Tata Motors Finance Solutions Limited Vs Naushad Khan (Bombay High Court)
Introduction: The Bombay High Court, in the case of Tata Motors Finance Solutions Limited vs. Naushad Khan, recently addressed a significant legal question regarding the invocation of arbitration proceedings despite the existence of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The respondents contended that the petitioner, being a financial institution under the SARFAESI Act, should exclusively resort to the statutory remedies provided by the Act, and arbitration should not be permissible. This article explores the court’s reasoning and its impact on the dispute resolution landscape.
Background: The petitioner, Tata Motors Finance Solutions Limited, had entered into Loan-cum-Hypothecation-cum-Guarantee Agreements with the respondents, which included an arbitration clause. The petitioner claimed defaults in loan repayments by the respondents, leading to the initiation of arbitration proceedings. However, the respondents argued that the petitioner, being a financial institution under the SARFAESI Act, should pursue remedies exclusively under that Act, and arbitration was not permissible.
Key Arguments:
i. Respondents’ Position: The respondents contended that the petitioner, being notified as a financial institution under the SARFAESI Act, must approach the Debt Recovery Tribunal (DRT) for recovery of dues. They relied on the Supreme Court’s decision in Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1, which, according to them, barred arbitration in the presence of a statutory remedy.
ii. Petitioner’s Counterarguments: The petitioner argued that its notification as a financial institution under the SARFAESI Act was limited to the purposes of that Act and did not extend to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act). They asserted that the SARFAESI Act and arbitration proceedings could coexist, with arbitration determining the debt due, followed by SARFAESI Act enforcement.
Court’s Analysis and Decision: The court meticulously examined the provisions of the SARFAESI Act, RDDB Act, and relevant case law. The crucial finding was that the petitioner’s notification as a financial institution under the SARFAESI Act was specific to that Act and did not extend to the RDDB Act.
The court emphasized that the SARFAESI Act primarily dealt with enforcement proceedings and lacked a mechanism for determining the debt due. Therefore, the court held that arbitration, as an adjudicatory process, was necessary for determining the debt, and the SARFAESI Act’s enforcement proceedings could follow.
The court rejected the respondents’ reliance on Vidya Drolia, distinguishing it by highlighting that the petitioner was not covered under the RDDB Act, and the case did not prohibit arbitration for entities not specifically covered under that Act.
Furthermore, the court emphasized Section 37 of the SARFAESI Act, which explicitly stated that the provisions of the Act did not bar the application of other laws, including the Arbitration Act.
Conclusion: The Bombay High Court’s decision clarifies that a mere reference to the SARFAESI Act in agreements does not preclude the invocation of arbitration. The court’s meticulous analysis reaffirms the coexistence of arbitration and SARFAESI Act proceedings, provided each process serves its designated purpose. This ruling underscores the importance of precise legal language in notifications and agreements and contributes to the evolving jurisprudence surrounding the interplay of arbitration and statutory remedies in the financial sector.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
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.
2. 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 reported in (2021) 2 SCC 1, 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.
3. Brief reference to facts would give the backdrop in which the present proceedings have been initiated. The petitioner had advanced loan facilities to the respondents for purchase of vehicles and accordingly, Loan-cum-Hypothecation-cum-Guarantee Agreements were executed between the petitioner and the respondents. Each of the agreements contained an arbitration clause, which reads as follows:-
“21. Arbitration
21.1. All disputes differences and / or claims arising out of this Agreement or as to the construction, meaning or effect hereof or as to the rights and liabilities of the parties hereunder shall be settled by arbitration to be held in Mumbai in accordance with the Arbitration and Conciliation Act 1996, or any statutory amendments thereof and shall be referred to a sole arbitrator to be appointed by the Lender. In the event of death, refusal, neglect, inability or incapability of the person so appointed to act as an arbitrator, the Lender may appoint a new arbitrator. The proceedings will be conducted in English. The award of the arbitrator shall be final and binding on parties concerned.”
4. The loan amounts were secured by way of hypothecation of vehicles in respect of which the loan amounts were advanced. The petitioner claims that although, initially, the respondents did make payment of installments, but subsequently, they started committing defaults. The parties entered into correspondence regarding repayment of outstanding amounts by the respondents. When the petitioner noticed that one of the vehicles was sold by the respondents, the petitioner was constrained to invoke the arbitration clause. Since the petitioner apprehended that the respondents would continue using the vehicles despite committing defaults and the vehicles may even be disposed off, the present petition under Section 9 of the Arbitration Act and the application under Section 11 thereof were filed before this Court.
5. The respondents appeared and resisted the prayers made in the petition and in the application. The aforementioned fundamental objection regarding jurisdiction was raised, on the basis of which, the respondents prayed for dismissal at the threshold of the petitions and the application.
6. Since the respondents raised objection of jurisdiction, going to the very root of the matter, this Court is referring to the arguments made on behalf of the respondents first and then reference would be made to the submissions made on behalf of the petitioner.
7. Mr. Anita Castellino, learned counsel appearing for the respondents in the petition as well as in the application submitted that the petitioner was notified as a financial institution by the central government under the provisions of the SARFAESI Act by issuing notification dated 27.08.2018. It was submitted that the moment the petitioner stood notified 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, as per the law laid down by the Supreme Court in the case of Vidya Drolia and others Vs. Durga Trading Corporation (supra), notwithstanding the existence of arbitration clause under the agreements executed between the parties, the disputes were rendered non-arbitrable. On this basis, it was submitted that the present petitions and the application filed under the provisions of the Arbitration Act are barred by law, and therefore, this Court cannot exercise jurisdiction to entertain the same.
