Arbitral Tribunal Has No Jurisdiction To Create Security Over A Property Which Has A Third Party Charge: Delhi High Court

The bench of Justice Yogesh Khanna modified an interim order of the arbitral tribunal passed under Section 17 of the A&C Act to the extent to which the order created security on the property on which a charge was already created in favour of a third party which was not present before the arbitral tribunal.

The Court also held that that registration of charge makes the charge holder a secured creditor and puts it in a preferential position as compared to all other unsecured creditors.

The appellant challenged an order passed by the arbitral tribunal under Section 17 of the A&C Act wherein the tribunal had created security over certain properties over which the appellant had a pre-existing charge. Admittedly, the appellant was not a party to the arbitration agreement and the fact that the appellant had a charge on the subject property was not brought to the notice of the tribunal and the impugned order was passed by the tribunal being unaware of such a charge.

The appellant contented that the tribunal erred in creating security on the subject property as the appellant had a pre-existing charge on it which is duly registered with the Registrar of Companies, therefore, no security could have been created on a property over which a charge exists.

It contended in terms of two loan agreement between the appellant and the respondent nos. 2 & 3 (borrowers) wherein the appellant had disbursed to the respondents a total sum of Rs. 450 crores and in the subject property was given as a security for the said amount. In terms of the agreement an escrow account was to be created wherein all the amount received as the proceeds of sale of the flats in the property would be kept to repay the loan amount. Thereafter, a charge was created on the subject property in favour of the appellant which was duly registered.

It contended that the impugned order is infringing on contractual rights of the appellant.

The respondent contended that they had invested in nine projects of the ATS Group and had entered into various agreements. They contended that their investment in the subject projects was prior in time and their interest is also secured.

The Court observed that though the agreement between the respondent no. 1 & 3 is prior in time, however, by mere agreement no charge can be created unless the same is duly registered as provided under the law. The Court held that the respondent failed to prove that they had any charge on the subject property and they were a secured creditors. On the other hand, the charge in favour of the appellant is duly registered.

The Court held that once it is determined that the appellant has a charge in its favour in respect of the subject property, it becomes a secured creditor of the respondent nos. 2&3 and enjoys a preferential position as compared to the respondent no. 1 which is an unsecured creditor.

The Court held that the arbitral tribunal has no jurisdiction to create security on a property over which a charge is created in favour of a third party.

Accordingly, the Court modified the interim order to the extent that it had created a security on the property over which a charge is created in favour of the appellant.

Case Title: Asset Reconstruction Company India Ltd v. ATS Infrastructure Limited, ARB. A. (COMM) 7 of 2022

Citation: 2023 LiveLaw (Del) 1185

Date: 20.11.2023

Counsel for the Appellant: Mr.Jayant Mehta, Sr Advocate with Mr.Manmeet Singh, Mr.Yashvardhan Bandi, Ms.Anjali Dwivedi, and Mr.Samarth Sansar, Advocates.

Counsel for the Respondents: Mr.Darpan Wadhwa, Senior Advocate with Mr.Ajay Bhargava, Mr.Aseem Chaturvedi, Ms.Warmika Trehan, Ms.Radhika Khanna, Advocates. Mr.Kartik Nayar and Mr.Krish Kalra, Advocates

Click Here To read/Download Order