The judgment permits statutory arbitration for disputes regarding securitisation and non-payment between financial institutions, even when one party is not a secured creditor.
In a significant development, the Bombay High Court has allowed arbitration proceedings between Aditya Birla Housing Finance Limited and Axis Bank Limited under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The judgment, delivered by Justice Sandeep V. Marne, addresses the complexities arising from disputes between financial institutions over securitisation and non-payment, even in the absence of both parties being secured creditors.
The case revolves around a transaction involving the takeover of loans by Aditya Birla Housing Finance Ltd. from Axis Bank. The applicant, Aditya Birla, credited the outstanding amount in the loan account with Axis Bank. However, due to a delay in crediting the full amount, a minor sum remained outstanding, preventing the closure of the loan account and Axis Bank's termination of its security interest over mortgaged properties.
Axis Bank's refusal to hand over the title documents has prevented Aditya Birla from becoming a secured creditor, despite their intent to secure the loan against the same property. The court was tasked with deciding whether arbitration under Section 11 of the SARFAESI Act could be conducted between the applicant and the bank.
Justice Marne's judgment highlighted the broader interpretation of Section 11 of the SARFAESI Act, which permits arbitration for disputes related to securitisation or non-payment of amounts due. The court emphasized that the provision does not restrict arbitration to secured creditors alone, allowing a wider range of scenarios connected to unpaid amounts to fall within its ambit.
The judgment references the Supreme Court's ruling in Bank of India v. Sri Nangli Rice Mills Private Limited, which clarified that disputes concerning priority of charges and enforcement of security interest between financial institutions can be adjudicated under Section 11, irrespective of whether the parties are secured creditors.
Aditya Birla Housing Finance Ltd. sought arbitration against Axis Bank and the borrowers, invoking the contractual arbitration clause with the borrowers and statutory arbitration under the SARFAESI Act with Axis Bank. The court appointed a sole arbitrator to adjudicate the disputes, directing that the arbitration proceedings encompass both the contractual and statutory aspects.
The judgment marks a pivotal moment in the interpretation of the SARFAESI Act, reinforcing the role of arbitration in resolving disputes within the financial sector. It underscores the legislative intent to ensure swift and efficient resolution of disputes, preventing any squabbles between financial institutions from impeding recovery proceedings.
With this decision, Aditya Birla Housing Finance Ltd. can pursue arbitration against Axis Bank to resolve issues related to the loan transfer and title document handover, facilitating the creation of security interests essential for the financial institution's operations.
Bottom line:-
Section 11 of the SARFAESI Act, 2002 permits statutory arbitration even in cases where a financial institution is not yet a secured creditor, provided disputes relate to securitisation, reconstruction, or non-payment of amounts due, including interest.
Statutory provision(s): SARFAESI Act, 2002 Section 11, Arbitration and Conciliation Act, 1996 Section 11
Aditya Birla Housing Finance Limited v. Axis Bank Limited, (Bombay) : Law Finder Doc id # 2893952
