TaxTMI 
TaxTMI 
2025 (5) TMI 1744
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.......32 F. ANALYSIS .......33 i. Legislative History and Scheme 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 D....
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.... further undertakes that so long as the Borrower continues to be indebted or liable to the Bank under any of the Sanctioned Credit Facilities, 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....
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....ppellant bank is repaid. 6. It appears that while the loan amount under the aforesaid credit facility earlier sanctioned by the appellant bank was still outstanding and yet to be discharged, 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 borro....
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....is inspection, it discovered for the first time that pledge tags of the respondent bank had been affixed on the said security. 12. Accordingly, the appellant bank addressed a letter dated 02.04.2015 to the Chief Manager of the respondent bank, requesting details 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 th....
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....s of borrower company where bank's name board. Also being displayed fully knowing well that the stocks are hypothecated to Bank of India. In this process, you have connived with the borrower(s) with an intention to deceive Bank of India and indulge in breach of trust and also took action to deprive us from our right with an intention to put us to suffer probable loss. 8. You are 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 throug....
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....hecked only by our Sr. functioning from controlling office, where we found that all the stock in order with proper stacking and stack card attached along with display board of NBHC confirming stock pledged to our Bank. 4. It is the party/borrower who offer the godown for pledge. Then the godowns are surveyed by collateral manager and after it is found in order. the godown is considered to be handed over to collateral Manager on lease. This is the duty of borrower to share 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 ig....
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....s, plant and machinery along with the stocks of rice and paddy that were hypothecated to it as security, and sealed the godown of the respondent no. 1 that had been leased to the respondent no. 3 in relation to the Agreement of Advance / Pledge Agreement with the respondent bank. 17. It also appears from the material on record that, several joint meetings were convened between the directors of the borrower herein along with the officials of both the appellant and respondent banks. Two such meetings were convened on 30.04.2015 and 12.08.2015, respectively, 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 an....
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....t to following conditions that there should not be any6 stay granted by any competent court of law or higher authorities, In case of violation of any legal order than the authorized officer is responsible. Further, the stock of Punjab national Bank should be not touched and the Naib Tahsildar is deputy as Duty Magistrate." 21. Aggrieved by the aforesaid, the appellant bank preferred a writ petition being CWP-COM No. 177 of 2017 before the High Court, assailing the aforesaid order dated 12.10.2016 passed by the District Magistrate insofar as it restrained the appellant 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 altho....
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....ed: "The concerned AGM of Applicant Bank as well Resp. Bank No. 1 and one officer from National Bulk Handling Corporation Ltd. are hereby directed to jointly start the process of selling stocks immediately by taking joint exercise under the authority of all three to get the stocks released as well as sold in the open market as per rules. The Authorised Officer of the Applicant Bank, i.e. Bank of India, shall reopen the premises which they claim to have been in their physical possession and mortgaged with them and allow access to the above officers to get the stocks transferred 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 a....
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.... stocks lying in the premises being hypothecated to the Applicant Bank. The said stocks were shown to the NHBC who verified the quantity without verification of charge over stocks over which now the Applicant Bank and Resp. No.1 are claiming to have their right being hypothecated and pledged with them respectively. Meaning thereby that Resp. No.3 was aware that the warehouse godowns which were given on rent to the NHBC itself were built on the property which was mortgaged with Applicant Bank in violation of terms and conditions of agreements executed between Resp. No.3 and the Applicant, certainly which are prior to the pledge. 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 r....
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....respondent bank preferred an appeal bearing no. 500 of 2017 before the Debt Recovery Appellate Tribunal (for short, the "DRAT"). The DRAT vide its order dated 04.11.2019 held that the DRT whilst passing its order dated 10.11.2017 failed to take into consideration the preliminary objection that was raised by the respondent bank herein to the effect that the application filed by the appellant bank under Section 17 of the SARFAESI Act was not maintainable; first, because the remedy under the said provision is available only against measures taken in terms of Section 13 of the SARFAESI Act which the respondent bank had never initiated and secondly, because Section 17 of the SARFAESI 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 res....
