From Sarfaesi Act to arbitration clause, here are the key court orders

SC clarifies debtor’s right under Sarfaesi

The Supreme Court last week ruled that a debtor can approach the debts recovery tribunal (DRT)  under the Securitisation Act (Sarfaesi) at the stage of possession notice by the secured creditor. The court was considering a full Bench judgment of the Allahabad High Court in the case, Hindon Forge Ltd vs State.  Earlier, two high court Benches had differed on the question whether a borrower can move the DRT even before physical possession of assets is taken by banks/financial institutions in the exercise of their powers under the Act. Therefore, the question was referred to a full Bench of the high court. Now, the Supreme Court has ruled that the full Bench judgment was wrong.  The secured creditor can take possession of the assets of the borrower when there is a default after following the procedure laid down in the rules. The judgment discussed the different modes of taking possession — symbolic, constructive, physical, etc — and granted the borrower a slim chance of defending its assets.

Arbitration when there is consortium

When there is a consortium agreement between an Indian company and a foreign entity, a claim can be filed only in the name of the consortium and not separately, the Supreme Court ruled in the judgment, L&T vs Mumbai Metro. In this case, a consortium agreement was signed between the Indian company and a Malaysian firm for constructing a monorail system in Mumbai. Disputes arose between the consortium and the Mumbai Metropolitan  Regional Development Authority. They made separate claims before the authority but the latter rejected the claims. The consortium moved the Supreme Court seeking international commercial arbitration as defined in the Arbitration and Conciliation Act. The court rejected it as there could not be an international commercial arbitration because “the Indian company is the lead partner, the supervisory board constituted under the consortium agreement made it clear that the lead partner really has the determining voice in that it appoints the chairman of the said board; and the fact that the consortium’s office is in Mumbai as also that the lead member shall lead the arbitration proceedings, would all point to the fact that the central management and control of this consortium appears to be exercised in India and not in any foreign nation.”

No civil court role in cases under Sarfaesi Act

The Bombay High Court has asserted that the Securitisation Act (Sarfaesi Act) clearly barred the filing of a civil suit in a matter for the debt recovery tribunal. The division bench of the High Court thus allowed the appeal of Axis Bank against the order of a single judge bench, which took a contrary stand. In this case, several persons booked luxury flats in Mumbai from a builder. In order to get a loan, the builder mortgaged land and building in the project to create a security interest in favour of the bank. However, the builder and his guarantors defaulted, leading to the bank invoking the provisions of the Securitisation Act. The buyers, on the other hand, moved a civil court for specific performance of their contracts with the builder and making the bank a party, though they were not directly connected to the bank. Therefore, the bank moved the high court arguing that Section 34 of the Act barred the jurisdiction of the civil court. The judgment stated: “No civil court can exercise jurisdiction to entertain any suit or proceeding in respect of any matter which the debt recovery tribunal is empowered by or under the Securitisation Act”.

Ambiguity in arbitration clause

Certain clauses in contracts could be ambiguous despite them being drafted by experienced lawyers. The Bombay High Court was confronted with one such in its judgment, Jay Bhagwati Construction Co vs Haware Engineers & Builders Ltd. The clause stated: “In case of any dispute, our managing director’s decision will be final and binding on both the parties any dispute shall be referred to arbitration or any court.” When disputes arose, one party wanted arbitration, while the other asserted that the above clause made the managing director's decision final. If disputes persisted, there was an option to go for arbitration or court, it argued. The high court stated that the intention of the parties was clear and it provided for arbitration. The judgment added: “The court has to encourage the parties to refer the dispute to arbitration and while interpreting an arbitration clause, it has to adopt a liberal approach.”

Cement unit covered by new legislation

The Chhattisgarh High Court ruled last week in its judgment, Ultratech Cement Ltd vs State of Chhattisgarh, that the company was within the scope of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act and the Building and Other Construction Workers’ Cess Act. The cement company had argued that since it was already registered under the Factories Act, there was no need to register under the new Acts. The court rejected the contention and granted it time to register under the new Acts. The judgment noted the issue has already been decided for other industries by the Supreme Court in the 2016 judgment, Lanco Anpara Power Ltd vs State of UP.

Judges’ vacancies cause anomaly

Vacancies in high courts and districts courts are in hundreds, but the situation in the consumer courts is worse. Some of them have no retired judge to preside over. Justice is dispensed by a graduate nominated by the state government. This situation prompted the Rajasthan High Court to rule that a single member bench cannot pass a valid order. There must be a president and another member. The order was passed in a large number of appeals in the leading case, Trackon Couriers Pvt. Ltd vs State, against the order of the state commission. Allowing the appeals, the high court remarked: “It is incomprehensible that an order passed by the district consumer forum comprised an officer in the rank of a district judge and two members sitting together could be upturned by a single bench of the State Commission in appeal. The situation if allowed to prevail would be totally undesirable and would be nothing short of a travesty of justice.” The HC asked the government to fill up the vacancies immediately, and the advocate general has to report compliance within three months.


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