Dismissed

Manyata Developers Private Limited v. Arcil-Ast-Ix-Trust

Karnataka HC23 Jun 2023CMP/110/2022

Case brief

AI extract

What is this about?

This High Court Bench of Karnataka dismissed a Section 11 petition seeking appointment of a nominee arbitrator. The court held that due to the lender's status under the DRT Act, the dispute between the developer and ARCIL regarding loan recovery is non-arbitrable and must be adjudicated by the Debt Recovery Tribunal.

What did the court decide?

The petitions for appointment of a nominee arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 were dismissed.

Manyata Developers Private Limited Vs Arcil-Ast-Ix-Trust — Arbitration | Karnataka HC (2023)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 23^RD DAY OF JUNE 2023

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PRESENT

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THE HON’BLE MR. JUSTICE ALOK ARADHE

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AND

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THE HON’BLE MR. JUSTICE ANANT RAMANATH HEGDE

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C.M.P. NO.110 OF 2022

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C/W

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C.M.P. NO.540 OF 2022

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IN C.M.P. NO.110 OF 2022

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BETWEEN

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MANYATA DEVELOPERS PRIVATE LIMITED CIN U45201KA2008PTC047296 A COMPANY REGISTRED UNDER THE COMPANIES ACT 1956 HAVING ITS REGISTERED OFFICE AT 9/1, 1ST FLOOR, CLASSIC COURT RICHMOND ROAD, BANGALORE 560025 REP. BY MR. REDDY VEERANNA.

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...PETITIONER

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(BY SRI. S.M. CHANDRASHEKAR, SR. COUNSEL FOR SRI. CHANDRASHEKAR PATIL, ADV.,)

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AND:

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ARCIL-AST-IX-TRUST REPRESENTED THROUGH ITS TRUSTEE ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED (ARCIL) CIN NO. U65999MH2002PLC134884 HAVING ITS REGISTERED OFFICE AT

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THE RUBY, 10TH FLOOR 29, SENAPATI BAPAT MARG DADA WEST, MUMBAI 400028 REP BY ITS AUTHORIZED REPRESENTATIVE.

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(AMENDED VIDE COURT ORDER DATED 12.06.2023)

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…RESPONDENT

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(BY SRI. V. SRINIVASA RAGHAVAN, SR. COUNSEL FOR SRI. P. CHINNAPPA, ADV.,)

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THIS CIVIL MISC. PETITION IS FILED UNDER SEC.11(6) OF THE ARBITRATION AND CONCILIATION ACT 1996, PRAYING TO APPOINT AN APPROPRIATE NOMINEE ARBITRATOR ON BEHALF OF THE RESPONDENT WHO SHALL ALONG WITH HONBLE (RETD) JUSTICE VIKRAMJIT SEN, FORMER JUDGE, SUPREME COURT OF INDIA NOMINATED BY THE PETITIONER, APPOINT THE THIRD ARBITRATOR TO ADJUDICATE UPON THE CLAIMS OF THE PETITIONER AGAINST THE RESPONDENT IN THE PRESENT SUBJECT MATTER. PASS ANY OTHER ORDER(S) AS MAY BE DEEMED FIT BY THIS HONBLE COURT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE.

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IN C.M.P. NO.540 OF 2022:

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BETWEEN:

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1 . MANYATA DEVELOPERS PRIVATE LIMITED CIN-U45201KA2008PTC047296 A COMPANY REGISTERED UNDER THE COMPANIES ACT 1956 HAVING ITS REGISTERED OFFICE AT 9/1, 1ST FLOOR, CLASSIC COURT RICHMOND ROAD BANGALORE -560 025 REP. BY MR. REDDY VEERANNA.

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...PETITIONER

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(BY SRI. S.M. CHANDRASHEKAR, SR. COUNSEL FOR SRI. CHANDRASHEKAR PATIL, ADV.,)

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AND:

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1 . ARCIL-AST-IX-TRUST REPRESENTED THROUGH ITS TRUSTEE ASSET RECONSTRUCTION COMPANY (INDIA) LIMTIED (ARCIL) CIN NO.U65999MH2002PLC134884 HAVING ITS REGISTERED OFFICE AT THE RUBY, 10TH FLOOR 29, SENAPATI BAPAT MARG DADAR (WEST), MUMBAI-400 028 REP BY ITS AUTHORIZED REPRESENTATIVE. (AMENDED VIDE COURT ORDER DTD:12.06.2023).