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.... of the S.A. No.285/2017 of Bank of India keeping in mind the observations made in this order by this and giving fresh hearing to the parties and at the same time to pass fresh order uninfluenced by anything said in its impugned order which now stands set aside. The S.A. shall accordingly be now taken up for 'directions' by the DRT on 23.11.2019 at 2.p.m. and efforts should be made to pass the fresh order as far as possible within two months from the date of receipt of this order. While disposing of the S.A. afresh DRT also be at liberty to pass appropriate order concerning the appropriation/disbursement/utilisation of the sale proceeds of stocks of rice/paddy etc. which were sold during the pendency 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 w....
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.... Vs Canara Bank 2011 BC 14 (DRAT Delhi)" has been relied upon in the said order. The petitioner is having a remedy under Section 11 of the SARFEASI Act, 2002 (here-in-after referred to as `the Act, 2002) as the dispute can be settled by resorting the said remedy. Section 11 of the Act, 2002 [...] xxx xxx xxx Accordingly, by considering the provisions of Section 11 of the Act, 2002, we do not find any merit in the contention raised by learned counsel for the petitioner. The remedy is available to petitioner under Section 11 of the Act, 2002. The petitioner is at liberty to avail that remedy before the appropriate Forum. 29. In view of the aforesaid, the appellant bank being aggrieved and dissatisfied with the impugned order passed by the High Court 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 SARFAES....
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....said Act which deals with the functioning and powers of banks, financial institutions and asset reconstruction companies in respect of securitization and reconstruction, and that the said provision has no application to enforcement of security interest provided in Chapter III of the SARFAESI Act. He further submitted that where the dispute pertains to enforcement of borrower's assets given as security, such dispute must be addressed in terms of Section(s) 17 and 18 of the SARFAESI Act, respectively, and Section 11 would be inapplicable in such disputes, notwithstanding whether such dispute is between two or more secured creditors such as two banks, financial institutions etc. 35. In such circumstances referred to above, the learned Senior Counsel prayed that there being merit in 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....
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....c Enterprises, Government of India. She submitted that the AMRCD Memorandum has been formulated with a view to provide a structured mechanism for resolution of disputes inter se CPSEs. through arbitration, in accordance with the procedure outlined therein. Placing reliance on the said guidelines, she contended 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. 41. In such circumstances referred to above, it was prayed on behalf of the respondent bank that there being no merit in the appeal, the same may be dismissed. E. ISSUES FOR DETERMINATION. 42. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following questions fall for our 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....
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....court/tribunal often rendered the secured asset nearly worthless due to the long delays. In this background the Committees thus, proposed new laws for securitisation in order to permit banks and financial institutions to hold securities and sell them in a timely manner without the involvement of the courts. 46. On the recommendations of the Narasimham Committee and Andyarujina Committee, the SARFAESI Act was enacted to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the court. 47. The statement of objects and reasons for which the Act has been enacted reads as under: - "STATEMENT OF OBJECTS AND REASONS The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry 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 ....
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....circumstances which retard the economic progress followed by a large number of other consequential ill effects. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the Governments in creating Debts Recovery Tribunals and appointing presiding officers, for a long time. Even after leaving that margin, it is to be noted that things in the spheres concerned are desired to move faster. In the present-day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster 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....
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....the Report of the Narasimham Committee, yet another Committee was constituted headed by Mr Andhyarujina for bringing about the needed steps within the legal framework. We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of Debts Due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances and the financial climate world over, if it was thought as a matter of policy to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor is it a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy." 49. In this regard, reference may also be made to the following observations of this Court in Union Bank of 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 form....
