In a recent ruling the Bombay High Court has held that the debt owed to financial institutions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is arbitrable.
The respondents in these proceedings have raised a fundamental objection regarding jurisdiction of this Court to entertain the two petitions filed under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) and an application under Section 11 thereof, on the ground that the petitioner – applicant in these proceedings 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), further claiming that the petitioner ought to proceed under the SARFAESI Act and that the remedy of arbitration cannot be invoked by the petitioner at all.
The respondents claim that the petitioner ought to approach the Debts Recovery Tribunal (DRT) by invoking the provisions of the SARFAESI Act and that the law laid down by the Supreme Court in the case of Vidya Drolia and others Vs. Durga Trading Corporation, makes it amply clear that in the face of the statutory remedy with special tribunal available to the petitioner, resort to arbitration proceedings is barred, notwithstanding an arbitration clause contained in the agreement executed between the parties.
Thus, the petitioner, from the date of issuance of the notification, is indeed recognized as a financial institution. But, it is crucial that Section 2(1)(m)(iv) of the SARFAESI Act specifies that an institution, which is notified by the central government, shall be a ‘financial institution for the purposes of this Act’. The words used in the aforesaid provision make it very 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.
A Single Bench of Justice Manish Pitale observed that “In the present case, the mechanism and machinery under the RDDB Act is not applicable and available to the petitioner, and 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. In this context, Section 37 of the SARFAESI Act assumes significance, as it provides that, the application of other laws is not barred.”
“Reference to the SARFAESI Act in the agreements cannot be a bar for the petitioner to invoke arbitration. The reference to RDDB Act in the agreements is limited to the extent that, if in future, there is a change in law and the petitioner is included under the definition of ‘financial institution’ under the RDDB Act, the petitioner has reserved its right to proceed under the RDDB Act. As on today, the petitioner is admittedly not notified as a ‘financial institution’ under the RDDB Act, and therefore, the adjudicatory process of arbitration is clearly available to the petitioner, in the light of the above quoted arbitration clause in the agreements executed between the parties” the Court noted.
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