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….RESPONDENT

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(BY SRI. V. SRINIVASA RAGHAVAN, SR. COUNSEL FOR SRI. P. CHINNAPPA, ADV.,)

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THIS CIVIL MISC. PETITION IS FILED UNDER SEC.11(6) OF THE ARBITRATION AND CONCILIATION ACT 1996, PRAYING TO APPOINT AN INDEPENDENT ARBITRATOR TO ADJUDICATE UPON THE CLAIMS OF THE PETITIOER AGAINST THE RESPONDENT IN THE PRESET SUBJECT MATTER IN TERMS OF CLAUSE 18.10 OF THE LOAN AGREEMENT DATED 23RD FEBRUARY 2018 AT ANNEXUREB. PASS ANY OTHER ORDER(S) AS MAY BE DEEMED FIT BY THIS HONBLE COURT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE.

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THESE CIVIL MISC. PETITIONS HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 19.06.2023, COMING ON FOR PRONOUNCEMENT OF ORDERS THIS ALOK ARADHE J., MADE THE FOLLOWING:

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ORDER

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In these petitions filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act' for short) seeking appointment of a nominee arbitrator on behalf of Asset Reconstruction Company India Limited (hereinafter referred to as 'the ARCIL' for short) for resolution of dispute between the parties as per Clause 18.10 of the Facility agreements dated 27.09.2017 and 23.02.2018. For the facility of reference, facts from CMP No.110/2022 are being referred to.

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(i) BACKGROUND FACTS.

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The petitioner is a company incorporated under the Companies Act, 1956 and is engaged in the business of development of properties (hereinafter referred to as 'the Company' for short). The respondent viz., ARCIL is an asset reconstruction company and is engaged in the business of resolution

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of Non Performing Assets after acquisition of Indian Banks and Financial Institutions.

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Admittedly, vide sanction letter dated 19.07.2017, a term loan of Rs.470,00,00,000/(Rupees Four Hundred and Seventy Crores) was sanctioned in favour of the company. Subsequently, a facility agreement dated 26.09.2017 was executed between the company and the original lender.

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Clause 1.1(viii) of the agreement defines the expression Lender(s) to mean (a) lender(s) under the loan agreement and (b) any new lender(s) which has rights under the loan agreement. Clause 2.5 and 2.6 of the agreement provides for interest rate and interest rate reset. Clause 2.7 and 2.8 of the agreement provides for additional interest and default interest. Clause 2.10(c) deals with tenor and repayment of loan, which inter alia provides that interest rate and

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other charges including the additional interest and default interest shall be payable as per the terms of the agreement during the tenor of the loan including the moratorium period. Clause 13.1(i) of the agreement describes the events of default, whereas, clause 14 provides for consequence in the event of default.

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Another loan agreement dated 23.03.2018 was executed between the company and ARCIL.

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The company defaulted on its obligation

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under the loan agreement since, 2019 itself and the original lenders sent default intimation notices from June 2019 itself. Thereafter, the original lenders and the company entered into a memorandum of understanding dated 15.06.2020 under which the company undertook to furnish additional security in relation to repayment of loan under the loan

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agreement. The original lenders agreed to extend the moratorium under the loan agreement from March 2020 to August 2020. From August 2020 to January 2021 original lenders sent notices to the company several times, to make payment of the amount due under facility agreement.

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On 16.03.2021, the account of the

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company was classified as Non Performing Asset (NPA). The original lenders entered into two

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assignment agreements dated 30.03.2022 with ARCIL. The company continued to default on its obligations under the loan agreements. Thereupon ARCIL by a demand notice dated 27.10.2021 recalled the entire amount due under the agreement.

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The company thereafter filed a petition under Section 9 of the Act seeking to restrain ARCIL from transferring /selling / alienating / encashing or disposing of creating any third party rights or

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otherwise part with ‘any security’ under the loan documents. The company issued a notice dated 13.11.2021 seeking to invoke the arbitration agreement contained in the loan agreements. The respondent by a notice dated 06.12.2021 denied the existence of the arbitration agreement and pointed out that the dispute between the parties is non arbitrable.

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The Commercial court by an order dated 15.12.2021 allowed the petition preferred by the company under Section 9 of the Act. The ARCIL has filed commercial appeal No.70/2022 in which the validity of the aforesaid order passed by the commercial court has been assailed. The company thereafter, filed a petition under Section 11 of the Act seeking appointment of an appropriate nominee arbitrator on behalf of the ARCIL who shall along with the arbitrator nominated by the company shall appoint the third arbitrator to adjudicate upon the

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claims of the company against ARCIL as per clause 18.10 of the facility agreements dated 26.09.2017 and

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23.02.2018.

