commercial contracts between two CPSEs etc. (emphasis). The said clause reads as under: - "3.3 Any dispute or difference relating to the interpretation and application of the provisions of commercial contract(s) between Central Public Sector Enterprises (CPSEs)/ Port Trusts inter....
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....uritisation, reconstruction or non-payment of any amount due between the bank or financial institution or asset reconstruction company or qualified buyer. (II) In order to attract the provision of Section 11 of the SARFAESI Act, twin conditions have to be fulfilled being; first, the dispute must be between any bank or financial institution or asset reconstruction company or qualified buyer and secondly, the dispute must relate to securitisation or reconstruction or non-payment of any amount due including interest. Where the aforesaid two conditions are found to be prima-facie satisfied, there the DRT will have no jurisdiction and the proper recourse would only be through Section 11 of the SARFAESI Act read with the Act, 1996. (III) The expression "non-payment of any amount due, including interest" used in Section 11 of the SARFAESI Act is of wide import and would include a various range of scenarios of 'disputes' connected to unpaid amounts including those arising due to third-party defaults, such as indirect defaults of the borrowers. (IV) Any dispute between two banks, financial institutions, asset reconstruction companies or qualified buyers etc., where the jural relation ....