Supreme Court bars lenders from making claims in arbitration tribunals

The Supreme Court has barred banks and financial institutions from making a claim in an arbitration tribunal to recover their money in an order that has serious implications for financial infrastructure projects.

“To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration,” Justice N V Ramana wrote in a December 14 order.

Thousands of crores of debt which is issued to infrastructure projects under the concession/license agreement, are now at risk/jeopardy.

Lenders are in dire straits now because the Supreme Court has shut the doors on them, says an infrastructure industry consultant. “As it is, they were finding it difficult to recover money in case of default; now there is no chance at all,” he stated.

Infrastructure sector

While the Apex Court order is applicable to all sectors, it will hit the infrastructure sector the most, unlike home and vehicle loans where the lender can attach the property under SARFAESI Act or DRT Act, auction it and recover the money.

“But in a port PPP project, the lender cannot attach the port or airport or highway because they belong to the government. And, if the lender is not allowed to go to arbitration, how will they recover their money. That security which it has inside the port or airport has no meaning,” the consultant said.

The concession agreements signed by the port trusts, for instance, says that the land and waterfront vests with the government of India.

“It can never be sold or auctioned. How can lenders auction the property of a port trust? The order will come in the way of financing infrastructure projects itself now,” the consultant said.

The lenders have a right under the concession agreements to make a claim on the debt due in case of default either by the concessioning authority or the concessionaire. If there is a dispute over payment, the matter goes for arbitration. “Now, in that dispute, lenders are not allowed, so how will they make a claim to collect the debt due,” he asked.

“With the SC order, it is a complete mess now. Lenders have a right under the DRT Act and under the SARFAESI Act, but in the case of a concession agreement involving a PPP project, that right is meaningless because it cannot sell a secure asset, it cannot auction the asset as they belong to the government,” he said.

The SC order implies that in arbitration, only the concession authority and the concessionaire can settle their dispute.

With DRTs over-burdened, banks and financial institutions have been increasingly favouring arbitration for resolving disputes because it is seen as quicker, convenient and more effective.