Bell Finvest India Limited & Ors. v. A U Small Finance Bank Limited

2. Notice on this petition was issued on 07.04.2021; whereupon counter-affidavit dated 05.07.2021 was filed by the respondent.

3. Mr. Sanjeev Bhandari, learned counsel for the petitioner has premised his submissions on section 11 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 („SARFAESI Act‟ for short), which, counsel submits, creates a statutory arbitration agreement between the parties. For completeness, it may be recorded that the Rupee Facility Agreement in itself does not contain an arbitration clause.

4. The essential submissions made on behalf of the petitioners in support of their petition under section 11 of the A&C Act are the following: 4.[1] That petitioner No. 1 is a Non-Banking Finance Company („NBFC‟ for short) registered with the Reserve Bank of India, and is accordingly a „financial institution‟ within the meaning of section 2(1)(m)(iv) of the SARFAESI Act, which entitles the petitioners to invoke arbitration under section 11 of the SARFAESI Act, since the latter provision amounts to a statutory arbitration agreement for settlement of disputes “amongst … the bank, or financial institution, or asset reconstruction company or qualified buyer … ”. The submission is that since the dispute in the present case is between petitioner No. 1, an NBFC, and the respondent, which is a bank, and they are both entities referred to in section 11 of the SARFAESI Act, their inter-se disputes are amenable to arbitration under section 11; 4.[2] That the proceedings filed by the respondent before the learned Debt Recovery Tribunal, Jaipur („DRT, Jaipur‟ for short) by way of O.A. No. 1442/2019, which were filed after declaring petitioner No. 1‟s assets/accounts as a non-performing asset („NPA‟ for short) on 18.12.2019, and all other consequential and related proceedings, including the issuance of show cause notice for declaring petitioner No. 1 as „wilful defaulter‟, cannot stand in the way of the petitioners invoking the remedy in arbitration. It is stated that vide invocation notice dated 08.02.2021, the petitioners have invoked arbitration; and since by its reply dated 15.02.2021 the respondent has failed to agree to the appointment of a sole arbitrator from a panel of three arbitrators proposed by the petitioners in the invocation notice, the present petition seeking court intervention for seeking such appointment is maintainable.

5. On the other hand, opposing the appointment of an arbitrator, Mr. Shivam Singh, learned counsel for the respondent submits, that the petition deserves to be dismissed on the following grounds: 5.[1] That the respondent‟s claim against the petitioners is simply for recovery of a debt due by petitioner No. 1 to the respondent; and the dispute is a simple debtor-creditor dispute, with petitioner No. 1 being a “borrower” within the meaning of section 2(1)(f) of the SARFAESI Act. It is submitted that even though petitioner No. 1 is a “financial institution” as defined under section 2(1)(m) of the SARFAESI Act, it also comes within the ambit of a “borrower” since the respondent has extended financial assistance to petitioner No. 1; 5.[2] That the respondent has invoked proceedings under section 13 of the SARFAESI Act for enforcement of a „security interest‟ created by petitioner No. 1 in its favour, by reason of petitioner No. 1 having defaulted in payment of installments due against an outstanding loan. The remedy available to petitioner No. 1 against such proceedings initiated by the respondent is under section 17 of the SARFAESI Act, which remedy would lie before the learned DRT, Jaipur; 5.[3] That the attempt of petitioner No. 1 to draw a distinction between the proceedings pending before the learned DRT, Jaipur and the disputes sought to be referred to arbitration, is a false distinction, inasmuch as both disputes arise from the same Rupee Facility Agreement and from the same transaction, under which the respondent had advanced to petitioner No. 1 a credit facility of Rs. 10 crores; and, it is noteworthy that petitioner No. 1 has failed to bring on record any agreement, other than the Rupee Facility Agreement, from which the present disputes may be said to arise. It is argued, that as held by the Hon‟ble Supreme Court in Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya[1] it is impermissible to bifurcate a cause of action or the subject matter of an action, making only one part of a dispute arbitrable. It is pointed-out that this principle has been affirmed in the recent decision of Hon‟ble Supreme Court in Vidya Drolia vs. Durga Trading Corpn.2; 5.[4] That section 11 of the SARFAESI Act 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 are referable to arbitration under section 11 of the SARFAESI Act. The submission is that if every dispute between a lender and a borrower, who (latter) happens to be a financial institution, seeking a money decree and enforcement of a security interest becomes arbitrable under section 11, that would render the entire mechanism provided under the SARFAESI Act and under the Recovery of Debts and Bankruptcy Act, 1993 („RDB Act‟ for short) irrelevant and would nullify the mandate for establishing the DRT in the first place. If this were the position, no action could be brought before the DRT against a financial institution that has offered security as a borrower; 5.[5] That the interpretation of section 11 of the SARFAESI Act must turn upon the „fourfold test‟ for a non-arbitrable dispute as laid down in Vidya Drolia (supra), and must also be in consonance with the settled position of law as enunciated in Vidya Drolia, namely 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, petitioner No. 1 has also participated in the proceedings before the learned DRT, Jaipur and is now attempting to elect arbitration, which is impermissible in terms of the law laid-down in Vidya Drolia; 5.[6] That the present dispute is a simple case of credit default on the part of petitioner No. 1, against which the respondent is entitled to enforce the security interest created it its favour under the SARFAESI Act, which is a special legislation for securitization and reconstruction of financial assets and for enforcement of security interests. The respondent has invoked its remedies before the learned DRT, Jaipur, which tribunal is seized of the matter and hearings before it are at the final stages; 5.[7] That other things apart, in any case, the Rupee Facility Agreement confers exclusive jurisdiction for all disputes upon courts in Jaipur and, even if there is an arbitration agreement between the parties by operation of section 11 of the SARFAESI Act, in line with the view taken in Aarka Sports Management Pvt. Ltd. vs. Kalsi Buildcon Pvt. Ltd.,[3] since there is no covenant stipulating any „seat‟ of arbitration, the seat of arbitration is required to be determined as per section 2(1)(e) of the A&C Act read with section 20 of the Code of Civil Procedure, 1908. In the present case, the loan in question was sanctioned by the Mansarovar Branch, Jaipur; the registered office of the respondent is at Jaipur; and no part of the cause of action has arisen in Delhi. Therefore, the disputes between the parties have no territorial basis in Delhi and this court accordingly has no territorial jurisdiction to entertain the present petition even on that count; 5.[8] That if the dispute was arbitrable, the petitioners ought to have availed remedies under the A&C Act; but instead, the petitioners themselves have chosen to approach the Civil Court in Rohini by way of Civil Suit bearing C.S. No. 247/2020, and have therefore „elected‟ the remedy of a civil forum and thus abandoning arbitration. (2020) 271 DLT 194