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....initiate proceedings under Section 13(2) of the SARFAESI Act. While attempting symbolic possession under Section 13(4), the petitioner therein discovered that the same property was also mortgaged to the respondent, another NBFC. The Delhi High Court held that since the dispute was between two NBFCs regarding priority of claims over a mortgaged property under the SARFAESI Act, the same must be resolved through arbitration as mandated by Section 11 thereof. The relevant observations read as under: - "6. In view of the fact that disputes have arisen between the parties, this Court is inclined to appoint an Arbitrator to adjudicate upon the disputes between the parties." 52. In Bank of India v. Development Credit Bank Ltd. reported in 2012 SCC OnLine AP 71 it was the case of the petitioner therein that a prior mortgage over a house, had been created in its favor to secure loans. Although possession proceedings were 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....
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....of excess auction proceeds in its favour. However, the DRT, Guwahati whilst dismissing the same as not maintainable inter-alia on the ground of jurisdiction, placed reliance on the decision of Oriental Bank of Commerce (supra) and observed that since the dispute pertained to overlapping security interests and competing claims between two banks over the same property, such inter-se disputes between banks are to be resolved through arbitration and not before the DRT as per Section 11 of the SARFAESI Act. 54. In CFM Asset Reconstruction (P) Ltd. v. Tamilnad Mercantile Bank Ltd., reported in 2022 SCC OnLine DRAT 305, the dispute in the said was between an asset reconstruction company and a bank over competing security interests in the same property. The appellant held 96.25% of the total secured interest, while the respondent bank claimed 3.75% and thus, filed a securitization application under Section 17 of the SARFAESI Act challenging 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 ....
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....-adjustments and wrongful debits from his loan account to discharge the liability of another borrower introduced by him, and thereafter issued a notice under Section 13(2) of the SARFAESI Act for recovery of dues. The applicant approached the Andhra Pradesh High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996, for initation of arbitration in terms of Section 11 of the SARFAESI Act. The Andhra Pradesh High Court dismissed the application holding that the applicant being a borrower did not fall within the class of parties covered under Section 11 of the SARFAESI Act, which permits arbitration only among specified financial entities such as banks, financial institutions, ARCs, or qualified institutional buyers. It was further held that Section 11 of the SARFAESI Act envisages a statutory arbitration only among those enumerated parties and not between a bank and a borrower. The relevant observations read as under: - "13. Therefore, 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 "recons....
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.... "7.11 Though petitioner No. 1 is a financial institution, for the purposes of the present lis between the parties, petitioner No. 1 dons the hat of a borrower within the meaning of section 2(1)(f) of the SARFAESI Act ... section 11 conspicuously omits the word borrower from its text, which is a clear indication ... that a financial institution which happens to be a borrower vis-a-vis the institution with which a dispute arises, cannot resort to arbitration as a remedy." (iii) Lastly, that disputes concerning enforcement of security interests, which are governed by special legislations such as the SARFAESI Act and the RDB Act, are non-arbitrable, and the special remedy provided therein cannot be overridden by any statutory or consensual arbitration. The relevant observations read as under: - "7.13 ... matters covered by special laws, which create special rights, to be adjudicated and enforced by special forums, under special procedures, in this case the DRT, are non-arbitrable; 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....
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....n Company Pvt. Ltd. v. Universal Journeys India Pvt. Ltd., (Arb. P. No. 1226 of 2024), the Delhi High Court was considering a petition under Section 11 of the Act, 1996 for seeking appointment of an Arbitrator for disputes arising out of a loan transaction. The dispute pertained to non-payment of dues under a loan agreement entered into between the respondent and one Riviera Investors Private Limited, which was later assigned to the petitioner therein who was an Asset Reconstruction Company. The respondent objected to the arbitration, contending that it had not consented to the assignment and that the arbitration clause was not effectively transferred. The High Court held that Section 11 of the SARFAESI Act expressly provides for arbitration of disputes "relating to securitisation or reconstruction or non-payment of any amount due including interest" amongst a bank, financial institution, asset reconstruction company or qualified buyer, once the parties have consented in writing. As the dispute arose on account 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 ass....
