LI Network
Published on: November 29, 2023 at 13:20 IST
The Delhi High Court has held that an arbitral tribunal cannot exercise jurisdiction to impose security on a property when a charge has been established in favor of a third party.
Justice Yogesh Khanna modified an interim order from the arbitral tribunal under Section 17 of the Arbitration and Conciliation Act, clarifying that the tribunal lacks authority to create security on a property already subject to a charge held by a third party not involved in the arbitration proceedings.
The court emphasized that the registration of a charge designates the charge holder as a secured creditor, granting them a preferential position over unsecured creditors.
The appellant contested an arbitral tribunal order under Section 17, arguing that the tribunal erred by imposing security on a property already subject to a pre-existing charge held by the appellant.
The appellant, not a party to the arbitration agreement, asserted that the tribunal was unaware of their charge on the property, leading to the erroneous order.
The appellant highlighted two loan agreements between them and the borrowers (respondents 2 and 3), wherein the subject property was pledged as security for a disbursed sum of Rs. 450 crores. The charge on the property was duly registered.
The respondent countered that their investments in the ATS Group’s nine projects predated the appellant’s charge. However, the court ruled that the respondent failed to prove their secured creditor status, as their agreement alone does not create a charge without proper registration, unlike the appellant’s registered charge.
The court concluded that the arbitral tribunal lacks authority to impose security on a property already charged to a third party, upholding the appellant’s secured creditor status.
Case Title: Asset Reconstruction Company India Ltd v. ATS Infrastructure Limited, ARB. A. (COMM) 7 of 2022