Court Has No Jurisdiction To Review Order Passed Under Section 11 of A&C Act: Delhi High Court

The bench of Justice Neena Bansal Krishna, while dismissing a review petition filed against the arbitral reference made under Section 11, held that in view of the decision of Apex Court in M.D. Frozen Foods Exports Pvt Ltd versus Hero Fincorp Ltd. (2017), disputes covered under the SARFAESI Act in respect of which proceedings under the SARFAESI Act are initiated, can be referred to arbitration.

The Court remarked that though M.D. Frozen Foods (2017) is specifically mentioned in Vidya Drolia (2020) but it has not been overruled and thus, there is no ground to review the High Court’s order under Section 11.

The petitioner- M/s Diamond Entertainment Technologies, filed a review petition against the order of the Delhi High Court passed in an application filed by the respondent- Religare Finvest, under Section 11 of the A&C Act.

The petitioner, M/s Diamond Entertainment, contended that the reliance placed by the High Court, while allowing the Section 11 application, on HDFC Bank Ltd. versus Satpal Singh Bakshi (2012), which has been overruled by the Apex Court in Vidya Drolia and Ors. versus Durga Trading Corporation (2020), is an error apparent on the face of the record. The reliance placed on an overruled judgement is an error apparent on the face of the record which is reviewable under Order XLVII of CPC, the petitioner pleaded.

The petitioner argued that after the respondent had made defaults in the loan availed by it, the matter was referred to arbitration and an award was passed for recovery of the loan amount. Thereafter, the petitioner claimed that the respondent again defaulted in making payments against the restructured loan. Accordingly, proceedings were initiated by the petitioner under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and a demand notice under Section 13 (2) of the SARFAESI Act was issued by the petitioner, which was followed by a Possession Notice.

Assailing the amounts claimed by the petitioner, the respondent- Religare Finvest, had filed an application under Section 11 of the A&C Act. The Delhi High Court in its Order dated 14.10.2022 had allowed the application and referred the parties to arbitration.

The petitioner, M/s Diamond Entertainment, submitted before the High Court that arbitral reference cannot be made with respect to the matters covered under the SARFAESI Act. It argued that the Apex Court in Vidya Drolia (2020) has categorically observed that the action taken under the SARFAESI Act is not amenable to arbitration.

The petitioner further argued that since a final arbitral award was already passed in relation to the dispute, second arbitral proceedings for the same dispute could not be initiated.

The respondent, Religare Finvest, contended before the Court that there is no provision under the A&C Act for seeking review of the orders passed under the Act.

The High Court ruled that orders made under a Section 11 application are in exercise of the statutory powers as defined under the A&C Act. Thus, any review of the same can be only made within the parameters of the A&C Act. Since, there is no provision of review in the A&C Act, the Court has no jurisdiction to review its order passed in a Section 11 application, the Court said.

Referring to the grounds raised by the petitioner for seeking review, the Court held that the said grounds were in the realm of an appeal as they sought to challenge the findings of the Court. The bench added that the said grounds cannot be brought within the scope of “error apparent on the face of the record” and thus, the order is not amenable to review.

The bench reckoned that the Supreme Court in M.D. Frozen Foods Exports Pvt Ltd versus Hero Fincorp Ltd. (2017) has held that disputes, even though agitated before the Debt Recovery Tribunal (DRT), are still arbitrable because even after the proceedings under SARFAESI Act have been satisfied, there may still be certain dues left, which would be required to be determined and recovered.

Further, the Apex Court in Bank of Rajasthan Ltd. versus VCK Shares & Stock Broking Services Ltd. (2022) had laid down that Section 17 of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) bars the jurisdiction of the Civil Court only in respect of the application filed by the Bank/ Financial Institution. No jurisdiction has been conferred on DRT to try independent suits or proceedings initiated by the borrower against Banks/ Financial Institutions, the Apex Court had held.

The bench concluded that the observations made by the Supreme Court in Vidya Drolia (2020) that the claims of banks and financial institutions covered by the DRT Act are not arbitrable as there is a prohibition against waiver of DRT’s jurisdiction, are not applicable to the facts in the present case. The Court took note that in the present case, it is the borrower (respondent) who has filed an application under Section 11 of the A&C Act, and not the Financial Institution (petitioner).

“The observations made in Vidya Drolia as stated above, are not applicable to the facts in hand and is distinguishable as it is the borrower/ respondent who had brought its disputes for resolution through Arbitration by filing the application under S.11 of the Act, 1996 and not the Bank/ Financial Institution to whom The RDB Act is applicable.”

Referring to Section 11 of SARFAESI Act, the Court observed that resolution of disputes through arbitration is recognized even under the SARFAESI Act, and there is no absolute bar for referral of disputes which may be covered under the SARFAESI Act to arbitration.

“As has been argued, that even though HDFC Bank Ltd. (Supra) has been over ruled, the law as enunciated in M.D. Frozen Foods (Supra) still is good law. Though M.D. Frozen Foods (Supra) is mentioned specifically in Vidya Drolia (Supra) but it has not been overruled and there is no ground to review the impugned Order,” the Court said.

The Court thus concluded that there was no error apparent on face of the record nor were the findings made by the Court under the Section 11 application in contravention of the observations made in Vidya Drolia (2020). The Court thus dismissed the review petition.

Case Title: M/s Diamond Entertainment Technologies Private Limited & Ors. versus Religare Finvest Limited

Citation: 2023 LiveLaw (Del) 27

Counsel for the Petitioner: Mr. J.S. Bakshi, Sr. Advocate with Mr. Praveen Sharma, Mr. Abhishek Mohan and Mr. N. Bakshi, Advocates

Counsel for the Respondent: Mr. Dhruv Chawla, Ms. Ridhi Pahuja and Mr. Lokesh Mittal, Advocates

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