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* IN THE fflGH COURT OF DELHI AT NEW DELHI
% DECIDED ON: 05.08.2016
+ FAQ (OS) (COMM) 60/2016, CM APPL.28073-28075/2016
NEIL SINGH CHAHAL Appellant
Through: Ms. Anita Sahani withMr. KunalBahri, Advocates.
Through: Ms. Maninder Acharya, Sr. Advocate with
Mr. Vikas Chopra, Mr. Umang Mittal, Advocates along with Mr. Parth Sachdeva, representative on behalfofrespondent/KMPL.
HON'BLE MS. JUSTICE DEEPA SHARMA
S.RAVINDRA BHAT. J.fORAL^
JUDGMENT
1. Issue notice. Mr. Vikas Chopra, Advocate accepts notice. With consent of counsel fortheparties, the appeal was finally heard.
2. The appellant is aggrieved by an order whereby the learned Single Judge directed the sale of property bearing nos.347 and 348 admeasuring 1366 Sq. Yds. at New Jauhar Nagar within the MC limits ofJalandhar, Punjab.
3. The brief facts necessary to decide the case are that the appellant had borrowed amounts through various credit facilities extended by the respondent Kotak MahindraPrime Limited (hereafter referred to as "KOTAK"). The order discloses that in the previous proceedings, i.e., OMP 1208/2013 and OMP 1381/2014 directions towards securing properties and also inventorizing of movable FAO (OS) (COMM) 60/2016 Page[1] 2016:DHC:8579-DB properties were made from time to time. Apparently, Kotak had even instituted two contempt proceedings, i.e.. Contempt Case No.70/2013 and 183/2013. The service of notices/summons in these proceedings had not been completed. On 12.03.2014 in OMP 206/2014, the Court in modification of an earlier order had directed symbolic possession of the said plots to be taken on behalf of Kotak. This was further to an attachment of the property; all these proceedings were in the context of an application moved by Kotak under Section 9 of the Arbitration and Conciliation Act, 1996 (hereafter "the Act").
4. By the impugned order, the learned Single Judge directed sale ofthe property in the following terms: -
5. The appellant's grievance is that during the pendency of arbitration proceedings and the given circumstances, the Single Judge could not have passed the order which virtually amounted to finally determining the entire dispute, to its prejudice. It is also contended that such an order is impermissible under Section 9 of Arbitration & FAO (OS) (COMM) 60/2016 Page[2] Conciliation Act.
6. Learned senior counsel for the respondents, on the other hand, urges that this Court should not interfere with the impugned order. She relies upon the authority of the Bombay High Court m National Shipping Company v. Sentrans Industries Limited, AIR 2004 Bom 136, Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd. (2007) 7 see 125 and C.V. Rao & Ors. v. Strategic Port Investments KPC (FAO (OS) 203/2014, decided on 01.09.2014). It was submitted that Section 9 is unconstrained by the considerations which normally weigh with the Civil Court while dealing with interlocutory matters. Unlike interlocutory applications which are to be dealt within the context of specific provisions of the Code of Civil Procedure, such as Order XXXIX which also contains conditions, Section 9 is of wider nature and allows the Court greater discretion and flexibility. It was, therefore, submitted that the Court exercising power under Section 9 is in no manner prevented from directing the sale of the property. It was asserted that the impugned order is correct inasmuch as the ultimate objective is to ensure that the interests of the parties seeking such relief are secured in the ultimate event of its success, rather than defeating it.
7. We notice that a reference under the Arbitration and Conciliation Act, 1996 is pending adjudication and the parties have filed pleadings. The question is whether in such context the power under Section 9 could have been exercised in the manner that the learned Single Judge did in the present case.
8. Kotak is no doubt right to the extent it contends that power FAO (OS) (COMM) 60/2016 Page 3 under Section 9 is unfettered andallows considerable flexibility to the Court in granting reliefs. The conditions which the Civil Courts have to comply with, for instance, in issuing aJ interim injunctions and directing attachment of properties - under Orders XXXVIII and XXXIX CPC do not apply or bind the Court, exercising jurisdiction under Section 9. However, at the same time, this proposition does not lead to the conclusion that the Court exercising purely interlocutory powers can order such sale virtually deciding therights as it were ofthe parties.
