The single-judge bench of the Bombay High Court held that SARFAESI proceedings are in the nature of enforcement proceedings, while arbitration is in the context of an adjudicatory proceeding. The SARFAESI proceedings and arbitration proceedings thus can proceed parallelly.
Brief Facts:
The factual matrix of the case is that the Applicant is the non-financing company, and the Respondent is the private limited company. The Respondent approached the applicant to obtain a finance facility, and the applicant issued a sanction letter, sanctioning loan amount to the respondent for a sum of Rs.6,75,00,000/- (Rupees Six Crores Seventy-Five Lakhs) on terms and conditions set out in the sanction letter. Thereafter, the loan agreement was executed between the applicant and the Respondent. Furthermore, by a sanction letter dated 29 October 2019, the applicant had sanctioned a loan by way of credit facilities to the respondent for a sum of Rs.50,00,000/- (Rupees Fifty Lakhs). Further, the applicant had to vide another sanction letter dated 10 July 2020 sanctioning an amount of Rs.1,36,00,000/- (Rupees One Crore Thirty-Six Lakhs only) to the respondent under the GECL term loan vide sanction letter dated 11 November 2021for an amount of Rs.68,14,000/- (Rupees Sixty-Eight Lakhs Fourteen Thousand Only) to the respondent under the GECL term loan facility. It was stipulated in the loan agreement that the seat of arbitration shall be New Delhi for disputes and differences.
Thereafter, there were defaults on the part of the Respondent in adhering to the terms and conditions of the agreement. In light of the defaults, the loan account of the respondent was declared as Non-Performing Assets. Then, the notice was served to the Respondent under Section 13(2) of the SARFAESI Act, calling upon the Respondent to make payment for a sum of Rs.6,11,38,461.4/-. Thereafter, the applicant filed the proceedings under Section 14 of the SARFAESI Act for taking over possession of the mortgaged properties, which forms the subject matter of the auction proceedings initiated by the applicant. Upon the failure on the part of the Respondent to pay the outstanding amount, the dispute and differences arising between the applicant and respondent and the loan agreement specifically provide for the arbitration clause with this regard. After that, the applicant issued a notice to the Respondent invoking the arbitration clause and recommended the name of Dr. Justice S. Radhakrishnan (Former Judge of this Court) as the sole arbitrator. However, there was no response from the respondent. Thereafter, the applicant applied Section 11(6) of the Arbitration Act.
Observations of the Court:
The Hon’ble Court observed that the arbitration clause stipulates that A former judge of the Supreme Court or the High Court shall act as sole arbitrator. Also, even though the said arbitration clause provides for the appointment of the arbitrator to be made so unilaterally by the applicant, a perusal of the notice invoking arbitration dated 10 February 2023 shows that the applicant while invoking the arbitration clause, suggested the name of a neutral sole arbitrator, as incorporated in the said notice. However, the court was of the view that it is not necessary to delve into the issue of unilateral appointment of an arbitrator who is now ineligible to act in terms of the decisions of the Supreme Court in Perkins Eastman Architects DPC and Another vs. HSCC (India) Limited.
The primary objection raised by the Respondent relates to the very invocation of the arbitration clause by the applicant in light of the pending proceedings before DRT.
The court furthermore observed that SARFAESI proceedings are like enforcement proceedings, while arbitration is in the context of an adjudicatory proceeding. The SARFAESI proceedings and arbitration proceedings thus can proceed parallelly. For this, the court relied upon the judgment titled M.D. Frozen Foods Exports Pvt. Ltd and Ors. v. Hero Fincorp Limited.
The court noted that in the context of examining an application under Section 11, the Court ought to, prima facie, decide on the existence of an arbitration agreement under the framework of Section 7 of the Arbitration Act and no further.
The court relied upon the judgments titled Tata Capital Limited v. Priyanka Communications (India) Pvt. Ltd., and Ors, and Interplay between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899.
The court furthermore noted that there exists an arbitration agreement in the form of an arbitration clause as provided for under Section 7 of the Arbitration Act, the existence of which, per se, is not assailed by the respondent.
Based on these considerations, the court-appointed Justice Sadhana Jadhav (Former Judge, Bombay High Court) as learned sole arbitrator.
The decision of the court:
With the above direction, the court allowed the application.
Case Title: Aditya Birla Finance Limited V. Paul Packaging Private Limited
Coram: Hon’ble Mr. Justice Advait M Sethna
Case No.: Commercial Arbitration Application (L) No. 25050 of 2023
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