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(ii) SUBMISSIONS ON BEHALF OF COMPANY:

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Learned Senior counsel for the appellant while referring to decision of Hon’ble Supreme Court in ‘KESHAVANAND BHARTHI vs. STATE OF

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KERALA’, (1973) 4 SCC 225 submitted that if a law declared by a country is not in consonance with the International Law, a duty is cast upon the court to declare such law as beyond scope and power of legislative competence. Our attention has also been invited to decision of Hon’ble Supreme Court in

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‘KULDEEP NAIR VS. UNION OF INDIA’, (2006) 7

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SCC 1 and it has been contended that the International covenants have to be read into domestic

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jurisprudence. While referring to Section 5 of the Act, it is contended that no judicial authority can intervene

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in respect of a matter which is decided to be resolved by private resolution of dispute under the Act.

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It is contended that appointment of an arbitrator to adjudicate the dispute between the parties is by default when there is an existence of an arbitration clause in the agreement. In this connection, reference has been made to decision of Hon’ble Supreme Court in ‘MOHAMMED MASROOR SHAIKH VS. BHARAT BHUSHAN GUPTA AND OTHERS’, (2022) 4 SCC 156. It is also urged that the question whether the present dispute between the parties is non – arbitrable can also be decided by the arbitral tribunal as well, under Section 16 of the Act.

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Learned Senior counsel for the appellant while inviting the attention to Clause 18.10(e) of the facility agreement has contended that aforesaid clause is ab initio void as the same militates against Clause 18.10(a) of the facility agreement and completely

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obliterates the effect of Clause 18.10(a) of the agreement. It is submitted that Blue Pencil Doctrine should be applied while interpreting Clause 18.10 of the agreement. In support of aforesaid submission, reliance has been placed on decision of Hon’ble Supreme Court in ‘TEXCO MARKETING PRIVATE LIMITED VS. TATA AIG GENERAL INSURANCE COMPANY LIMITED AND OTHERS’, (2023) 1 SCC 428. Alternatively it is submitted that Clause 18.10(e) does not apply as there is neither any change in the status of the lender nor any amendment in the law so as to bring the lenders under DRT Act. It is also argued that no special legislation has been enacted to enable the lenders to recover dues from the borrower under the DRT Act. It is also contended that in the assignment of debt is invalid as ARCIL is not a financial institution under the Securitization and Reconstruction of Financial Assets and Enforcement

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of Security interest Act, 2002 (hereinafter referred to as 'the 2002 Act' for short). It is also urged that provisions of 2002 Act are in addition to other laws.

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(iii) SUBMISSIONS ON BEHALF OF ARCIL:

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On the other hand, learned Senior counsel

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for the ARCIL contended that since, clause 18.10 of the agreement does not mandatorily require the parties to refer the dispute to arbitration. Therefore, the same cannot be construed to be an arbitration agreement within the meaning of Section 7 of the Act. In support of aforesaid submission, reference has been made to decision of Hon’ble Supreme Court in ‘WELLINGTON ASSOCIATES LTD. VS. KIRIT MEHTA’, (2000) 4 SCC 272. It is urged that the court dealing with a petition under Section 11 of the Act has to deal with the issue pertaining to non–arbitrability of the dispute between the parties. In this connection, reliance has been placed on decision of Hon’ble

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Supreme Court in ‘VIDYA DROLIA AND ORS. VS. DURGA TRADING CORPORATION’, (2021) 2 SCC 1.

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It is pointed out that the company has admitted that it has committed a default with regard to payment of interest from October 2020. In this connection, our attention has been invited to consolidated financial statement of the company from 01.04.2020 till 31.03.2021.

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Alternatively, it is contended that since, the

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matter is covered under the provisions of 2002 Act; therefore, even otherwise, the disputes between the parties cannot be referred to arbitration. In support of aforesaid submission, reliance has been placed on decision of Hon’ble Supreme Court in ‘MAGIC EYE DEVELOPERS PVT. LTD. VS. GREEN EDGE INFRASTRUCTURE PVT. LTD. AND OTHERS’, 2023

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SCC ONLINE SC 620. It is also pointed out that the ARCIL is notified as a financial institution under the

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notification dated 05.08.2016 issued under Section 31A(2) of the 2002 Act. It is also contended that similar clause has been interpreted by a division bench of Delhi High Court in ‘TATA CAPITAL HOUSING FINANCE LTD. VS. SHRI. CHAND CONSTRUCTION AND APARTMENT PVT. LTD.’, 2021 SCC ONLINE DELHI 5091 and it has been held that such a clause does not mandatorily provide for arbitration.