9. The Supreme Court's judgment in BoozAllen & Hamilton Inc.
V. SBI Home Finance Ltd., (2011) 5 SCC 532 in this context is decisive; it has even gone to the extent of holding that where mortgages are in issue, the exclusive and only forum to decide it is the Civil Court. The following declaration of law can be usefully quoted: -
FAO (OS) (COMM) 60/2016 Page 4 by private fora (Arbitral Tribunals). We may briefly refer to some ofthe provisions which leadustosuch a conclusion.
48.1. Rule 1 of Order 34provides thatsubject to the provisions of the Code, all persons having an interest either in the mortgage security orin the right ofredemption shall have to be joined asparties to any suit relating to mortgage, whether they areparties to the mortgage or not. The object ofthis rule is to avoid multiplicity ofsuits and enable all interestedpersons, to raise their defences or claims, so that they could also be taken note of while dealing with the claim in the mortgage suit and passing a preliminary decree. Aperson who has an interest in the mortgage security or right or redemption can therefore make an application for being impleaded in a mortgage suit, and is entitled to be made a party. But if a mortgage suit is referred to arbitration, a person who is not a party to the arbitration agreement, but having an interest in the mortgaged property orright ofredemption, can not get himselfimpleaded as a party to the arbitration proceedings, nor get his claim dealt with in the arbitration proceedings relating to a dispute between the parties to the arbitration, thereby defeating the scheme relating to mortgages in the Transfer of Property Act and the Code. It will also lead to multiplicity ofproceedings with the likelihood ofdivergentresults. 48.[2] Inpassing apreliminary decree andfinal decree, the court adjudicates, adjusts and safeguards the interests not only ofthe mortgagor and mortgagee but also puisne/mesne mortgagees, persons entitled to equity of redemption, persons having an interest in the mortgagedproperty, auction purchasers, persons inpossession. An arbitral tribunal will not be able to do so. 48.[3] The court can direct that an account be taken ofwhat is due to the mortgagee and declare the amounts due and direct that ifthe mortgagor pays into court, the amount sofound due, on or before such date as the court mayfix (within six months from the date on which the court confirms the account taken or from the date on which the court declares the amount due), the petitioner shall deliver the documents and if necessary re-transfer the property to the defendant; andfurther direct that ifthe mortgagor defaults in payment ofsuch dues, then the FAO (OS) (COMM) 60/2016 P"9e 5 c mortgagee will be entitled to final decree for sale of the property orpart thereofandpay into court the sale proceeds, and to adjudge the subsequent costs, charges, expenses and interest and direct that the balance be paid to mortgagor/defendant or other persons entitled to receive the same. An arbitral tribunal will not beable todoso. 48.[4] Where in a suitfor sale (or in a suitforforeclosure in which sale is ordered), subsequent mortgagees or persons deriving title from, or subrogated to the rights of any such mortgagees are joined as parties, the court while making the preliminary decreefor sale under Rule 4(1), couldprovidefor adjudication of the respective rights and liabilities of the parties to the suit in a manner andform setforth in Form Nos. 9, 10, and 11 ofappendix 'D' to the Code with such variations as the circumstances of the case may require. In a suit for foreclosure in the case of an anomalous mortgage, if the plaintiffsucceeds, the court may, at the instance ofanyparty to the suit or any otherparty interested in the mortgage security or the right ofredemption, pass alike decree in lieu ofadecree for foreclosure, on such terms as it thinksfit. But an arbitral tribunal will not be able to do so. 48.[5] The court has thepower under Rule 4(2), on good cause beingshown andupon terms to befixed by it,from time to time, at any time before afinal decree ispassed, extendthe timefixed forpayment ofthe amountfound or declareddue or the amount adjudged due in respect ofsubsequent costs, charges, expenses and interest, upon such terms as it deems fit. The Arbitral Tribunal will have no suchpower.
49. Adecreefor sale ofa mortgagedproperty as in the case ofa decree for order ofwinding up, requires the court to protect the interests ofpersons other than the parties to the suit/petition and empowers the court to entertain and adjudicate upon rights and liabilities of third parties (other than those who are parties to the arbitration agreement). Therefore, a suitfor sale, 28foreclosure or redemption ofa mortgaged property, should only be tried by apublic forum, and not by an arbitral tribunal. Consequently, itfollows that the court where the mortgage suit ispending should not refer FAO (OS) (COMM) 60/^6 —— Page 6 theparties to arbitration.
