The recent judgment of the Bombay High Court in Tata Capital Financial Services Limited v. M/s Deccan Chronicle Holdings Limited1 gains significant importance in light of the recent spur in lending disputes. The High Court of Bombay while dealing with a petition seeking interim reliefs in aid of arbitration under Section 92 of the Arbitration and Conciliation Act, 1996 ("Act") has held that even though certain debts may be secured by a mortgage, the lender may choose to bring only a claim for recovery of the amounts due and not sue for enforcement of mortgage. Accordingly, as money claims arising under contracts are arbitrable disputes, courts are empowered to grant interim reliefs under section 9 of the Act.
FACTS AND CONTENTIONS
The case involved two separate arbitration petitions filed against Deccan Chonicle Holdings Ltd. and Mr. T. Venkatram Reddy ("Respondent(s)"). The petitions related to certain loans which were provided to the Respondent. Such loans had been secured by the Respondent by mortgage of immovable property. Due to the financial difficulties being faced by the Respondent, the Tata Capital Financial Services and L & T Finance Ltd.("Petitioner(s)") recalled the entire loan amount with interest. The Respondent failed to repay the said amount in response to the demand from the the Petitioners. Accordingly, the two separate petitions came to be filed against the Respondents under section 9 of the Act, whereby the Petitioners sought various interim reliefs including:
- Direction to Respondents to furnish additional security;
- Direction for appointment of a Court Receiver;
- Direction to Respondents to attach their properties before the final judgment;
- Direction to Respondents to disclose on oath all the properties owned by them.
One of the principal arguments raised by the Respondents was whether the current dispute was arbitrable or not, as interim reliefs under section 9 of the Act are granted in aid of arbitration. The submission made by the Respondent was that enforcement of mortgage of immovable property could not happen by way of an arbitration. The Respondents placed reliance on the landmark judgment of the Supreme Court in Booz Allen and Hamilton Inc. vs. SBI Home Finance Limited and Ors.3 to substantiate their contention that the reliefs claimed in the petition filed under Section 9 of the Act are for protection of mortgaged properties, thus, rights claimed by the Petitioner are rights in rem which can only be decided by a Civil Court and not by an arbitral forum. The Respondent submitted that the notice of demand invoking arbitration clause issued by the Petitioner was for enforcement of mortgage alongwith other claims.
Further, it was argued that by the Respondent that the grant of interim measures under Section 9 of the Act would be governed by the underlying principles for grant of interim relief under Order 38 Rule 5 of the Civil Procedure Code, 1908 ("CPC") and that the present cases did not merit any order for interim releifs as sought by the Petitioner.
The Petitioner's on the other hand submitted that the statement of claim was not yet filed before the arbitral tribunal and the Court in such circumstances cannot refuse to grant interim relief based on the presumption of the Respondents that the Petitioner would apply for the enforcement of mortgage against the Respondents before the arbitral tribunal. It is always open to the Petitioner to choose a claim either for enforcement of mortgage or for recovery of money simplicitor based on other securities furnished by the Respondents.
The Court appreciating the Petitioners arguments that the statement of claim had not been filed proceeded to assert that it was not up to them to presume that the Petitioner might apply for enforcement of mortgage which would be beyond the jurisdiction of arbitral tribunal. The notice of demand for enforcement of mortgage cannot be treated as a statement of claim.
Based on Order 34 Rule 144 of the CPC, it was observed that there is no bar in filing a mere money claim arising under mortgage by a mortgagee. The mortagaged property could not be sold without instituting a suit for sale of mortgaged properties, however it was up to the mortgagee i.e. the Peitioners to decide In whether to file a money claim before the arbitral tribunal and file a separate suit for enforcement of mortgage after complying with the provisions of Order II Rule 25. It was further held that the interim measures cannot be denied on the ground that the entire demand notice and petition filed under Section 9 of the Act was on the premise that the same was for enforcement of mortgaged properties. The Respondents had executed other securities in the nature of a guarantee and a promissory note and the claim could be made for enforcement of such securities.
Thus, it is for the Petitioner to decide what claims the petitioner would make before the arbitral tribunal and even if a relief by way of enforcement of mortgage was claimed, the same could be subsequently withdrawn or amended. An arbitral tribunal, upon an objection under Section 16 (objection to jurisdiction) of the Act, can always decide whether any of the claims made by the claimants are within its jurisdiction to adjudicate upon. Accordingly, the court in the present case proceeded to hold that the facts satisfy the principles for grant of the releifs and passed orders in favour of the Petitioner.
The judgment provides valuable guidance in context of lender disputes, where lenders normally obtain multiple securities such as guarantee, pledge of shares and including a mortgage of property.
The judgment is also critical from the prespective of the real estate sector as lending activites in the real estate sector would almost always be backed by a mortgage of the property. Further, the real estate sector has grown at a tremendous pace in the past few years, and especially since it was opened to foreign investment in 2005. However, with the dampening of the world economy and the regulatory ambiguity surrounding normal modes of exit, foreign investors have adopted a more cautious approach, which has slowly led to a predilection towards mezzanine and pure debt financing structures as opposed to pure equity investments. The regulatory measures recently taken such as opening up and liberalization of the QFI route and increase in the corporate debt limits available for foreign investment has revealed the regulatory acceptance and interest in attracting foreign investment via the debt route. Buoyed by the regulatory support the sector has continued to attract foreign investments which normally are in form of collateralized debt and one of the most important collateral is the mortgage of the immovable property.
Accordingly, an important takeaway from the present judgment comes in relation to the various debt transactions. The present judgment indicates that in such scenarios lenders may first invoke arbitration to obtain an adjudication on the pending debts and and the amounts owed. Thus providing an expeditious option as compared to a through and through court mechanism. Further, the ruling highlights the importance of a section 9 releif in securing the claims as in all scenarios the mortagage security may not be a sufficient security.