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....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 SRFAESI Act in this case is without jurisdiction." 61. In Reliance Commercial Finance Limited v. Axis Bank Limited, (AP No. 361 of 2019) the petitioner, a financial institution under the SARFAESI Act, 2002, sought arbitration under Section 11 of the Act, 1996, relying on the statutory arbitration provision enshrined in Section 11 of the SARFAESI Act. The dispute arose from the petitioner's takeover of a loan from the respondent bank, and subsequent claims regarding mortgage documents and related transactions. The respondent argued there was no privity of contract or written arbitration agreement thus, there could be no reference to arbitration as the statutory conditions of existence an arbitration agreement under Section 7 of the Act, 1996 was not fulfilled. However, the Calcutta High Court held th....
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...., it is manifest that the scope and ambit of the said provision have been limited or confined by the twin conditions laid therein, that have to be satisfied in order to attract the said provision being as under: - (i) Where the dispute arises between: - a. any bank; b. any financial institution; c. any asset reconstruction company; d. any qualified buyer; and (ii) Where the dispute relates to: - a. securitization of financial assets; b. reconstruction of assets; c. non-payment of any amount due and / or interest 64. The object underlying Section 11 of the SARFAESI Act insofar as it mandates arbitration or conciliation as the only mechanism for resolution of disputes between a bank, financial institution, ARC etc., and ousts the jurisdiction of the DRTs under Section 17 for adjudicating such disputes is to ensure that ancillary or collateral disputes that may arise between competing secured creditors do not hinder the larger purpose of the SARFAESI Act of facilitating recoveries of dues from the borrowers expeditiously by enforcement of secured assets or other means provided thereunder. It is to ensu....
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.... thus, encompass disputes between the borrower and secured creditor(s) alone. However, the latter disputes are specifically in respect of the secured asset or security interest, the nature of dispute is not in relation to the manner of recovery but rather the manner of apportionment of the recovery proceeds either directly or indirectly, and thus, such disputes arise and concern the secured creditors that are covered under the SARFAESI Act, namely banks, financial institutions, asset reconstruction companies and qualified buyers. The legislature keeping the aforesaid distinction in mind, incorporated the provisions of Section(s) 11 and 17 of the SARFAESI Act, for resolution of disputes pertaining to any rights or claims in respect of the secured asset and disputes in relation to the recovery proceedings or measures taken thereunder, respectively. 67. The Black Law Dictionary (5th ed. 1979) defines "dispute" as "A conflict or controversy; a conflict of claims or rights; an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other. The subject of litigation; the matter for which a suit is brought and upon which issue is joined, and in r....
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....ing and not an agreement as to how they are to be settled, then it is neither an agreement to refer to arbitration nor a submission to arbitration, and it is not within the Act." 12. The existence of a dispute is an essential condition for the jurisdiction of an arbitrator. If there is no dispute, there can be no right to demand arbitration at all. This was clearly laid down by Rankin, J., as he then was, in Uttam Chand Saligram v. Jewa Mamooji, ILR 46 Cal 534 : (AIR 1920 Cal 143). A point as to which there is no dispute cannot be referred to arbitration. Failure to pay does not necessarily constitute a difference or dispute. A dispute implies an assertion of right by one party and repudiation thereof by another. In tide instant case, there was; merely an assertion of a claim made by the appellant for payment of Rupees 16,77,197.28 P., but there was no repudiation of that claim by the respondent and, therefore there could be no dispute which could be referred to arbitration. The jurisdiction of an arbitrator depends not upon the existence of a claim or the accrual of a cause of action, but upon the existence of a dispute. (See Balmukund Ruia v. Gopiram Bhotica, 24 Cal WN 7....