50. The appellant contended that the suit ultimately raises the following core issues, which can be decided by aprivate forum: (i) Whether there is a valid mortgage or charge in favour ofSBI? (ii) What is the amount due to SBI? and (Hi) Whether SBI couldseek eviction ofappellantfrom theflat, even if it is entitled to enforce the mortgage/charge? It was submitted that merely because mortgage suits involve passing ofpreliminary decrees and final decrees, they do not get excluded from arbitrable disputes. It is pointed out that the arbitral tribunals can also make interim awards deciding certain aspects ofthe disputesfinally which can be equated to preliminary decrees granted by courts, and the final award made by the arbitrator, after detailed accounting etc. could be compared to the final decree passed by courts. It is therefore contended that there is no impediment for the parties to mortgage suits being referred to arbitration under section 8of the Act.
51. Ifthe three issues referred by the appellant are the only disputes, it may be possible to refer them to arbitration. But a mortgage suit is not only about determination ofthe existence ofthe mortgage or determination ofthe amount due. It is about enforcement ofthe mortgage with reference to an immovable property and adjudicating upon the rights and obligations of several classes ofpersons (referred to inpara 48.[2] above), who have the right to participate in the proceedings relating to the enforcement of the mortgage, vis-a-vis the mortgagor and mortgagee. Even if some of the issues or questions in a mortgage suit (as pointed out by the appellant) are arbitrable or could be decided by a private forum, the issues in a mortgage suitcannot be divided.
52. The following observations ofthis court in a somewhat different context, in Sukanya Holdings (P) Ltd. v. Jayesh H.Pandya are relevant (SCC p.536 Para 16)
FAO (OS) (COMM) 60/2016 7 difficult to give an interpretation to Section 8 under which bifurcation ofthe cause of action, that is to say, the subject-matter ofthe suitor insome cases bifurcation of the suit between parties who are parties to the arbitration agreement and others ispossible. This would be laying down a totally newprocedure notcontemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there isno such indication inthe language, itfollows that bifurcation of the subject-matter of an action brought beforeajudicial authority is not allowed. " Conclusion
53. Having regard to ourfinding on question (iv) it has to be held that the suit being one for enforcement of a mortgage by sale, it should be tried by the court and not by an atiitral tribunal. Therefore we uphold the dismissal of the application under section[8] oftheAct, thoughfor different reasons. "
10. In the present instance, we noticed that Kotak, i.e., the respondent is not a public scheduled bank. It cannot, therefore, securitize the debt invoking the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI ACT"). It, however, seeks to enforce its claim through arbitration. This Court is not aware as to whether the claims before the Arbitrator encompass enforcement of the mortgage security. If it does, then the law declared in Booz Allen (supra) would apply. However, if Kotak is seeking to enforce its claim as a creditor, then in such an event, it would have to await a final determination of the merits of the parties in respect of claim and counter claims and thereafter execute theAward subject to objections. FAO (OS) (COMM) 60/2016 Page 8 if any, under Section 34. That such recourse is available to the respondent and that after the final determination in an Award, SARFAESI Act proceedings are not available, in the opinion ofthis Court, bars the Court from exercising jurisdiction under Section 9 of the Arbitration and Conciliation Act to direct a sale of immovable property, which has the effect ofa final order that would act as afait accompli and tothe prejudice ofone ofthe parties inArbitration.
11. In the circumstances, we modify the impugned order to the extent that the direction for sale of the property is hereby vacated. However, the attachment and other constraints placed upon the property are hereby maintained.
12. During the course ofthehearing, counsel forthe appellant had made a without prejudice offer to settle the respondent Kotak's dues by onetime payment of ?7 Crore. Counsel for the respondents, however, stated that this offer is not acceptable having regard to the fact that the appellant had paid ?11.69 Crores at an earlier stage through cheques which was laterdishonoured - a fact, disputed bythe appellant.
13. The appeal is allowed to the above extent.
S. RAVINDRA BHAT
(JUDGE) AUGUST 05,2016/vite/ DEEPf SHARMA (JUDGE) FAO (OS) (COMM) 60/2016 Page 9