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Banks successfully defeat debtors' attempt to challenge jurisdiction

Jurisdiction challenges are often deployed by debtors in international financing either to try to have the dispute dealt with by a foreign court and/or as a delaying tactic.

TLT acted for the Banks in the case of Bank of Baroda, Bank of India & another -v- Nawany Marine Shipping FZE & others, where Judgment was recently given on the debtors' challenge to the jurisdiction of the English courts.

Several arguments were advanced by the applicants, including those on the grounds of forum conveniens (i.e. that a more appropriate forum exists in which to hear the matter) and general case management powers.

Of particular interest was the argument put forward of ‘election’ in the context of a jurisdiction clause allowing the banks to bring proceedings in more than one jurisdiction. In other words, if a party brings a claim in country A, has it made an ‘election’ in favour of that country, thus precluding it from suing in country B?

Background to the loan

Bank of Baroda and Bank of India agreed to enter into a syndicated loan facility to assist with the purchase of a ship. The borrower was a UAE incorporated company. There were also two corporate guarantors incorporated in India and two personal guarantors resident in India. A suite of security was provided, including mortgages over four residential properties in Mumbai.

The loan agreement contained a clause that the English courts had exclusive jurisdiction to settle any dispute. The clause went on to say that the jurisdiction clause was for the benefit of the banks and that, to the extent provided by law, the banks could take concurrent proceedings in any number of jurisdictions.

Following default under the loan agreement, the banks made demand on the borrower and the various guarantors. In order to enforce their security in India, the banks sought to accelerate the loan by serving notices on the debtors under Indian legislation – the SARFAESI Act (the Act) – which, unless challenged by the borrower, entitles a lender to enforce against any security if the outstanding sum has not been paid in full within 60 days of the notice.

Within the 60 day ‘cure period’, the debtors challenged the bank's decision to serve notices under the Act and subsequently issued proceedings before the Mumbai Debt Recovery Tribunal (the DRT). Amongst other grounds, the debtors argued that the correct jurisdiction was England.

Whilst the challenge before the DRT was ongoing, the banks issued proceedings in England against the debtors for the full amount owing under the loan agreement. This resulted in the debtors issuing an application challenging jurisdiction on the basis that the steps taken by the banks pursuant to the Act had invoked the jurisdiction of the Indian Courts.

The question of ‘election’ and concurrent proceedings clauses

The debtors sought to argue that, on the true construction of the jurisdiction clause, the banks had an option which can only be exercised once. Given that the banks had, on the debtors' case, commenced and pursued proceedings in India, they had effectively exercised that option away from the jurisdiction of the English courts and had made an election in favour of Indian jurisdiction. They also argued that the phrase "to the extent provided by law" did not help the banks given that parallel proceedings are not allowed by law if they are precluded by an election.

The court rejected the debtors' arguments on the following basis:

  • The jurisdiction clause gave the Banks the clear right to pursue multiple proceedings in more than one jurisdiction. Any election would therefore have to be one that clearly waived the benefit of the clause.
  • Election requires a clear and unequivocal communication by the party making the election (whether by words or acts) that they had chosen a particular jurisdiction over another.
  • The debtors were incorrect in their assertion that "to the extent provided by law" meant that further proceedings would not be allowed if an election had already been made. English law did not prohibit parallel proceedings per se and the purpose of the clause was to permit multiple proceedings. If, by simply pursuing proceedings, an election was made the clause would be denuded of its meaning.
  • It was the debtors, and not the banks, which had commenced proceedings in India. However, even if the banks had commenced the proceedings in India, the court would have not considered this to be an election in favour of Indian jurisdiction. This was because the Indian proceedings related to the enforcement of Indian law security, whereas the English action constituted debt recovery proceedings in which liability would be determined. It could not be said that the two sets of proceedings were parallel as they sought different things.

What can be learned from this case?

The case provides a useful illustration of how the courts will interpret what is a common jurisdiction clause in many financial transactions involving parties and assets in multiple jurisdictions.

It re-emphasises that banks can seek recovery of sums owed through a combination of debt recovery and security enforcement proceedings in multiple jurisdictions – provided of course its jurisdiction clause is drafted to permit such action. 

Contributor: Corinne Henry

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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