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....plained the meaning of the term "dispute". In the said case, the appellant therein had contracted with the respondent therein for constructing of 240 flats. The appellant therein repeatedly requested the respondent authority to finalize the pending bills. However, due to the inaction of the respondent, the appellant therein issued a notice for seeking the release of the sum offered as security and for invoking arbitration. When the respondent authority failed to respond, the appellant therein filed an application for initiation of arbitration, alleging the existence of a 'dispute' regarding the unsettled bills and withheld security. This Court held as under: - "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 particular case a dispute has arisen or not has to be found out from the facts and circumstances of the case." (Emphasis supplied) 70. The ratio of the ....
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.... the SARFAESI Act defines 'securitisation' as "acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such asset reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise". 73. Section 2(b) of the Act defines 'asset reconstruction' as "acquisition by any asset reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance". 74. It is manifest from the foregoing discussion that the present case at hand, more particularly dispute between the appellant and respondent banks does not pertain to either securitisation or reconstruction. It does not involve any acquisition of financial assets or rights by an asset reconstruction company (ARC). Rather, the crux of the issue is whether the controversy involving the competing claims of rights over the stocks of goods by hypothecation or pledge and the dispute therein falls within the scope of Section 11 of the SARFAESI Act, more particularly the third category of disputes delinea....
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....is not made by a party from whom demand is made by the other party, the same would be a case of repudiation. In our view the third kind of case mentioned by us, that is, failure to pay within the time provided in the contract resulting in breach of terms of the contract depending upon the terms of the particular arbitration clause could be validly the subject-matter of a reference to arbitration. In this connection we may refer to the observation of Rankin J. as his Lordship then was, in the case of Uttam Chand Saligram v. Jewa Mamooji, ILR 46 Cal 534 : AIR 1920 Cal 143 to the effect that the existence of a dispute was an essential condition for the Arbitrator's jurisdiction, the dispute may be either in the acknowledgment of debts or as regards the mode and time of satisfying it [...]" (Emphasis supplied) 77. A situation of "non-payment of any amount" or an overdue arises when one party fails to fulfil their obligation to pay the party they are indebted to. For the purposes of the present case at hand, we will be focusing on the scope of Section 11 of the SARFAESI Act specifically in the context of disputes between two banks, excluding financial institutions, asset....
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....ancial institutions, ARCs etc.. The language of the provision is clear and discernible: "Where any dispute relating to [...] non-payment of any amount due, including interest, arises amongst any [...]". The broad phrasing of the aforesaid expression signifies a wide import of its meaning which would include a various range of scenarios where disputes are connected to unpaid amounts, including those arising due to third-party defaults, such as indirect defaults of the borrowers. 81. For illustration, a borrower may owe a certain amount to Bank A and another amount to Bank B, after both of these banks have hypothecated the borrower's property. If the borrower defaults and fails to repay these loans, a dispute may arise between Bank A and Bank B regarding their respective claims over the borrower's mortgaged assets. This dispute is inherently and intrinsically linked to the borrower's "non-payment of any amount due including interest", which the borrower was obligated to pay under the terms of their respective loan agreements with the banks. 82. Thus, it follows that where the dispute between the banks is fundamentally related to the "non-payment of any amount due including inte....
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....present case falls under the ambit of Section 11 of the SARFAESI Act. 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. 85. At this stage we may clarify one another pertinent aspect regarding Section 11 of the SARFAESI Act, and whether the said provision could said to be applicable where one of the parties although is a bank, financial institution or ARC etc., yet its jural relation to another such entity is that of a borrower and lender? In this regard, we must look into the decisions of this Court in M/s. Transcore v. Union of India & Anr. reported in (2008) 1 SCC 125 and the Delhi High Court in Bell Finvest India (supra). 86. In Transcore (supra) this Court held that that Section 11 of the SARFAESI Act is applicable to financial institutions for their inter-se disputes but not to a dispute with a borrower. The relevant observation reads as under: - "21 [...] Section 11 deals with resolution of disputes relating to securitisation, reconstruction or non-payment of any amount due between the bank or FI or securitisation company or reconstruction company. It further states....