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(iv) REASONS:

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We have considered the rival submissions made on both sides and have perused the record. Section 7 of the Act deals with the expression 'arbitration agreement' and provides that arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of defined legal relationship whether

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contractual or not. The intention to refer the dispute to arbitration must be clearly discernable from the terms of the agreement.

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Before proceeding further, it is apposite to take note of Clause 18.10 of the agreement between the parties, which is extracted below for the facility of reference:

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18.10 Arbitration

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(a) Any dispute or difference, or claims that arises between the Parties or any of them concerning the Transaction Documents of any condition herein contained or as to the rights, duties or liabilities of parties hereto or any of them either during the continuance of the Transaction Documents of after termination or purported termination hereof shall be referred to panel of three arbitrators ("Arbitration Panel"), with one arbitrator to be appointed by the Borrower, one arbitrator to be appointed

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the Lender(s) and the third arbitrator being appointed jointly by the two arbitrators appointed by the Borrower and the Lender(s) respectively.

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(b) It is agreed between the Parties, hereto that nothing contained in Section 17 of Arbitration and Conciliation Act 1996, shall in any way, affect the right of any of or preclude the Parties to/from seek/seeking such interim relief(s) in any court of competent jurisdiction, including interim relief under Section 9 of the Arbitration and Conciliation Act 1996, and the rules framed thereunder.

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(c) The award of the Arbitration Panel shall be a written award and shall be final, conclusive and binding on all the Parties whether on question of law or of fact.

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(d) The venue of the arbitration shall be such place where this Agreement is executed i.e., Bengaluru.

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(e) Notwithstanding anything

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contained hereinabove, in the event of change in the status of the Lender(s) or in the event of the law being made or amended so as to bring the Lender(s) under the DRT Act, or any other special legislation to enable the Lender(s) to proceed to recover dues from the Borrower under the DRT Act, the arbitration provisions hereinbefore contained shall at the option of the Lender(s) cease to have any effect and if arbitration proceedings are commenced but no award is made, then at the option of the Lender, such proceedings shall stand terminated and the mandate of the Arbitrator shall come to an end, from the date of the making of the law or the date when amendment becomes effective or the date when the Lender(s) exercises the option of termination the mandate of arbitrator the case may be.

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The Hon'ble Supreme Court in MAGIC EYE DEVELOPERS PVT. LTD. supra, in para 16 after

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taking note of its previous decision in VIDYA DROLIA

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AND ORS. supra has held as under:

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16 . At this stage, it is required to be noted that as per the settled position of law, pre-referral jurisdiction of the court under section 11(6) of the Arbitration Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant's privity to the said agreement. The said matter requires a thorough examination by the referral court. [paragraph 25 of the decision in the case of NTPC Ltd. (supra)]. The secondary inquiry that may arise at the reference stage itself is with respect to the non- arbitrability of the dispute. Both are different and distinct. So far s the first issue with respect to the existence and the validity of an

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arbitration agreement is concerned, as the same goes tot eh root of the matter, the same has to be conclusively decided by the referral court at the referral stage itself. Now, so far as the non arbitrarbility of the dispute is concerned, even as per the law laid down by this court in the case of VIDYA DROLIA (supra), the court at pre referral stage and while examining the jurisdiction under Section 11 (6) of the Act may even consider prima facie examining the arbitrability of claims. As observed, the prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. However, so far as the dispute with respect to the existence and validity of an arbitration agreement is concerned and when the same is

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raised at pre-referral stage, the referral court has to decide the said issue conclusively and finally and should not leave the said issue to be de4termined by the arbitral tribunal. The reason is that the issue with respect of the existence and validity of an arbitration agreement goes tot eh root of the matter. As observed by the Cionstitution bench in the case of N.N.Global Mercantile Pvt. Ltd. (supra) Sans an agreement, there cannot be any reference to the arbitration. In the said decision this court has also specifically observed and held that the intention behind the insertion of Section 11(6A) in the Act was to confine the court, acting under Section 11, to examine and ascertain about the existence of an arbitration agreement. We are of the opinion that therefore, if the dispute / issue with respect to the existence and validity of an arbitration agreement is not conclusively and

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finally decided by the referral court while exercising the pre referral jurisdiction under Section 11(6) and it is left to the arbitral tribunal, it will be contrary to Section 11 (6A) of the Arbitration Act. It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and / or when there is no valid arbitration agreement at all.

