On December 20 2023, the Bombay High Court gave its decision in the case of Tata Motors Finance Solutions Ltd. v/s. Praveen Travels Pvt. Ltd. & Anr. whereby it held that the Arbitration Act and the SARFAESI Act operate in tandem, and a dispute raised by a financial institution notified under the SARFAESI Act is arbitrable.

Brief Facts:

Tata Motors Finance Solutions Ltd. (“Petitioner”) filed two petitions under Section 9 and an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) pursuant to loan facilities advanced to Mr. Naushad Khan and Praveen Travels Pvt. Ltd. (“Respondents”) for purchase of vehicles. Loan-cum-Hypothecation-cum-Guarantee Agreements were executed between the Petitioner and the Respondents and each of the agreements contained an arbitration clause.

As the Respondents started committing defaults and the Petitioner apprehended that the vehicles may be disposed off by the Respondents, petitions under Section 9 of the Arbitration Act were filed.

The Respondents opposed the said petitions and raised a fundamental objection regarding jurisdiction of the Court to entertain the two petitions on the ground that the petitions are barred by law.

It was submitted by the Respondents that as the Petitioner is a 'financial institution' covered under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), it ought to proceed under the SARFAESI Act and the remedy of arbitration cannot be invoked by it.

Issue:

As the Respondent raised a preliminary objection, the issue inter alia which arose for consideration before the High Court was whether a bar on jurisdiction under the SARFAESI Act would preclude the Petitioner from invoking arbitration for recovery of its dues against the Respondents.

Submissions on behalf of the Respondent:

The submissions made on behalf of the Respondent are summarized below:

1. As a financial institution under Section (2)(1)(m) (iv) of the SARFAESI Act the entire mechanism available under the said Act became available to the Petitioner. This being a statutory remedy, wherein the DRT exercises exclusive jurisdiction and as per the law laid down by the Supreme Court in the case of Vidya Drolia & Ors. v/s. Durga Trading Corporation, the disputes were rendered non-arbitrable.
2. Section 34 of the SARFAESI Act specifically provides that, no civil court would have jurisdiction to entertain any suit or proceeding in respect of a matter which the DRT or the appellate tribunal is empowered to determine. Since arbitration proceedings are civil proceedings, they are also barred by operation of Section 34 of the SARFAESI Act.
3. Section 2(h) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”), defines 'financial institution'. Section 18 of the RDDB Act specifies that, no court or other authority shall be entitled to exercise jurisdiction in relation to the matters specified in Section 17 of the RDDB Act as such powers are exercised by the DRT only.
4. The Petitioner itself has retained its right to proceed under the RDDB Act as well as the SARFAESI Act under the agreements and therefore the Petitioner cannot be permitted to turn around and claim that despite the aforesaid stipulations in the agreement, it is entitled to invoke arbitration.

Submissions on behalf of Petitioner:

The submissions made on behalf of the Petitioner are summarized below:

1. Objection regarding jurisdiction raised by the Respondents is based on a misreading of the position of law.
2. The Petitioner stood notified as a 'financial institution' only under Section 2(1)(m)(iv) of the SARFAESI Act, 'for the purposes of the SARFAESI Act' and the Respondents were wrongly presuming that the same resulted in the Petitioner being notified as the financial institution even under the RDDB Act.
3. As the provisions of the RDDB Act are not available to the Petitioner, there is no question of the Petitioner approaching the DRT for determination of the debt due.
4. The proceedings under the SARFAESI Act and the arbitration proceedings could go hand in hand, with the arbitration proceedings being the adjudicatory process and the SARFAESI proceedings being the enforcement proceedings.
5. A mere reference to the RDDB Act and the SARFAESI Act in the agreements executed between the parties, cannot lead to a conclusion that the dispute resolution mechanism of arbitration would not be available.

Observation:

The High Court inter alia observed that the definition of 'financial institution' under Section 2(h) of the RDDB Act is distinct from that of the SARFAESI Act and the words used in the said provision make it clear that when an institution or a non-banking financial company like the Petitioner is notified as a financial institution, it is only for the purposes of the SARFAESI Act.

The bar of jurisdiction contained in Section 34 of the SARFAESI Act pertains only to the matters which the DRT or the appellate tribunal is empowered to undertake as per the SARFAESI Act and the mechanism under the RDDB Act is not applicable and available to the Petitioner. Therefore, the exercise of determining and resolving disputes pertaining to the debt due, falls within the process of arbitration to which the parties have agreed by incorporating arbitration clauses in the said agreements.

Decision:

In view of the above observations, the High Court held that there are arbitrable disputes that have arisen between the parties and therefore, both the petitions under Section 9 and the application under Section 11 of the Arbitration Act can be entertained by the Court. Thus, the Court rejected the objection regarding jurisdiction raised by the Respondents.

The High Court was also of the view that a strong prima facie case is made out by the Petitioner for grant of interim measures and accordingly the petitions filed under Section 9 of the Arbitration Act were partly allowed. An arbitrator was thus appointed in the application filed under Section 11 of the Arbitration Act.

Please find attached a copy of the order.

This update has been contributed by Murtaza Kachwalla (Partner) and Aashdin B. Chivalwala (Principal Associate).

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