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....r and thus would be disentitled to claim the benefit of Section 11 of the SARFAESI Act. The relevant observations read as under: - "7.10 [...] the SARFAESI Act does not deal with disputes between a secured creditor and a borrower; but deals with the rights of the secured creditors inter-se ... claims covered by the RDB Act are non-arbitrable, with a prohibition against waiver of jurisdiction under those statutes by necessary implication. Accordingly, disputes that would be covered by section 11 of the SARFAESI Act are those which deal with the rights of secured creditors inter-se, since the SARFAESI Act proceeds on the basis that the liability of the borrower has been crystallized and the borrower's account has been classified as a non-performing asset in the hands of the financial institution. 7.11 Though petitioner No. 1 is a financial institution, for the purposes of the present lis between the parties, petitioner No. 1 dons the hat of a borrower within the meaning of section 2(1)(f) of the SARFAESI Act ... section 11 conspicuously omits the word borrower from its text, which is a clear indication ... that a financial institution which happens to be a borrower ....
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.... any bank or financial institution in relation to such financial assistance or who has raised funds through issue of debt securities; 91. It is clear from the above definition that the Act defines 'borrower' in broad terms, meaning "any person" or pooled investment vehicle that has received financial assistance from a bank or financial institution. The definition explicitly includes those who have provided guarantees or created security interests, as well as those whose debt has been acquired by the ARC. It also extends to entities that have raised any funds through the issuance of debt securities. lender-turned-borrower will also fall within the scope of a borrower. The use of the phrase "any person" in this provision makes it clear that it does not leave out such entities who are banks but taking the loans in the capacity of a borrower. When a lender avails a loan from another bank or institution in its capacity of being a borrower, then it steps into the position of a borrower and shall be governed by the same statutory framework as a borrower is. The classification of a borrower shall be determined by the nature of the transaction rather than the inherent status of such part....
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....ication including communication through electronic means which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. 95. Similarly, Section 8 of the Act, 1996 which empowers a judicial authority to refer the parties to arbitration also stipulates that such reference shall be made if the judicial authority finds that prima-facie a valid arbitration agreement exists. The said provision reads as under: - "8. Power to refer parties to arbitration where there is an arbitration agreement.- (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, ....
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....evant observations read as under: - "26. The expression "as if" is used to make one applicable in respect of the other. The words "as if" create a legal fiction. By it, when a person is "deemed to be" something, the only meaning possible is that, while in reality he is not that something, but for the purposes of the Act of legislature he is required to be treated that something, and not otherwise. It is a well-settled rule of interpretation that, in construing the scope of a legal fiction, it would be proper and even necessary to assume all those facts on the basis of which alone such fiction can operate. The words "as if" in fact show the distinction between two things and, such words must be used only for a limited purpose. They further show that a legal fiction must be limited to the purpose for which it was created. [Vide Radhakissen Chamria v. Durga Prosad Chamria [(1939-40) 67 IA 360 : (1940) 52 LW 647 : AIR 1940 PC 167], CIT v. S. Teja Singh [AIR 1959 SC 352], Ram Kishore Sen v. Union of India [AIR 1966 SC 644], Sher Singh v. Union of India [(1984) 1 SCC 107 : AIR 1984 SC 200], State of Maharashtra v. Laljit Rajshi Shah [(2000) 2 SCC 699 : 2000 SCC (Cri) 533 : AIR 2....
