Partly allowed

Neil Singh Chahal v. Kotak Mahindra Prime Ltd.

Delhi HC5 Aug 2016FAO(OS) (COMM)/60/2016

Case brief

AI extract

What is this about?

The court modified an impugned order directing the sale of property during pending arbitration. It held that directing sale under Section 9 creates a fait accompli barring appeal, preventing the Arbitral Tribunal from adjudicating mortgage and related rights.

What did the court decide?

The direction for sale of the property was vacated, while the attachment and constraints on the property were maintained.

Neil Singh Chahal Vs Kotak Mahindra Prime Ltd. — Arbitration | Delhi HC (2016)

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Signature Not Verified Digitally Signed By:AM UL YA

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propertieswere made from time to time. Apparently,Kotak had even institutedtwo contemptproceedings,i.e.. ContemptCase No.70/2013 and 183/2013. The service of notices/summons in these proceedings had not been completed.On 12.03.2014in 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 furtherto 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").

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By the impugned order, the learned Single Judge directedsale of the property in the following terms: -

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"9. Mr. Virendra Mehta, Advocate (Mobile 9811151865) is appointed as the Receiverwho will take the necessary stepsfor sale of property bearing plots No.347 and 348, total admeasuring about 1366.00 Sq. Yards, situated at New Jawahar Nagar, within MC limits of Jalandhar, Punjab. The petitioner shall provide all requisite co-operation in this regard. The sale proceeds shall be deposited by the Receiver with the Registrar General of this Court in the Fixed Deposit. All the expenses for the said purpose shall be borne by the petitioner at present. The fee of the Receiver is fixed at Rs.1,50,000/- to be paid by the petitioner as well as all expenses to be incurredfor thepurpose of complying the order. Thereport befiled by the Receiver on or before the next date. "

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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 &

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Conciliation Act.

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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.

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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

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under Section9 is unfetteredand allows considerableflexibilityto the Court in granting reliefs. The conditions which the Civil Courts have to comply with, for instance, in issuing aJ interim injunctionsand directing attachment of properties - under Orders XXXVIII and XXXIX CPC do not apply or bind the Court, exercisingjurisdiction under Section 9. However, at the same time, this propositiondoes not lead to the conclusion that the Court exercising purely interlocutorypowers can order such sale virtuallydecidingthe rights as it were of the parties.

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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 mortgagesare in issue,the exclusiveand only forum to decideit is the Civil Court. The following declaration of law can be usefully quoted: -

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"47. The scheme relating to adjudication of mortgage suits containedin Order34 of the Code of CivilProcedure,replaces some of the repealedprovisions of Transfer of Property Act, 1882 relating to suits on mortgages (section 85 to 90, 97 and 99) and alsoprovidesfor implementationof some of the other provisionsof that Act (section92 to 94 and 96). Order24ofthe Code does not relate to executionof decrees, butprovidesfor preliminaryandfinal decreestosatisfythe substantiverightsof mortgageeswithreferenceto their mortgagesecurity.

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The provisions of the Transfer of Property Act read with Order 34 of the Code, relatingto the procedureprescribedfor adjudicationof the mortgage suits, the rights of mortgagees and mortgagors,the parties toa mortgagesuit, and the powers of a court adjudicatinga mortgagesuit, make it clear that such suits are intended to be decided by public fora (Courts) and therefore, impliedly barred from being referred to or decided

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by privatefora (Arbitral Tribunals). We may briefly refer to some oftheprovisionswhich leadusto such a conclusion. 48.1. Rule 1 of Order34providesthatsubjectto the provisions of the Code, all persons having an interest either in the mortgagesecurityor in the rightofredemptionshallhave to be joinedas partiesto any suit relatingto mortgage,whetherthey arepartiesto the mortgageor not. The objectof this rule is to avoid multiplicityofsuits and enable all interestedpersons, to raise their defencesor claims, so that they couldalso be taken note of while dealingwith the claim in the mortgagesuit and passinga preliminarydecree. Aperson who has an interestin the mortgage security or right or redemption can therefore make an applicationfor being impleadedin 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 arbitrationagreement, but havingan interestin the mortgaged propertyor right ofredemption,can not get himselfimpleaded as a party to the arbitrationproceedings, nor get his claim dealt with in the arbitrationproceedingsrelating to a dispute between the parties to the arbitration, thereby defeating the scheme relating to mortgages in the Transferof PropertyAct and the Code. It will also lead to multiplicityof proceedings with the likelihoodof divergentresults.

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48.2 Inpassinga preliminarydecreeandfinal decree, the court adjudicates,adjustsandsafeguardsthe interestsnot only ofthe mortgagorand mortgagee but also puisne/mesnemortgagees, persons entitled to equity of redemption, persons having an interestin the mortgagedproperty,auctionpurchasers,persons in possession.An arbitraltribunalwill not be able to do so. 48.3 The court can direct that an account be taken of what is due to the mortgageeand declare the amounts due and direct that if the mortgagorpays into court, the amountsofounddue, on or before such date as the court mayfix (withinsix months from the date on which the courtconfirmsthe accounttaken or from the date on which the courtdeclaresthe amountdue), the petitioner shall deliver the documents and if necessary re-transferthe property to the defendant; andfurther direct that ifthe mortgagordefaultsin paymentofsuch dues, then the

