Allowed

Cfm Asset Reconstruction Pvt.Ltd. v. Tamilnad Mercantile Bank Limited

DRAT19 Sept 2022MISC APPEAL/106/2022

Case brief

AI extract

What is this about?

The Debts Recovery Appellate Tribunal allowed an appeal against the DRt's dismissal of an arbitration application. The Tribunal held that disputes between secured creditors are non-arbitrable under Section 17 and must be resolved via statutory arbitration under Section 11 of the SARFAESI Act, distinguishing cases involving borrower-creditor disputes.

What did the court decide?

The impugned order of the Learned Presiding Officer, D.R.T.-II, Ahmedabad, in I.A. No. 1848 of 2022 is set aside. The appeal is allowed.

Cfm Asset Reconstruction Pvt.Ltd. versus Tamilnad Mercantile… — Company and Corporate | DRAT (2022)

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BEFORE THE DEBTS RECOVERY APPELLATE TRIBUNAL, AT: MUMBAI Present: Mr Justice Ashok Menon, Chairperson Misc. Appeal No. 106/2022

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Between CFM Asset Reconstruction Pvt. Ltd. … Appellant/s V/s. Tamilnad Mercantile Bank Ltd. & 2 Ors. … Respondent/s

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Mr Rajesh Nagori along with Ms Madhura Kulkarni, i/b M/s. Juris Corp, Advocate for Appellant.

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Mr. Amit Sule along with Mr. Vinay B., i/b M/s. Consulta Juris, Advocate for Respondent No.1.

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-: Order dated: 19/09/2022:-

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This is an appeal filed under the provisions of section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ for short). The Appellant is CFM Asset Reconstruction Private Limited, an asset reconstruction company and the 1st Respondent in Securitisation Application (S.A.) No. 372 of 2022 on the files of Debts Recovery Tribunal-II, Ahmedabad and impugns the order in IA No. 1848 of 2022 in the aforesaid SA, dated 20/07/2020.

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The Appellant had filed the aforementioned interlocutory application for dismissal of the Securitisation Application in view of section 11 of the SARFAESI Act for resolution of disputes between the Appellant herein and the 1st Respondent Tamil Nadu Mercantile Bank Ltd. The SA was filed by the 1st Respondent claiming to have 3.75% security interest over the secured assets

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belonging to the borrowers who are the 2nd and 3rd Respondents respectively. The Appellant admittedly had 96.25% security interest in the secured assets. The borrowers had on their own volition invited the Appellant vide a letter dated 09/11/2021 to take possession of the secured assets and initiate all necessary steps to sell the property in terms of the SARFAESI Act by way of a ‘Private Treaty’. In pursuance of a notice dated 11/05/2022 issued by the Appellant, the borrowers responded with a letter dated 23/05/2022 confirming handing over peaceful possession of the secured assets to the Appellant. They also waived their rights under the SARFAESI Act and Security Interest Rules. The borrowers also requested the Appellants not to wait for the statutory period of 30 days from the issuance of the sale notice and to proceed with the sale by a private treaty to which they had consented.

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The 1st Respondent herein namely the Tamil Nadu Mercantile Bank Ltd. approached the DRT by filing the abovementioned SA No. 372 of 2022 with a prayer to quash and set aside the impugned sale notice dated 11/05/2022 and to direct the Appellant to sell the secured assets by way of a public auction and realise maximum value for the property. This is with the intention to realise their pari-passu charge over the secured assets to the extent of 3.75%.

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The Appellants contended that the Bank is not entitled to challenge the Sarfaesi measures initiated by the Appellant under the provisions of section 17 of the SARFAESI Act. The dispute between the Appellant and the 1st Respondent Bank is with regard

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to the apportionment of the quantum of security interest over the secured assets. Such a dispute, according to the Appellant, is to be resolved by arbitration under the provisions of section 11 of the SARFAESI Act.