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....on of a dispute as mentioned in the said provision by way of arbitration, the said provision will not apply. In other words, Section 11 of the SARFAESI Act would only apply when there is an arbitration agreement subsisting between the parties to resolve a dispute as stipulated in the said provision. The relevant observations read as under: - 101. On the contrary, the DRAT in Oriental Bank of Commerce (supra) while deciding a similar question, simpliciter held that where there is a dispute inter- se two banks, or financial institutions or securitisation/reconstruction companies or qualified institutional buyers, the same shall be resolved by way of arbitration in terms of Section 11 of the SARFAESI Act. The relevant observations read as under: - "6. Since there is a dispute between the Banks inter se, therefore, I am of the considered view that the learned DRT did not have the jurisdiction to try the Securitisation Application under the SARFAESI Act Recently, the attention of the Court was invited towards Section 11 of the SRFAESI-Act which runs as follows: '11. Resolution of disputes.-Where any dispute relating to securitisation or reconstruction or non-payment....
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.... for determination of such dispute by conciliation or arbitration [...]" 104. On the other hand, the High Court of Andhra Pradesh in D. Dhanamjaya Rao (supra) held that there is no need for any agreement in writing between the parties for determination of a dispute contemplated in Section 11 of the SARFAESI Act, and that by virtue of the said provision, it is deemed that the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration in terms of the said provision. The relevant observations read as under: - "12. From a reading of the above provision, it becomes clear that if any dispute amongst the bank or financial institution or a securitization company or reconstruction company or qualified institutional buyer, as regards Securitization or reconstruction or non-payment of any amount due including interest arises, then such dispute shall be settled by conciliation or arbitration as provided under the Arbitration Act, as if the parties to the dispute had consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly. In that, the invocatio....
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....s concerned. iv. Section 11 of the SARFAESI Act is mandatory in nature. 108. The next issue which falls for our consideration is, what is the meaning and significance of the term "shall" used in Section 11 of the SARFAESI Act? Whether, the legal import of the term "shall" used in Section 11 denotes that the provision is mandatory in nature thereby compelling recourse to arbitration in all disputes of the nature specified in the said provision if it is between the parties enumerated therein, or could the said provision be said to be "directory" particularly in light of the fact that arbitration is generally understood to be an alternative dispute resolution mechanism. 109. This Court in Delhi Airtech Services (P) Ltd. v. State of U.P. reported in (2011) 9 SCC 354 held that the general rule of interpretation requires that the word "shall" be read as "must". It observed that the term "shall" only be read as "may" where doing so would achieve the ends of legislative intent behind the substantive provision and the scheme of the entire statute in question. The relevant observations read as under: - "122. The distinction between mandatory and directory provisions is a we....
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....rdingly. Equally, it is settled law that when a statute is passed for the purpose of enabling the doing of something and prescribes the formalities which are to be attended for the purpose, those prescribed formalities which are essential to the validity of such thing, would be mandatory. However, if by holding them to be mandatory, serious general inconvenience is caused to innocent persons or general public, without very much furthering the object of the Act, the same would be construed as directory." (Emphasis supplied) 111. In Mardia Chemicals (supra) this Court underscored that although the effect of some of the provisions may be a bit harsh, yet the same had been incorporated with a view to achieve speedier recovery of the dues declared as NPAs. It further observed that the purpose of DRTs were two folds; first, to facilitate the aforesaid object of speedier recovery and secondly, to ensure that the borrowers also get a fair opportunity to get their matters adjudicated before the DRT within the time-bound framework of the SARFAESI Act. The relevant observations read as under: - "81. In view of the discussion held in the judgment and the findings and direc....
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....invoke the jurisdiction of the civil courts for frustrating the proceedings initiated by the banks and other financial institutions." ( Emphasis supplied ) 113. From the above, it is clearly that the DRTs were established for the recovery of debts due to banks and financial institutions from the defaulting borrowers. Neither the statute nor any interpretation thereof suggests that DRTs were established even for the purpose of any dispute that arises amongst the banks, financial institutions, ARCs or qualified buyers etc., relating to securitization, reconstruction or non-payment of any amount due including interest. For the same, a remedy has been provided under Section 11 of the SARFAESI Act, when such dispute would arise inter se the mentioned parties relating to securitization, reconstruction or non-payment of any amount due including interest. For the remedy of recovering the dues from the borrowers, the banks and the financial institutions are provided for a remedy under the SARFAESI Act. It was in this context, that Mardia Chemicals (supra) held that the borrower can challenge the action taken under Section 13(4) of the SARFAESI Act by filing an application under ....