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P"9e5

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mortgagee will be entitled to final decree for sale of the propertyorpart thereofandpay into court the sale proceeds, and to adjudge the subsequentcosts, charges, expenses and interest and direct that the balance be paid to mortgagor/defendantor other persons entitledto receive the same. An arbitral tribunalwillnot beable todo so. 48.4 Where in a suitfor sale (or in a suitforforeclosurein which sale is ordered), subsequent mortgagees or persons deriving title from, or subrogatedto the rights of any such mortgageesare joinedas parties, the court while making the preliminarydecreefor sale underRule 4(1), couldprovidefor adjudication of the respective rights and liabilities of the partiesto the suit in a mannerandform setforth in Form Nos. 9, 10, and 11 ofappendix 'D' to the Code with such variations as the circumstancesof the case may require. In a suitfor foreclosure in the case of an anomalous mortgage, if the plaintiffsucceeds,the courtmay, at the instanceofanypartyto the suit or any otherparty interestedin the mortgagesecurity or the rightofredemption,pass a like decreein lieu ofa decree forforeclosure, on such terms as it thinksfit. But an arbitral tribunal will not be able to do so. 48.5 The courthas the power underRule 4(2), on goodcause beingshown andupon terms to befixedby it,from time to time, at any time beforeafinaldecreeispassed, extendthe timefixed forpaymentofthe amountfoundor declareddue or the amount adjudgeddue in respectofsubsequentcosts, charges, expenses and interest, upon such terms as it deems fit. The Arbitral Tribunalwill have no suchpower. 49. Adecreefor sale ofa mortgagedpropertyas in the case ofa decree for order of winding 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 liabilitiesof third parties (other than those who are parties to the arbitration agreement). Therefore, a suitfor sale, 28 foreclosureor redemptionofa mortgagedproperty, should only be tried by a publicforum, and not by an arbitraltribunal. Consequently,itfollows that the court where the mortgagesuit is pending shouldnot refer

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theparties to arbitration. 50. The appellantcontendedthat the suit ultimatelyraises the following core issues, which can be decided by a private forum: (i) Whether there is a valid mortgage or charge in favour of SBI? (ii) What is the amount due to SBI? and (Hi) WhetherSBI couldseek evictionofappellantfrom theflat, even if it is entitled to enforce the mortgage/charge?It was submittedthat merely because mortgage suits involvepassing of preliminary decrees and final decrees, they do not get excludedfrom arbitrable disputes. It is pointed out that the arbitral tribunals can also make interim awards deciding certainaspects ofthe disputesfinally which can be equatedto preliminarydecrees granted by courts, and the final award made by the arbitrator,after detailedaccountingetc. could be comparedto the final decreepassed by courts. It is therefore contended that there is no impedimentfor the parties to mortgagesuits being referredto arbitrationunder section8of the Act.

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If the three issues referredby the appellantare the only disputes, it may be possible to refer them to arbitration.But a mortgagesuit is not only about determinationof the existence ofthe mortgageor determinationofthe amountdue. It is about enforcementof the mortgage with reference to an immovable propertyand adjudicatingupon the rights and obligationsof severalclassesofpersons(referredto in para 48.2 above), who have the right to participatein the proceedingsrelatingto the enforcement of the mortgage, vis-a-vis the mortgagor and mortgagee. Even if some of the issues or questions in a mortgagesuit (as pointedout by the appellant)are arbitrable or could be decided by a private forum, the issues in a mortgagesuit cannotbe divided.

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The followingobservationsof this court in a somewhat different context, in Sukanya Holdings (P) Ltd. v. Jayesh H.Pandyaare relevant(SCC p.536 Para 16)

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"16. The next questionwhich requiresconsideration is - even if there is no provisionfor partly referringthe dispute to arbitration,whethersuch a course is possible under Section 8 of the Act. In our view, it would be

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difficult to give an interpretation to Section 8 under which bifurcationof the cause of action, that is to say, the subject-matterofthe suitor insome cases bifurcation of the suit between parties who are parties to the arbitration agreementand others ispossible. This would be layingdown a totallynewprocedurenotcontemplated under the Act. If bifurcationof the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indicationin the language,itfollowsthat bifurcation of the subject-matterof an action brought beforeajudicial authority is not allowed."

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Conclusion

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Having regard to ourfinding on question (iv) it has to be held that the suit being onefor enforcementof a mortgage by sale, it should be tried by the court and not by an atiitral tribunal. Thereforewe uphold the dismissalof the application under section8 of the Act, thoughfor differentreasons."

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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 determinationof the merits of the partiesin respectof claim and counterclaims and thereafterexecutethe Award subjectto objections.

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if any, under Section 34. That such recourse is available to the respondent and that after the final determination in an Award, SARFAESI Act proceedingsare not available,in the opinion of this Court, bars the Court from exercisingjurisdictionunder Section9 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 accompliand to the prejudiceof one ofthe partiesin Arbitration.

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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.

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Duringthe course ofthe hearing,counselforthe appellanthad made a withoutprejudiceoffer to settle the respondentKotak'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 throughchequeswhich was laterdishonoured- a fact, disputedby the appellant.

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The appeal is allowed to the above extent.

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S. RAVINDRA BHAT (JUDGE)

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DEEPf SHARMA (JUDGE)

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AUGUST 05,2016/vite/

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Neil Singh Chahal v. Kotak Mahindra Prime Ltd.

Case brief

What is this about?

What did the court decide?

Neil Singh Chahal v. Kotak Mahindra Prime Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

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