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The 1st Respondent Bank contends that the secured assets over which they too have a right are sought to be sold by the Appellant for a pittance by way of a private treaty in collusion with the borrowers. As per the sale notice dated 11/05/2022, the reserve price for all the immovable properties is fixed at ₹ 238 crores and the movable assets are valued at ₹ 643 crores, totalling ₹ 881 crores in all. The Appellant had informed the 1st Respondent Bank that they would be receiving only 0.81% of the total amount realised from the sale of the assets. The Appellant could not have sold the secured assets all by themselves by way of a private treaty without the consent of the 1st Respondent Bank, is the contention. It is contended that sale by private treaty is contemplated only when the exercise of a public auction fails. It is pertinent to note that the Appellants did not make any attempt to sell the secured assets by way of a public auction. After the assignment of the debt due from the borrowers to the Appellant, they are entitled to a claim of ₹818.29 crores whereas the amount due to the 1st Respondent Bank is to realise a sum of only ₹ 31.86 crores from the borrowers. That would be 3.75% of the total debt due from the borrowers. The challenge regarding the maintainability of the application under section 17 of the SARFAESI Act filed by the 1st Respondent Bank is also countered by the submission that the 1st Respondent Bank

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would fall within the description of ‘any person’ referred to in section 17. It is also contended that there is no arbitration agreement between the Appellant and the 1st Respondent Bank. And therefore, the dispute between them cannot be referred to an arbitrator.

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The learned Presiding Officer came to the conclusion by observing thus:

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“… the SARFAESI Act creates special right in favour of the Bank/Financial Institution and provides for a remedy under section 17 which is beyond the ordinary domain of civil courts or arbitration”.

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The Learned Presiding Officer also relied upon the decision of the Hon’ble Supreme Court in Vidya Drollia & Ors Vs. Durga Trading Corporation (2021) 2 SCC 1 to come to the conclusion that the SARFAESI Act creates special rights and provides for the determination of the right and liability by a specified court or public forum constituted under the Act and that the disputes coming under the purview of the SARFAESI Act are non-arbitrable. In view of the above, the Learned Presiding Officer dismissed the Interlocutory Application No. 1848 of 2022 and directed the Appellant to file a reply with all relevant documents pertaining to the sale of the secured assets by private treaty within 15 days from the date of order.

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Aggrieved by the aforesaid order of the learned Presiding Officer, the Appellant is before this Tribunal in appeal.

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Heard the learned counsel for the Appellant Mr Rajesh

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Nagori and the learned counsel for the 1st Respondent Mr Amit Sale. Records produced.

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Mr Rajesh Nagori argues that admittedly the Appellant is a secured creditor representing 96.25% in value of the amount outstanding as the debt. And therefore, under sub-section (9) of section 13 of the SARFAESI Act, the 1st Respondent is not entitled to exercise any or all of the rights conferred on them under or pursuant to sub-section (4) of section 13 of the SARFAESI Act unless the exercise of such right is agreed upon by the secured creditors representing not less than 60% in value of the amount outstanding as on a record date and search action shall be binding on all the secured creditors. And the assertion of the first Respondent that the Appellant could not have proceeded against the secured assets without their concurrence is contrary to the statutory provisions.

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11. Sub-section (9) of section 13 referred to above reads thus:

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“(9) Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to subsection (4) unless exercise of such right is agreed by the secured creditors representing not less than sixty per cent in value of the amount outstanding as on a record date and search action shall be binding on all the secured creditors:……”

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Mr Nagori further argues that the aforesaid sub-section provides that in the case of financing of a financial asset by more than one secured creditor as it is in the instant case, the 1st

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Respondent Applicant cannot exercise its right under section 13 (4) SARFAESI Act unless the Appellant agrees to it. Under the circumstances, the sale conducted by the Appellant can never be challenged by the 1st Respondent because they are holding only 3.75% of the total secured credit amount.

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That apart, Mr Nagori also relies on the provision under section 11 of the SARFAESI Act wherein it is provided that where any dispute relating to securitisation including interest arises amongst any of the parties namely the Bank or financial institution or a securitisation company or as in the instant case, such a dispute is to be settled under the provisions of the Arbitration and Conciliation Act, 1996 as if the parties to the dispute have consented in writing for determination of such a dispute by conciliation or arbitration, though there is no arbitration agreement executed between them. For that reason, too, the securitisation application filed by the 1st Respondent before the DRT is not maintainable submits Mr Nagori.

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14. The relevant section 11 of the SARFAESI Act reads thus:

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“11. Resolution of disputes.-Where any dispute relating to securitisation or reconstruction on non-payment of any amount due including interest arises amongst any of the parties, namely the bank or financial institution or asset reconstruction company or qualified buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996 (26 of 1996), as of the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that act shall apply accordingly.”

