Arbitrator Has No Jurisdiction To Set Aside Sale Notice Issued By Secured Creditor Under Section 13(4) Of SARFAESI Act: Delhi High Court

The bench of Justice Anup Jairam Bhambhani remarked that the matter of a notice issued under Section 13(4) of the SARFAESI Act is not arbitrable at all, and thus, the Arbitrator does not have the option to exercise any discretion under Section 17 of the Arbitration and Conciliation Act, 1996 (A&C Act) in relation to the said matter.

Since a specific right is vested in a “secured creditor” to enforce a “security interest”, by issuance of a sale notice under Section 13(4) of the SARFAESI Act, that specific right cannot be ousted by an order made by an arbitral tribunal, the Court held.

The respondents, M/s. Shipra Estate Ltd, M/s. Shipra Hotels Ltd and M/s Shipra Leasing Pvt Ltd, are claimants in the arbitral proceedings initiated against M/s. Indiabulls Housing Finance Ltd. and M/s. Edelweiss Asset Reconstruction Company Ltd.

The respondents filed applications under Section 17 of the A&C Act before the Arbitral Tribunal, seeking maintenance of status quo in relation to the securities provided by them against the loans availed from their secured creditor, M/s. Indiabulls Housing Finance (appellant no.1).

Allowing the Section 17 applications seeking interim measures, the Arbitrator set-aside the Sale Notice issued by Indiabulls under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) read with Section 8(6) of the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules). By the said Notice, Indiabulls sought to enforce its “security interest” in “Shipra Mall”, i.e., the claimant’s asset (Mall Asset).

Against the order of the Arbitral Tribunal, the appellants filed an appeal before the Delhi High Court.

The appellant, Indiabulls, submitted before the Court that it is a “financial institution” and a “secured creditor” within the meaning of Sections 2(m) and 2(zd) of the SARFAESI Act vis-à-vis the respondents/ claimants, who are the “borrower” as defined in Section 2(f) of the SARFAESI Act. It added that a “security interest” over the “secured asset”, i.e., the Mall Asset, was created in favour of Indiabulls.

Indiabulls argued that the Arbitrator, by restraining Indiabulls from confirming the sale of the Mall Asset through auction proceedings, had exceeded his jurisdiction and had stepped into the domain of the powers conferred exclusively upon the agencies under the SARFAESI Act.

While contending that it was entitled to enforce its security interest over the secured asset in terms of Section 13(4) of the SARFAESI Act, the appellant, Indiabulls, further averred that the respondents have a remedy against enforcement of the security interest by initiating proceedings under Section 17 of the SARFAESI Act before the Debts Recovery Tribunal (DRT).

Arguing that the DRT has exclusive jurisdiction to decide all matters relating to Sections 13 and 17 of the SARFAESI Act, Indiabulls averred that the jurisdiction of a “civil court” to entertain a challenge against the actions of a secured creditor, is completely barred in view of Section 34 of the SARFAESI Act.

Referring to Apex Court’s decision in Vidya Drolia & Ors. vs. Durga Trading Corporation, (2021) 2 SCC 1, the High Court reckoned that implicit non-arbitrability is established when under the statute, the parties are barred from contracting/ waiving out the jurisdiction of the designated court/public forum, as specified in the statute. The person who insists on the remedy must seek his remedy before the forum stated in the statute and before no other forum, the Supreme Court had ruled.

The Court thus concluded that since a specific right is vested in a “secured creditor” to enforce a “security interest”, by issuance of a sale notice under Section 13(4) of the SARFAESI Act, that specific right cannot be ousted by an order made by an arbitral tribunal.

Noting that the respondents have a specific remedy under Section 17 of the SARFAESI Act before a specialised tribunal, i.e., the DRT, against the sale notice issued under Section 13(4), the Court said that the doctrine of election is not available to a party to choose between the DRT or the arbitral tribunal, as a forum to oppose enforcement of the security interest.

“The doctrine of election is simply not available for a party to choose between the DRT or the arbitral tribunal as the forum for invoking its remedy against action under section 13(4) of the SARFAESI Act. In the words of Vidya Drolia (supra): “There is no choice”. The person invoking the remedy must seek it before the forum prescribed in the statute and before no other forum. This is a situation of implicit non-arbitrability, since section 17(1) specifically provides a remedy against an action under section 13(4) of the SARFAESI Act,” the bench said.

“The remedy of arbitration as an alternative to a proceeding before the DRT is not available also for the reason that there is no inconsistency or repugnancy as between the provisions of the mandatory law i.e. the SARFAESI Act and the DRT Act on the one hand, and the A&C Act on the other,” the Court added.

Holding that the matter of a notice issued under Section 13(4) of the SARFAESI Act is not arbitrable at all, the bench ruled that the Arbitrator did not have the option to exercise any discretion under Section 17 of the A&C Act in relation to the said matter. The Court added that discretion may be exercised by an arbitral tribunal only when such discretion vests in it, in the first place.

“Since, as held above, the exercise of a secured creditor’s right to enforce a security interest under the SARFAESI Act is not arbitrable at all, there was no discretion vested in the learned Arbitrator, that he could have exercised. The grant of an interim measure under section 17 of the A&C Act, which is wholly outside the scope of arbitration, cannot be permitted. This court is accordingly, within its powers under section 37(2)(b) of the A&C Act to interfere in the impugned orders,” the Court said.

Ruling that the Arbitrator had clearly exceeded his jurisdiction in setting-aside the sale notices issued by the secured creditor, the Court set aside the order passed by the Arbitrator under Section 17 of the A&C Act.

Case Title: M/s. Indiabulls Housing Finance Ltd & Anr. versus Shipra Estate Ltd

Citation: 2023 LiveLaw (Del) 170

Counsel for the Appellants: Mr. Rajiv Nayar, Senior Advocate with Mr. Rishi Agrawala, Mr. Karan Luthra, Mr. Ankit, Mr. Shravan Niranjan & Mr. Prabhav Bahuguna, Advocates

Counsel for the Respondents: Mr. Rakesh Tiku, Senior Advocate with Mr. Rudra Pratap, Mr. Ankit Kashyap, Mr. Ashish & Mr. Subhanshu, Advocates

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