The Dispute

A dispute over a $150 billion loan default between Aditya Birla Finance and Siti Networks, who served as the loan's guarantor, and Zee Entertainment Enterprises was referred to arbitration by the Delhi High Court. Moreover, Judge LN Rao, a former member of the Supreme Court, was chosen as the only arbitrator. Siti Networks received a 150 crore term loan from Aditya Birla Finance in 2017 as part of a credit arrangement letter.

The lender claims that the interest rate was lowered from 16% to 13% on the condition that Zee, a group company, would guarantee the loan and Siti would pay off the remaining loan balance of 75 crores before 2018.

The Essel group of enterprises, Zee Entertainment Enterprises Ltd., Siti Networks Ltd., and Aditya Birla Finance Ltd. are embroiled in a debt dispute totaling Rs. 150 crores, and the Delhi High Court (HC) has assigned justice L Nageswara Rao (an ex-Supreme Court judge) as the sole arbitrator.


In a decision made earlier this month, justice V Kameswar Rao's bench states, "Till such time the applications are decided by the arbitrator, the orders passed by this court in this petition from time to time shall continue. It is made clear the amount deposited by Siti Networks in this court shall continue to be deposited till the decision of the learned arbitrator"

Justice Nageswara Rao was appointed as the arbitrator by the HC, who also stated that he could determine the cost of the arbitration proceedings after consulting with the attorneys for the parties.

Aditya Birla Finance has requested the appointment of an arbitrator to resolve disagreements pertaining to the Rs150 crore term loan provided to Siti Networks pursuant to the credit arrangement letter (CAL). The first letter of assurance was signed by Punit Goenka, managing director, and CEO of Zee Entertainment, and the second was signed by Essel's head of corporate finance and strategy, Himanshu Mody.

However, Siti Networks admitted default in its regulatory disclosures to the National Stock Exchange (NSE) and BSE and failed to repay its term loan. Siti Networks had an outstanding balance of Rs134 crore as of November 30, 2021.

The term loan was then recalled three times by Aditya Birla Finance. Yet, the Essel group did not pay it anything. The Delhi High Court was then served with a petition.

Zee Entertainment's senior attorney P Chidambaram argued during the hearing that the arbitration clauses, in this case, are not applicable because Aditya Birla Finance has legal recourse under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act and the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

Aditya Birla Finance is justified in emphasizing that under Clause 33, the remedy of arbitration should be available if the remedy of both the RDDBFI Act and the SARFAESI Act is not available to a lender. The bench explained that even the SARFAESI Act is for the enforcement of security and not for recovering the money due.

In addition, the HC rejects the argument that Zee Entertainment, which is not a party to the loan arrangement, can be forced to arbitrate without the parties consent.

Justice Kameswar Rao cited a Supreme Court decision from Chloro Controls India, which stated that in exceptional circumstances, a non-signatory or third party could be subjected to arbitration without their prior consent. The court would also have to consider whether referring all such parties to arbitration at once would further the interests of justice.

The HC further stated that there is no guarantee that Zee Entertainment and Essel Group will both pay the loan facility to Aditya Birla Finance in the event that Siti Networks fails. Only Essel Croup and Zee Entertainment are instructed in the letters to ensure and confirm that Aditya Birla Finance pays back the loans on time.

The High court concluded that "the intent being clear, the same cannot be construed as letters of guarantee which necessarily requires, as per Section 126 of the Indian Contract Act, 1872, a promise to discharge the liability of a third person in case of his default," 

How this could have been avoided?

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Digital escrow

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Also, read - Role of Digital escrow in lending.