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There is no dispute that the 1st Respondent Tamilnadu

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Mercantile Bank is a Bank and a secured creditor as regards the borrowers in this case. The Appellant is an asset reconstruction company. Hence, both these entities fall within the purview of the above-quoted section 11. The dispute between them is also regarding the pari-passu claim over the secured assets, and the security measures taken with regard to the secured assets. The Learned Presiding Officer has not discussed the implication of section 13 (9) of the SARFAESI Act. As regards the embargo pointed out under section 11 of the SARFAESI Act, the Learned PO refused to agree with the Appellant relying upon the decision in Vidya Drollia’s case (supra) and held that any dispute under the provisions of section 17 of the SARFAESI Act is non-arbitrable. The Learned PO refers to section 17 (1) and points out that the word used there is any person, which would also include a bank, and therefore a Bank is also entitled to file an application under S. 17 of the SARFAESI Act.

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Unfortunately, the Learned PO has not discussed the scope of section 11 or its purport. In case the interpretation of the Learned PO is accepted, section 11 of the SARFAESI Act would become redundant. The said section which is extracted above provides for a statutory arbitration. It raises a presumption of the existence of an arbitration agreement in respect of a dispute relating to securitisation or reconstruction on non-payment of any amount including interest between bank or financial institution or asset reconstruction company. The application of section 11 cannot be thwarted by referring to the scope of section 17 which states that

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entitles any person to make an application therein. Application of the decision of the Hon’ble Apex Court in Vidya Drollia (supra) is of no help to the 1st Respondent. The said decision was rendered in a case relating to an arbitration agreement between the parties and it pertains to a dispute between the borrower and a secured creditor. It was held that the doctrine of election by mutual agreement is available only if the law accepts the existence of arbitration as an alternative remedy and freedom to choose is available. In cases where a Bank or Financial Institution falls within the purview of the RDB Act and the SARFAESI Act, the arbitration clause in the agreement between the borrower and the creditor will not enable the creditor to elect arbitration as a means of resolving the dispute. It is mandatory for the creditor to approach the DRT under the RDB Act for adjudicating the dispute and also could resort to the provisions of the SARFAESI Act without approaching the DRT in case there are secured assets available to be proceeded against. In the instant case, there is no option of an election of a forum for resolving the dispute. When both parties to the dispute are secured creditors, there is no option for them but to resolve the dispute except by resorting to arbitration under the provisions of section 11 of the SARFAESI Act. It is not an arbitration by choice. It is a statutory arbitration contemplated under the provisions of the Act which binds the parties to a dispute referred to therein. I find support to this view in a decision of the Hon’ble High Court of Calcutta, exercising ordinary original civil jurisdiction in AP 361 of 2019 Reliance Commercial Finance Ltd vs. Axis Bank Ltd.

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In view of the above, I am of the opinion that the Learned Presiding Officer has gone wrong in finding that the DRT has jurisdiction to entertain an application filed by the 1st Respondent under section 17 of the SARFAESI Act.

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The securitisation application is also bad for the reason stated in sub-section (9) of section 13 of the SARFAESI Act since the decision to proceed with the sale under a private treaty was exercised by the Appellant financial institution which has more than 60% of the amount provided as loan to the borrower. However, in case there is a dispute between the Appellant and the 1st Respondent, it needs to be resolved by an arbitrator agreed upon by the parties or by resorting to the provisions of the Arbitration and Conciliation Act, 1996.

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In the result the impugned order of the Learned Presiding Officer, D.R.T.-II, Ahmedabad, in I.A. No. 1848 of 2022 in S.A. No. 372 of 2022 dated 20/07/2022 is set aside. The appeal is allowed. No order as to costs.

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All Miscellaneous Applications, if any, are dismissed as infructuous.

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Sd/Chairperson

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dpj-1

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Cfm Asset Reconstruction Pvt.Ltd. v. Tamilnad Mercantile Bank Limited

Case brief

What is this about?

What did the court decide?

Cfm Asset Reconstruction Pvt.Ltd. v. Tamilnad Mercantile Bank Limited

Case brief

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What did the court decide?

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