Dispute Between Financial Institutions to Be Resolved Through Statutory Arbitration: DRT Dismisses SARFAESI Plea [Read Order]

The Debts Recovery Tribunal (DRT), Delhi, has rejected a securitization application made under Section 17 of the SARFAESI Act on the grounds that disputes between financial institutions regarding the recovery of their dues and the issue of priority of charge must be decided through statutory arbitration under Section 11 of the Act.

It was filed by Union Bank of India against Can Fin Homes Ltd. The respondent financial institution raised a preliminary objection on the maintainability of the application based on a recent Supreme Court order in Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd.

The applicant bank had made an application to the Tribunal seeking relief under the SARFAESI Act. The disputes raised were regarding the recovery of loans and the issue of priority of security between two creditors who were secured creditors of the borrower. The respondent had raised the contention that such disputes were outside the jurisdiction of the DRT as provided under Section 17.

Counsel appearing for the respondent argued that as the Supreme Court had given a judicial interpretation to Section 11 of the SARFAESI Act disputes between banks or financial institutions regarding securitisation, reconstruction or non-payment of any dues had to go for arbitration. Section 11 of the SARFAESI Act provides a statutory arbitration agreement and does not require a separate agreement.

The applicant bank was of the view that the matter had to be adjudicated upon under Section 17 of the SARFAESI Act as the Tribunal was competent to entertain the matter.

Upon examining the judgment delivered by the Supreme Court and considering the statutory provisions, the Tribunal held that Section 11 of the SARFAESI Act is a mandatory provision.

The Supreme Court had clarified that in cases where there is a dispute between specified financial entities and the dispute relates to securitization or non-payment of dues, and in cases where two conditions are satisfied, the DRT has no jurisdiction.

The Tribunal comprising Shri Sushil Kumar Rastogi, Presiding Officer held that the case fell within the scope of Section 11 and therefore had to be referred for arbitration. The securitization application was therefore dismissed, and the parties were given liberty to go for arbitration.

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