6. Before proceeding further to decide the contentions raised on merits, a peculiar circumstance that has arisen in the present matter needs to be addressed. That peculiar circumstance is this: while the petitioner asserts that there is an arbitration agreement with the respondent created by section 11 of the SARFAESI Act, the respondent disputes it. However, the respondent says, that if there were to be an arbitration agreement between the parties by reason of section 11 of the SARFAESI Act, the territorial jurisdiction over such arbitral proceedings would have to be decided upon a conjoint reading of section 2(1)(e) of the A&C Act and section 20 of the CPC. Now, on point of fact, the Branch Office of the respondent which has dealt with petitioner No.1 is situate at Delhi (see Schedule 4 to the Rupee Facility Agreement); and the agreement itself was stamped and executed at Delhi. Accordingly, it cannot be said that the agreement and the transaction between the parties has no territorial basis in Delhi, within the jurisdiction of this court. Besides, none of the parties has seriously argued that this court does not have territorial jurisdiction to entertain the present petition. In view of the circumstances obtaining in the case, this court has proceeded to decide the parties‟ contentions on merits.

7. While extensive submissions have been made by learned counsel appearing for the parties based on the averments contained in the petition, in the opinion of this court, the relevant aspects of the matter on which the decision of the present petition hinges, are the following: 7.[1] Under the Rupee Facility Agreement the status of petitioner NO. 1 has been expressly defined as that of a “borrower”; and the respondent is the “lender”, with petitioners Nos. 2 to 4 being the “guarantors”; 7.[2] The fact that petitioner No. 1 is an NBFC is also expressly acknowledged in the Rupee Facility Agreement, without in any way detracting from its position as a borrower; 7.[3] The Rupee Facility Agreement does not contain any arbitration provision; 7.[4] The disputes between the parties have admittedly arisen by reason of default on the part of petitioner No. 1 to repay the loan due under the Rupee Facility Agreement; 7.[5] It is also not in dispute that a „security interest‟, as defined in section 2(1)(zf) of the SARFAESI Act, was created by petitioner No. 1 in favour of the respondent as part of the loan transaction comprised in the Rupee Facility Agreement; to enforce which, the respondent has taken steps under the SARFAESI Act by moving an Original Application before the learned DRT, Jaipur. Although other related proceedings are also stated to have been filed inter-alia by the petitioners before the learned Debt Recovery Appellate Tribunal, New Delhi, the details of those proceedings are not relevant for purposes of the present decision, except to notice that the petitioners as well as the respondent are locked in various legal proceedings under the SARFAESI Act and the RDB Act; 7.[6] The present petition under section 11 of the A&C Act is premised upon a notice dated 08.02.2021 invoking arbitration issued by the petitioners to the respondent, based not upon any independent arbitration agreement but relying upon section 11 of the SARFAESI Act; 7.[7] The contentions raised in the invocation notice have, of course, been disputed and denied by the respondent vide its reply dated 15.02.2021. 7.[8] The issue of arbitrability of disputes in cases where special statutes govern the field has been enunciated by the Hon‟ble Supreme Court in the seminal decision in Vidya Drolia (supra), the following portions whereof squarely cover the present case, both on the issue of „doctrine of election‟ and „non-arbitrability‟ of certain kinds of disputes: