Fermina Developers Private Limited VersusIndiabulls Housing Finance Limited (2022 SCC OnLine Del 4487)
The conundrum that arose before the Hon’ble High Court of Delhi was whether “in case proceedings under SARFAESI be maintainable in case the dispute is arbitrable? and the enforcement of security interests that may be created and exist in favor of a secured creditor under SARFAESI.”
Prior to the institution of section 9 of Arbitration and Conciliation Act, 1996 petition on or about December 06, 2022, the respondent had issued notices dated November 30, 2022, referable to Section 13(2) of the SARFAESI, 2002 and when the instant batch was taken up for consideration, a preliminary objection was taken by respondents, to the maintainability of the instant petitions with it being contended that since they had proceeded to initiate proceedings under SARFAESI, the instant petitions would not be maintainable since the dispute would not be arbitrable.
The aforesaid contention was made based upon the following principles as enunciated by the Hon’ble Supreme Court in Vidya Drolia v. Durga Trading Corpn. while dealing with the issue of non-arbitrability of disputes.
The respondents also contended that SARFAESI constructs a comprehensive and self-contained code for determination of all questions and disputes which may arise from an action that may be taken by a financial institution for enforcement of a security interest. Sections 13, 17, and 18 of the SARFAESI create and put in place an adjudicatory mechanism by a statutory tribunal, and thus under Section 9 of the 1996 Act would not be maintainable.
The Petitioners contended that the action initiated by the respondent would clearly fall within the ambit of actions which were termed by the Supreme Court in Mardia Chemicals Ltd. v. Union of India as being fraudulent, absurd, and untenable and in which case the jurisdiction of the civil court could always be invoked and thus consequently it would be incorrect for the respondent to assert that the dispute would fall in the category of a non-arbitrable dispute.
The invocation of Section 13(2) of the SARFAESI is dependent upon a borrower having defaulted in repayment of a secured debt or an instalment thereof. The petitioners question the very fact of a default having occurred and thus assail the initiation of action by the respondent. This would essentially merit an evaluation of the terms of the OTS, the payments made by the petitioners, accounting for the principal and interest payable thereunder and ultimately considering whether a default had occurred on the date when the notice under Section 13 of SARFAESI came to be issued.

All issues relating to default, accounting for the payments made, and the amount which was envisaged to be paid under the OTS would clearly fall within the purview of Section 13 of SARFAESI. The petitioners stand conferred the right to assail the assertion of default and prefer objections to the notice that has come to be issued at the behest of the respondent. The respondent is obliged in law to consider those objections and communicate reasons if they are found to be untenable. The petitioners would thereafter have the right to assail any such order that the respondent may choose to pass by way of an appeal under Section 17 of the SARFAESI.  The dispute which stands raised in the present case thus stands confined to the question of an asserted default and the liability of the petitioners to pay further sums to the respondent. These and other allied issues would clearly fall within the scope of proceedings contemplated by and under Section 13 of the SARFAESI. In the facts of the present case, the Court finds that the dispute that stands raised is essentially a question in relation to the determination of a debt. It is clearly linked to the question of adjudication of liability and thus liable to be exclusively tried by the DRT. Once an action under Section 13 of the SARFAESI had been initiated by a secured creditor, the rights and obligations of parties would have to necessarily be examined and decided in accordance with the procedure contemplated under Sections 13, 17, and 18 of the SARFAESI. Upon the issuance of such a notice, the dispute that may be raised by a debtor would fall outside the purview of a private adjudication which arbitration essentially represents. The limited window within which the issue of non-arbitrability would not come in the way would be where a party alleges and is able to establish that the action of the secured creditor is either fraudulent or that the claim is wholly absurd and untenable. This limited window stands duly recognised and conferred a judicial imprimatur by Mardia Chemicals itself. Undisputedly, this is not a case where fraud is either alleged or asserted. The challenge essentially was that the petitioners have been held to be in default even after they had paid the entire sums due under the OTS and after the respondent had accepted those payments without demur or protest. It was asserted that all the petitioners had ultimately paid the entire sum settled upon under the OTS and thus the stand taken by the respondent is clearly absurd and untenable. The Court noted that to characterise a default claimed by a creditor to fall within the exceptions carved out in Mardia Chemicals, the Court would have to be convinced on an ex-facie examination of the facts of the case that the liability asserted to exist is preposterous, patently erroneous and perhaps even bordering on the ludicrous. In order to arrive at such a conclusion, the Court would have to be convinced that the liability which is sought to be enforced cannot possibly be recognised in law to exist. That decision would necessarily have to be one that can be arrived at without the Court delving into or undertaking an accounting exercise or a detailed examination of the respective accounts that may be maintained by parties in their ordinary course of business. In fact, it is the trial of those issues which are contemplated to be undertaken by the tribunal under Sections 13 and 17 of SARFAESI. While the petitioners had asserted that they had ultimately liquidated all liabilities in terms of the OTS, this fact was seriously disputed by the respondent. It was contended for and on behalf of the respondent that since the petitioners had failed to adhere to the repayment schedule as fixed under the OTS, the settlement did not survive, and it was thus open for them to have recalled the loan facility. Whether the petitioners have ultimately paid the entire sum which was due under the OTS and its terms adhered to are questions that the DRT is statutorily empowered and enabled to decide. In fact, it is these very disputes which could be said to squarely fall within the scope of Sections 13 and 17 of SARFAESI. Viewed considering the above, the Court concludes that the issues raised clearly fall in the genre of non-arbitrability and would have to be raised and challenged in accordance with the procedure specified under SARFAESI.

Maruturi Raghavendra Rao and Anr vs. State of Andhra Pradesh Rep., by District Collector (2022 SCC Online AP 2774)
The Petitioner was the successful bidder in an auction conducted by the Debt Recovery Tribunal, Visakhapatnam and accordingly, he was allotted the sale certificate confirming the sale in its favour. Thereafter, the District Collector unilaterally executed a deed of cancellation with respect to the said sale in favour of Petitioner. Aggrieved by the said action, the Petitioner has approached the Hon’ble High Court. The Petitioner submitted that no notice was issued before cancellation and that the provisions of Recovery of Debts and Bankruptcy Act, 1994, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 being special legislations passed by the parliament will prevail over the State legislation. It was also contended that Rule 26(1)(k)(i) of the Andhra Pradesh Rules under Registration Act, 1908 on which the State relies is not applicable and the same was relied upon for cancelling the deeds.
The State on the other side contended that said auctioned lands were already assigned and resumed by the State and the fact was also informed to the DRT despite this the Recovery officer proceeded with the sale and hence the said sale was not valid.
The Hon’ble High Court while considering the position of law with regards to Rule 26 (1)(k)(i) of the rules, observed that the sum and substance of rule consisted of four parameters i.e.(i) cancellation deed should be executed by all the parties concerned (ii) there should be a declaration showing mutual consent which shall be presented along with the deed of cancellation or there should be an order of a competent civil court or High court or the state or central government annulling the transaction (iii) if the deed is executed by a government officer, it should reflect the fact that the properties contained in the previously registered conveyance are government properties, assigned lands or endowment lands and cannot be registered by any provision of law (iv) officer executing the deed of cancellation should be competent to execute the document.
Laying down these parameters, the Hon’ble High Court held that annulment of a sale transaction is also an order having serious consequences, and the same be done keeping in consideration the principles of natural justice. That there was neither a government order annulling the transaction nor any government order declaring the properties were assigned or government land. Further, the competency of the district collector to execute the deed of cancellation was not established. On the aspects of the SARFAESI Act, the Court observed that as per section 17, a person aggrieved by the sale of property shall approach the DRT within 45 days providing a remedy to the person affected by bank’s action. Furthermore, as per section 35 of the SARFAESI Act, the SARFAESI Act will override all the provisions of other state laws. The State can take recourse only under the provisions of the SARFAESI Act before the Designated Tribunal within the period of limitation as prescribed which has elapsed in the instant case and accordingly the writ petition was allowed.
UV Asset reconstruction Company Ltd vs. Union of India (2022 SCC Online Del 4289)
The Petitioner is an asset reconstruction company registered under section 3 of the SARFAESI Act, 2002, and had entered into multiple Debt Assignment Agreement with banks such as State Bank of India (SBI), Punjab National Bank (PNB) with regards to the various loans provided by these banks to the defaulter company that is M/s. Burnpur Cement Ltd (BCL). Subsequently, by a restructuring package, the terms were set in a master restructuring agreement in which equity shares (2,17,99,826) were pledged by the BCL with the SBI (as SBI being the lead banker) by a pledge agreement. In furtherance of such debt assignment agreement entered into by the Petitioner, the Petitioner had approached National Securities Depositories Ltd (NSDL) for substitution of its name in the record maintained by it in respect of the pledged shares of the BCL. The NSDL had denied such substitution and assailing the same, the Petitioner had approached the Hon’ble High Court.
The Petitioner submitted that pursuant to the Debt Deed Assignments entered into with the SBI and other members of the consortium in accordance with the provisions of the SARFAESI Act, it is entitled to be treated as a lender in relation to the pledged shares of BCL. Further, by virtue of sections 5(2) and (3) of the SARFAESI Act, the Respondent cannot refuse to incorporate such substitution. NSDL on the other hand contended that there is no provision either in the Depositories Act, 1996 or in the SEBI (Depositories and Participant) Regulations, 2018 for incorporating such changes. Hence it is justified in not processing the Petitioner’s request of substitution. The Court after deliberating on the provisions of section 5 (2) and (3) of the SARFAESI Act, held that the Act envisages transfer of assets by the original lender to asset reconstruction companies like the Petitioner. The Petitioner as per Section 5 of the SARFAESI Act purchased the NPA account of BCL, along with all assets and pledged shares. Thus, there is no doubt that the Petitioner is the new pledgee of the shares. The Court further observed that since there were no provisions for such transfer in other legislations, it does not imply that the Petitioner cannot be substituted, as the ownership of the pledged shares already stands vested with the Petitioner by virtue of section 5(2) and (3) of the SARFAESI Act.
S. K. Bakshi Vs Punjab National Bank & Ors. (WP (C) No. 465/2021 and CM No. 4507/2021) (MANU/JK/1307/2022)
The Petitioner sought possession of the property in Jammu from the Respondent (PNB). The former had been declared as successful bidder after participating in an e-auction and, subsequently, transferred the bid amount. Despite this and the fact that the sale certificate of the property had been issued to the Petitioner, he still didn’t have physical possession of the same. When this was brought up before the respondents, they claimed trespassers had taken over its physical possession and this did not go in hand with the “as is where is” term of the e-auction sale notice and the respondent had, thus, only fulfilled their duties by initiating proceedings against such trespassers.
The Court held that the delivery of property free from any encumbrances (such as trespassers) was a duty of the respondent and came under Section 13(4) of the SARFAESI Act read with Clause 9 & 10 of Rule 9 of the Security Interest (Enforcement) Rules, 2002. As per Rule 9(9) of the 2002 Rules, the authorized officer had to deliver the property to the purchaser free from encumbrances on deposit of money in a manner specified in Sub-rule 7. As per the Rules of 2002, the Petitioner was entitled to such physical possession of the property and the Respondent cannot evade this duty to deliver the same and when such delivery is impossible, the respondent must take recourse as specified under Section 14 of the Act. It was also observed that when the sale certificate was delivered, it was mentioned that the property is free from any encumbrances, and it is the duty of the Respondent to deliver the property as soon as possible. The Court further observed that the objective behind the SARFEASI Act is speedy recovery and that must be the top priority and such delay in granting possession would be against the motive and purpose of the Act itself and accordingly allowed the petition and directed the Respondent to grant with physical possession of the property.
M/s Deecon India Pvt. Ltd. & Ors. vs Canara Bank & Ors. (W.P.A 18157 of 2022)
A writ petition was filed seeking quashing of the sale certificate issued under the SARFAESI Act.
The Respondent-Canara Bank contended that under section 13(8) of the SARFAESI Act, 2002, a borrower can take action against sale of a secured asset only till the date of publication of notice for the auction or tender inviting quotations from the public. The second objection was taken regarding the statutory time period mentioned under section 17(1) of the Act wherein the person making the application must file the same before the Debts Recovery Tribunal (DRT) having jurisdiction in the matter within 45 days from the date on which the measures under section 13(4) are taken by the secured creditor.
The Hon’ble High Court observed that time period mentioned in section 17(1) of the SARFAESI Act, must be given a purposive construction. Although the starting point is the date of the impugned measure taken by the secured creditor, the provision would be rendered arbitrary and ineffective if the date of knowledge of the ‘person’ [under section 17(1)] is not considered. If the date of knowledge is discounted, then most applications under section 17(1) would be rendered infructuous, particularly where the ‘person’ receives the communication of the impugned action beyond the 45-day time limit. It is completely believable that the Petitioners did not approach the DRT on the apprehension that the Petitioners’ application would be kept out and not even be given a file number on the ground of being belated. Accordingly, the Hon’ble High Court has sent the parties to the statutory forum under the SARFAESI Act, 2002, and sought appropriate redress.
Ravi Charan Pentapati
L. Venkateshwara Rao Grancy John
Senior Associate Associate
venkateshwara@linklegal.in grancy.bonam@linklegal.in
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