Enforcement of Security Interest Against Borrower is Non-Arbitrable

[Suradhish Vats is an Associate at OliveLaw]

In the recent case of Bell Finvest India Limited v. AU Small Finance Bank Limited, the Delhi High Court had the opportunity to resolve and clarify the position concerning section 11 of the Arbitration and Conciliation Act, 1996 (‘A&C Act’) and section 11 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’).

Section 11 of the A&C Act is for the appointment of an arbitrator to adjudicate disputes. Section 11 of the SARFAESI Act provides that where any dispute relating to securitisation or reconstruction or non-payment of any amount due arises amongst parties, namely, the bank, financial institution, or asset reconstruction company or qualified buyer, such dispute shall be settled by conciliation or arbitration as provided in the A&C Act, as if the parties to the dispute have consented in writing for determination of such a dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly. This provision would apply even if an agreement between such parties does not have an arbitration clause.

In the present case, the dispute arose with respect to a Rupee Facility Agreement under which Bell Finvest India had borrowed money from AU Small Finance Bank. Bell Finvest India contended that since the dispute in the present case is between Bell Finvest India which is an ‘NBFC’, and AU Small Finance Bank, which is a ‘bank’, and they are both entities referred to in section 11 of the SARFAESI Act, it is for this reason that their dispute is amenable to arbitration under section 11. Based on this, Bell Finvest India sought the High Court’s intervention to appoint an arbitrator, as AU Small Finance Bank did not agree to the appointment of an arbitrator.

AU Small Finance Bank contended that the present dispute is a simple debtor-creditor dispute, as Bell Finvest India would fall within the meaning of ‘borrower’ under section 2(1)(f) of the SARFAESI Act as AU Small Finance Bank had extended financial assistance to the Bell Finvest India. AU Small Finance Bank contended this dispute could only be adjudicated upon by the DRT as it is for the enforcement of a ‘security interest’, as Bell Finvest India had defaulted in payment of instalments due against an outstanding loan. In light of the same, AU Small Finance Bank had taken steps under the SARFAESI Act by moving an Original Application before the DRT, Jaipur. Further, a remedy against such proceedings initiated by AU Small Finance Bank is not before an arbitral tribunal but instead before the DRT as provided under section 17 of the SARFAESI Act.

AU Small Finance Bank went on to highlight the legislative intent behind section 11 of the SARFAESI Act. It stated that section 11 consciously omits the word ‘borrower’ from its ambit, with the aim and intent that only where two lenders (both being financial institutions) have inter-se disputes in relation to a common borrower, in that event the inter-se disputes between such lenders can be referred to arbitration under section 11 of the SARFAESI Act.

The Supreme Court in Vidya Drolia v. Durga Trading Corpn , laid down the position that a litigant cannot exercise the ‘doctrine of election’ to select arbitration as an alternative remedy if it is inconsistent with mandatory and special statutes. In the present case, the dispute is to enforce the security interest under the SARFAESI Act, which is a special legislation for the securitization and reconstruction of financial assets and enforcement of security interests.

The High Court, in its judgement, held that under the Rupee Facility Agreement, the status of Bell Finvest India had been expressly defined as that of a ‘borrower’ and AU Small Finance Bank is a ‘lender’. The Rupee Facility Agreement does not contain any arbitration provision. The court referred to the Vidya Drolia, as it squarely covers the present case on both the ‘doctrine of election’ and ‘non-arbitrability’ of certain kinds of disputes. Further, the court relied on the Supreme Court’s decision in M/s. Transcore v. Union of India,  to answer what types of disputes are intended to be covered by the statutory arbitral mechanism comprised in section 11 of the SARFAESI Act. The Supreme Court in Transcore clarified that the arbitral mechanism contemplated under section 11 applies to financial institutions for their inter-se disputes but not to a dispute with a borrower, even if the borrower is a financial institution. Further, in Transcore, the Supreme Court held that the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of the jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.

In light of the above argument’s and the law laid down in Vidya Drolia and Transcore, two things come to light. Firstly, that 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. Secondly, that the SARFAESI Act provides an additional procedural dispensation, which affords a complementary remedy to that available under the Recovery of Debts and Bankruptcy Act, 1933(‘RDB Act’) for financial institutions against borrowers. The court held that the remedy of arbitration provided in section 11 of the SARFAESI Act cannot override the special remedies stipulated under the set of special laws, viz. the SARFAESI Act and the RDB Act. Therefore, even statutory arbitration cannot derogate from a remedy available to a lender for enforcing a security interest. The ‘doctrine of election’ in such a case would simply not be available to a borrower. The court in clear terms held that, matters covered by special laws, which create special rights are to be adjudicated and enforced by special forums under special procedures, in this case it would be the DRT. Thereby, such disputes are non-arbitrable; and therefore, the remedies available to a lender for enforcing a security interest cannot be encroached upon by any arbitral mechanism. Henceforth, the court dismissed the prayer of Bell Finvest India seeking reference of the dispute to arbitration.

The Delhi Court, by passing such a judgement, has ensured that the mechanism provided under the SARFAESI Act and the RDB Act is not rendered irrelevant, and the mandate of establishing the DRT is not nullified. The decision is vital because if the position taken by Bell Finvest India was upheld by the court to be tenable, no action could be brought before the DRT against a financial institution that has offered security as a borrower. The court has once again reaffirmed the position that when the implied legislative intention is to exclude arbitration because the statute creates a special right or a liability and provides for the determination of the right and liability to be dealt with by the specified courts or the tribunals specially constituted for that behalf, all questions about the said right and liability shall be determined by the court or tribunals so empowered which have been vested with the exclusive jurisdiction.

– Suradhish Vats

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