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....lished when by mandatory law the parties are quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. There is no choice. The person who insists on the remedy must seek his remedy before the forum stated in the statute and before no other forum. In Transcore v. Union of India [Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116], this Court had examined the doctrine of election in the context whether an order under proviso to Section 19(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("the DRT Act") is a condition precedent to taking recourse to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("the NPA Act"). For analysing the scope and remedies under the two Acts, it was held that the NPA Act is an additional remedy which is not inconsistent with the DRT Act, and reference was made to the doctrine of election in the following terms : (Transcore case [Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116], SCC p. 162, para 64) 55. Doctrine of election to select arbitration as a dis....
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....olia (supra) further placing reliance on Transcore (supra) observed that insofar claims of banks and financial institutions as regards debt due is concerned that fall under the RDBFI Act, the same would non-arbitrable, as there is a prohibition against waiver of jurisdiction of the DRT. The relevant observations read as under: - "57. In Transcore [Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116], on the powers of the Debt Recovery Tribunal ("DRT") under the DRT Act, it was observed : (SCC p. 141, para 18) "18. On analysing the above provisions of the DRT Act, we find that the said Act is a complete code by itself as far as recovery of debt is concerned. It provides for various modes of recovery. It incorporates even the provisions of the Second and Third Schedules to the Income Tax Act, 1961. Therefore, the debt due under the recovery certificate can be recovered in various ways. The remedies mentioned therein are complementary to each other. The DRT Act provides for adjudication. It provides for adjudication of disputes as far as the debt due is concerned. It covers secured as well as unsecured debts. However, it does not rule out the appli....
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....sary implication. The legislation has overwritten the contractual right to arbitration." ( Emphasis supplied ) 117. The above exposition of law make it clear that election applies in the case where the statute provides a specific remedy that overrides general remedies. The ratio of Vidya Drolia (supra) insofar as it hold that a choice to elect arbitration as a dispute resolution mechanism would exists only if the law accepts existence of arbitration as an alternative remedy with the freedom to choose it, as naturally corollary implies that, where the law accepts existence of arbitration as the only mechanism of resolution, there arbitration will not be construed as an alternative remedy but as the only remedy available. 118. The aforesaid is particularly relevant in the interpretation of Section 11 of the SARFAESI Act as the said provision by outlining a special provision for banks, financial institutions, ARCs etc., to invoke the remedy in case of dispute related to securitization, reconstruction or non-payment of any dues indicates the intention of the legislature to create a special mechanism for resolving such disputes. We are of the considered view that the u....
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....re at a loss to understand, how the respondent bank could have ignored the aforesaid clause 3.3 of the AMRCD Memorandum and asserted that the dispute between it and the appellant bank ought to be resolved under the framework of the said memorandum. 123. Secondly, the dispute resolution mechanism envisaged under Section 11 of the SARFAESI Act has been statutorily provided and mandated. The dispute also pertains one between two banks in connection with the right of one of the banks for enforcement of a common security interest given to them by the borrower. Where such enforcement of security interest, by either bank is sought to be undertaken in terms of the SARFAESI Act, the statutory arbitration provided under Section 11 of the SARFAESI Act would immediately be attracted, as soon as there is a dispute in respect to the same with another bank, financial institution, ARC etc, as enumerated in the said provision. Section 11 of the SARFAESI Act, statutorily empowers such parties mentioned therein, to seek resolution of their dispute by way of arbitration, and their right cannot be curtailed or confined to any executive guideline or memorandum, particularly when such memorandum makes....