Debt Owed To Financial Institutions Under SARFAESI Is Arbitrable, Not Debt Under RDDB Act: Bombay High Court

The bench of Justice Manish Pitale while distinguishing both the acts held that the proceedings under RDDB Act contains exhaustive provisions for the determination as well as the recovery of the determined debt, however, SARFAESI Act contains provisions only for the enforcement of the debt and no provision for the determination/crystallization of the debt.

The Court held that since the RDDB Act contains an exhaustive provision, the debts covered under the ambit of the Act are non-arbitrable.

Facts

The legal dispute unfolded against the backdrop of a financial arrangement between the petitioner and the respondents. The petitioner, identified as a financial institution, had extended loan facilities to the respondents for the acquisition of vehicles. To formalize this financial relationship, Loan-cum-Hypothecation-cum-Guarantee Agreements were executed, each of which included a crucial arbitration clause.

Initially, the respondents adhered to the terms of the loan agreements by making timely payments. However, the situation took a downturn when the respondents started defaulting on their payment obligations. In response to these defaults, a correspondence ensued between the parties regarding the outstanding amounts. The tension escalated when the petitioner discovered that one of the financed vehicles had been sold by the respondents.

Apprehensive of further defaults and potential disposal of vehicles by the respondents, the petitioner invoked the arbitration clause contained in the agreements. To formalize this invocation and seek appropriate remedies, the petitioner initiated legal proceedings by filing two petitions under Section 9 of the Arbitration and Conciliation Act, 1996, and an application under Section 11 of the same Act.

Contentions of the Parties

The respondent raised the following objections to the maintainability of the petitions:

• That the petitioner, being a financial institution under the SARFAESI Act, should resort to the Debt Recovery Tribunal (DRT). They contended that arbitration, despite an existing arbitration clause, was not a viable option.
• The respondents emphasized the SARFAESI Act's exclusivity and asserted that the law categorically prohibits arbitration once the special tribunal avenue is available.

Petitioner countered the objections by making the following submissions:

• That the objection to jurisdiction rested on a misinterpretation of the law. While acknowledged as a financial institution under the SARFAESI Act, the petitioner asserted that this designation was specific to the SARFAESI Act and did not extend to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act).
• That disputes pertaining to debt determination, a critical aspect for arbitration, fell outside the SARFAESI Act's purview, making arbitration a legitimate avenue.

Analysis by the Court

The court emphasized the specificity of the petitioner's financial institution status under the SARFAESI Act, emphasizing that it did not extend to the RDDB Act.

The Court held that SARFAESI Act does not contain any provision for the crystallization of the debt and all the proceedings under the Act is only for the purpose of the enforcement of the crystallized debt, therefore, the financial institution covered therein can take recourse to the A&C Act for the purpose of crystallisation of the debt.

The Court held that a debt owed to a financial institution covered only under the SARFAESI Act is arbitrable, however, a debt owed to a financial institution to which the provisions of RDDB Act also applies is non-arbitrable.

The Court while distinguishing both the acts held that the proceedings under RDDB Act contains exhaustive provisions for the determination as well as the recovery of the determined debt, however, SARFAESI Act contains provisions only for the enforcement of the debt and no provision for the determination/crystallization of the debt.

Ultimately, the court dismissed the objection raised by the respondents, affirming that arbitrable nature of disputes. The Court observed that the petitioner had made out a case for interim measures, accordingly, the Court granted the interim protection and appointed a receiver to take custody of the vehicles and attached the bank account of the respondent. The Court also appointed the arbitrator to adjudicate on the disputes between the parties.

Case Title: Tata Motors Finance Solutions Ltd v. Naushad Khan, Commercial Arbitration Petition (L) No. 8654 of 2022

Date: 20.12.2023

Counsel for the Petitioner: Mr. Chetan Kapadia, Senior Advocate a/w. Ms. Vidisha Rohiya, Ms. Ami Brahmbhatt and Ms. Bhavna Dube Patil & Mr. Chetan Kapadia, Senior Advocate a/w. Ms. Vidisha Rohiya, Ms. Ami Brahmbhatt and Ms. Bhavna Dube Patil

Counsel for the Respondent: Ms. Anita Castellino a/w. Ms. Vibha Mishra and Mr. Mehul Thakkar, Md. Jamil Khan, Zia Syed and Cavin Gala.

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