The High Court of Delhi (“High Court”) has, by a common judgement dated February 21, 2023, in a batch of appeals namely, Arb. Appeal (Comm.) No. 36 of 2022, Arb. Appeal (Comm.) No. 37 of 2022 and Arb. Appeal (Comm.) No. 38 of 2022 (“Arbitration Appeals”) arising under Section 37(2)(b) (Appealable orders) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), filed by Indiabulls Housing Finance Limited (“Indiabulls”) and Edelweiss Asset Reconstruction Company Limited (“Appellants”) against Shipra Estate Limited, Shipra Hotels Limited and Shipra Leasing Private Limited (“Respondents”) respectively, held that arbitrator has no jurisdiction to set aside sale notice issued by secured creditor under Section 13(4) (Enforcement of security interest) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).

Facts

In an arbitration proceeding involving the above-mentioned parties, the Learned Arbitrator, by an order dated June 11, 2022 (“Impugned Order”), had set-aside a sale notice dated April 29, 2022 issued by Indiabulls (“Sale Notice”) under Section 13(4) of the SARFAESI Act read with the Security Interest (Enforcement) Rules, 2002 (“SARFAESI Rules”) seeking enforcement of their “security interest” in the secured asset being Shipra Mall, Ghaziabad (“Mall Asset”). In view of the aforesaid order dated June 11, 2022, Arbitration Appeals arose before the High Court and were disposed of by order dated July 8, 2022. Thereafter, in view of the Learned Arbitrator reiterating his previous order dated June 11, 2022, the aforesaid proceedings were sought to be revived by the Appellants by way of filing of applications, namely, I.A. No. 14180 of 2022, 14179 of 2022 and 14181 of 2022. In view thereof, the High Court allowed the aforesaid applications and was pleased to take on record the Arbitration Appeals.

Subsequently, by an order dated August 30, 2022, the Learned Arbitrator clarified that the Impugned Order continues to apply, thereby prohibiting enforcement of security interest in the Mall Asset and restraining Indiabulls from confirming the sale of the Mall Asset.

In view of the above-mentioned, the Appellants approached the High Court, challenging the Impugned Order.

Issues

• Whether the Learned Arbitrator was within his powers to interdict and set aside the Sale Notice.
• Whether the Learned Arbitrator could have curtailed the rights of a secured creditor in relation to a security interest created under the SARFAESI Act, being a special statute, in relation to which the Respondents have a specific remedy under Section 17 (Application against measures to recover secured debts) of the SARFAESI Act, before the Debts Recovery Tribunal.

Arguments

Contentions raised by the Appellants:

It was contended by the Appellant that by restraining Indiabulls from confirming sale of the Mall Asset, the Learned Arbitrator has exceeded his jurisdiction and stepped into the domain of the Debts Recovery Tribunal, which is exclusively empowered to decide on the legal issues pertaining to enforcement of security interest under the SARFAESI Act. Further, the Appellant relied upon the judgment of the Supreme Court in the matter of Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] (“Vidya Drolia Judgment”), wherein it is held that the matters falling within the purview of SARFAESI Act are non-arbitrable. In order to substantiate the contentions, Indiabulls submitted that they are a “financial institution” and a “secured creditor” within the meaning of Section 2(m) and 2(zd) of the SARFAESI Act qua the Respondents, who are covered within the meaning of “borrower” in terms of Section 2(f) of the SARFAESI Act and a “security interest” has been created in favour of the Mall Asset, in terms of Section 2(zf) and Section 2(zc) of the SARFAESI Act.

Further, it was contended that Indiabulls is legally empowered to enforce its security interest over the secured asset as per Section 13(4) of the SARFAESI Act, thereby taking possession of the Mall Asset and giving effect to sale of the Mall Asset as per the terms stipulated under Rule 8 of the SARFAESI Rules.

The Appellants further contended that legal remedy against enforcement of secured asset by the secured creditor lies before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. The Appellant relied upon various judicial pronouncements in order to substantiate the aforesaid contention that, when an efficacious remedy is available to the aggrieved borrower exclusively before the Debts Recovery Tribunal, even the High Court cannot exercise extraordinary writ jurisdiction to entertain a challenge to a sale notice issued under Section 13(4) of the SARFAESI Act. Similarly, by virtue of Section 34 (Civil court not to have jurisdiction) of the SARFAESI Act, even Civil Courts are barred from entertaining any challenge to the legality of enforcement of security interest.