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Thus, from the aforesaid enunciation of law, it is axiomatic that the court while deciding the petition under Section 11 of the Act has to conclusively determine the issue of non arbitrability of a dispute between the parties.

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In 'BOOZ-ALLEN & HAMILTON INC VS. SBI HOME FINANCE LTD. & ORS', (2011) 5 SCC

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532 the Hon'ble Supreme Court has dealt with the concept of arbitrability and has held as under:

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34. The term `arbitrability' has different meanings in different contexts.

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The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under :

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(i) whether the disputes are capable of adjudication and settlement by arbitration?

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That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts).

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(ii) Whether the disputes are covered by the arbitration agreement?

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That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or

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whether the disputes fall under the `excepted matters' excluded from the purview of the arbitration agreement.

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(iii) Whether the parties have referred the disputes to arbitration?

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That is, whether the disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be `arbitrable' if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the arbitral tribunal.

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In the backdrop of aforesaid parameters to decide, the arbitrability of the dispute, we may advert to the facts of the case in hand. Admittedly, in the instant case, the company has failed to deposit the interest under the facility agreement from October 2020. Therefore, the company has committed default under Clause 13.1(i) and therefore, the ARCIL has exercised the powers under the agreement to recover the dues. A three judge bench of Hon'ble Supreme Court in VIDYA DROLIA AND ORS. supra in para 54 and 58 has held as under:

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54 . Implicit non-arbitrability is established when by mandatory law the parties are quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. There is no choice. The person who insists on the remedy must seek his remedy before the forum stated in the statute and

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before no other forum. In Transcore v. Union of India and Another,28 this Court had examined the doctrine of election in the context whether an order under proviso to Section 19(1) of the Recovery of Debts Due to Banks and Financial Institutions Act,1993 (the ‘DRT Act’) is a condition precedent to taking recourse to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the ‘NPA Act’). For analysing the scope and remedies under the two Acts, it was held that NPA Act is an additional remedy which is not inconsistent with the DRT Act, and reference was made to the doctrine of election in the following terms:

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“64. In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies

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and a choice of one of them. If anyone of the three elements is not there, the doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, p. 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell's Principles of Equity (31st Edn., p. 119), the doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.”

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58 . Consistent with the above, observations in Transcore on

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the power of the DRT conferred by the DRT Act and the principle enunciated in the present judgment, we must overrule the judgment of the Full Bench of the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi,32 which holds that matters covered under the DRT Act are arbitrable. It is necessary to overrule this decision and clarify the legal position as the decision in HDFC Bank Ltd. has been referred to in M.D. Frozen Foods Exports Private Limited, but not examined in light of the legal principles relating to nonarbitrability. Decision in HDFC Bank Ltd. holds that only actions in rem are non-arbitrable, which as elucidated above is the correct legal position. However, non-arbitrability may arise in case the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, which right including enforcement of

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order/provisions cannot be enforced and applied in case of arbitration. To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.

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Thus, in view of decisions of Hon'ble Supreme Court in MAGIC EYE DEVELOPERS PVT. LTD . and a three judge bench of Hon'ble Supreme Court VIDYA DROLIA AND ORS., supra the inescapable conclusion is that the dispute between the parties is non arbitrable and has to be adjudicated under the provisions of 2002 Act and Recovery of

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Debts Due to Banks and Financial Institutions Act, 1993. The dispute between the parties is excluded from the purview of arbitration agreement. It is pertinent to note that decision in VIDYA DROLIA AND ORS . supra was referred to with approval in 'VGP MARINE KINGDOM PRIVATE LIMITED AND ANOTHER VS. KAY ELLEN ARNOLD', (2023) 1 SCC 597 and in 'NTPC LTD. VS. SPML INFRA LTD.', 2023 SCC ONLINE SC 389. The contention made by learned Senior counsel that decision of a three Judge bench of Hon'ble Supreme Court in VIDYA DROLIA AND ORS . has been clarified in MOHAMMED MASROOR SHAIKH supra is incorrect as para 9 of the decision in MOHAMMED MASROOR SHAIKH supra indicates that reliance was placed by learned Senior counsel for the appellant in the said case on the decision in VIDYA DROLIA AND ORS .