It was further argued that enforcement of a ‘mortgage’, which is a right in rem, cannot be decided by an arbitral tribunal. Further, it was contended that since remedy against enforcement of security interest exists under SARFAESI Act being a special statute, the Arbitration Act cannot over-ride such special remedy, and hence, the “doctrine of election” is not applicable in the present case.

Contentions raised by the Respondents:

It was contended on behalf of the Respondents that the Learned Arbitrator was well within his jurisdiction and has not entered into the domain of SARFAESI Act. The Respondent further submitted that the Learned Arbitrator was empowered to pass such orders which were necessary to preserve the asset, which is the subject-matter of arbitration by way of interim measure of protection, so that the arbitral proceedings are not rendered infructuous. Further, the Respondents contended that the Learned Arbitrator had only prohibited Indiabulls, being the respondent party in the Arbitration proceeding, from confirming the sale of the Mall Asset, through subsequent auction proceedings, without impeding their right to issue sale notice or call for bids.

Further, it was submitted that once the parties had chosen to refer the dispute to arbitration and submit themselves before the Learned Arbitrator, the Appellant in the present Arbitration Appeal have by implication, waived their right to file a civil suit or to adopt remedies under the SARFAESI Act.

Further, the Respondent made an attempt to demonstrate that the Vidya Drolia Judgment is factually distinguishable from the present case. More particularly, it was contended that Vidya Drolia Judgment has been pronounced in the context of rent control legislation and has no relation to SARFAESI Act.

Further, the Respondents sought reliance upon the principle of “doctrine of election”, thereby submitting that if there exist remedies under two statutes, a party is free to elect any one of them. In the context of the present case, it was argued that once the parties to the dispute had elected to resolve their disputes under the Arbitration Act, remedies under SARFAESI Act would no more be available to them.

Observations of the High Court

At the outset, the High Court made it clear that by way of the present judgment, the High Court does not propose to decide on the arbitrability or non-arbitrability of matters covered under SARFAESI Act at large, since the same would depend upon the nature of the dispute and other factors.

In the present case, the High Court relied upon the Vidya Drolia Judgment, and came to the finding that since Section 13(4) of the SARFAESI Act provides for a specific right vested in the secured creditor to enforce security interest, by issuance of sale notice, the aforesaid right cannot be ousted by an order passed by an arbitral tribunal. Further, the High Court observed that the remedy available to the borrower aggrieved by enforcement of security interest at the behest of the secured creditor lies before the Debts Recovery Tribunal under Section 17 of the SARFEASI Act. In view of the above-mentioned, the High Court observed that the “doctrine of election” is not applicable in the present case, since the question of choice does not arise. It was further observed that the question of remedy under the Arbitration Act as an alternative to a proceeding before the Debts Recovery Tribunal does not arise, since there is no inconsistency or repugnancy before the provisions of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, 1993 on the one hand and the Arbitration Act on the other hand.

Further, the High Court observed that the challenge to a sale notice issued under Section 13(4) of the SARFAESI Act is non-arbitrable and hence, the Learned Arbitrator had no discretion or jurisdiction to pass any order in this regard. Therefore, grant of an interim measure under Section 17 of the Arbitration Act, which is wholly outside the scope of arbitration, cannot be permitted. Thus, the High Court observed that it is empowered under Section 37(2)(b) of the Arbitration Act to interfere in the Impugned Orders.

Decision of the High Court

In view of the aforesaid observations and precedents, the High Court held that the Learned Arbitrator clearly exceeded his powers and jurisdiction in interdicting and setting aside sale notices issued by Indiabulls. Accordingly, the High Court was pleased to set aside the aforesaid orders.

VA View:

By way of the present judgment, the High Court has answered a pertinent question of law and clarified the legal position that in the event of the borrower being aggrieved by enforcement of security interest by the secured creditor, the remedy would exclusively lie before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act and no other forum including arbitral tribunal can step into the unchartered territory of SARFAESI regime, for which purpose, only the Debts Recovery Tribunal was empowered to grant appropriate relief(s).

This judgment is relevant, particularly for the reason that it reiterates the exclusivity of jurisdiction and powers vested with the Debts Recovery Tribunal in matters falling within the domain of SARFAESI Act (which is a special statute) and makes it clear that even an arbitral tribunal, whilst deciding an application seeking interim reliefs, cannot grant such interim measures, which are supposed to be adjudicated upon by the Debts Recovery Tribunal.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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