8. The learned counsel for the respondents invited attention of this Court to Section 2(1)(m) of the SARFAESI Act, which defines ‘financial institution’, as also Section 34 thereof, which 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. It was submitted that since arbitration proceedings are civil proceedings, they are also barred by operation of Section 34 of the SARFAESI Act.
9. The learned counsel further referred to the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act), particularly Section 2(h) thereof, which defines ‘financial institution’. Reference was also made to Section 18 of the RDDB Act, which 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, such powers being exercised by the DRT.
10. On this basis, it was submitted that by operation of the aforesaid statutes in the light of the petitioner being notified as a financial institution by notification dated 27.08.2018, the remedy of resolution of disputes through arbitration is no longer available to the parties before this Court. The learned counsel for the respondents specifically relied upon judgements of the Supreme Court in the case of the Authorized Officer, State Bank of India Vs. M/s. Allwyn Alloys Pvt. Ltd. and others, (2018) 8 SCC 120; Bank of Rajasthan Ltd. Vs. VCK Shares and Stock Broking Services Ltd., (2023) 1 SCC 1; and judgement of the Delhi High Court in the case of Bell Finvest India Limited and ors. Vs. A U Small Finance Bank Limited, AIR 2023 Delhi 32.
11. Reliance was placed on behalf of the respondents on judgements of this Court in the case of Mantras Green Resources Limited and others Vs. Canara Bank [judgement and order dated 03.2023 passed in Commercial Arbitration Application (L) No.12570 of 2021] and Naresh J. Doshi and others Vs. Reserve Bank of India, 2021 SCC OnLine Bom.11655.
12. It was further submitted on behalf of the respondents that in the agreements executed between the parties, there is a reference to the RDDB Act as well as the SARFAESI Act and that the petitioner itself has retained its right to proceed under the aforesaid statutes. On this basis, it was submitted that the petitioner cannot be permitted to turn around and claim that despite the aforesaid stipulations in the agreement, it is entitled to invoke arbitration.
13. On the other hand, Mr. Chetan Kapadia, learned senior counsel appearing for the petitioner in Commercial Arbitration Petition (L) No.8654 of 2022 and for the applicant in Commercial Arbitration Application (L) No.3908 of 2023, as also Dr. Abhinav Chandrachud, learned counsel appearing for the petitioner in Commercial Arbitration Petition (L) No.25851 of 2022, submitted that the objection regarding jurisdiction raised on behalf of the respondents is based on a misreading of the position of law and also that, the same is based on erroneous appreciation of the facts in the present proceedings.
14. It was submitted that there could be no dispute about the petitioner being notified as a financial institution by notification dated 27.08.2018, issued by the central government under the provisions of the SARFAESI Act. But, it was emphasized that 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’. According to the learned senior counsel appearing for the petitioner, the respondents were wrongly presuming that the aforesaid notification had resulted in the petitioner being notified as the financial institution even under the RDDB Act. The definitions of ‘financial institution’ under the SARFAESI Act and the RDDB Act were referred to and it was submitted that the petitioner could not be said to be a financial institution notified under the RDDB Act. Thus, the petitioner can approach the DRT only under the provisions of the SARFAESI Act, upon crystallization of the debt recoverable, only to utilize the mechanism and machinery provided under the SARFAESI Act for recovery of dues. It was emphasized that the provisions of the SARFAESI Act do not provide a mechanism for determination of the debt due, which in the facts of the present case is an exercise to be carried out only in the arbitral proceedings, in the light of the arbitration clause contained in the agreements executed between the parties. 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, and therefore, the contention raised on behalf of the respondents regarding jurisdiction, deserves to be rejected.
15. The learned senior counsel appearing for the petitioner in these proceedings relied upon judgement of the Supreme Court in the case of M. D. Frozen Foods Exports Private Limited Vs. Hero Fincorp Limited, (2017) 16 SCC 741 to contend that 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. It was emphasized that a proper reading of the judgement of the Supreme Court in the case of Vidya Drolia and others Vs. Durga Trading Corporation (supra), would show that the law laid down in M. D. Frozen Foods Exports Private Limited Vs. Hero Fincorp Limited (supra) was not overruled and the contention sought to be raised to the contrary on behalf of the respondents was not sustainable. In this regard, reliance was placed on judgement of the Delhi High Court in the case of Diamond Entertainment Technologies Private Limited and others Vs. Religare Finvest Limited through its Authorized Officer, 2023 SCC OnLine Del. 95.
16. The learned senior counsel appearing for the petitioner sought to distinguish the judgements of this Court in the case of Mantras Green Resources Limited and others Vs. Canara Bank (supra) and Naresh J. Doshi and others Vs. Reserve Bank of India (supra). Additionally, reliance was placed on judgment of this Court in the case of Bank of Baroda Vs. Gopal Shriram Panda and another, 2021 SCC OnLine Bom 466. Having contended that the objection regarding jurisdiction raised on behalf of the respondents was unsustainable, the learned senior counsel for the petitioner submitted that in the light of the material placed on record, a strong prima facie case was made out for grant of interim measures as prayed in the petitions filed under Section 9 of the Arbitration Act and it was contended that since arbitration had been invoked, this Court may also allow the application filed under Section 11 of the Arbitration Act.
17. The learned senior counsel appearing for the petitioner submitted that 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. It was submitted that the SARFAESI Act concerns enforcement process and reference to the RDDB Act is only to the extent that, if in future there is a change in law and the petitioner is included in the definition of the ‘financial institution’ under the RDDB Act, then the petitioner would be at liberty to exercise the rights available under the RDDB Act.
18. Heard learned counsel for the parties and perused the material on record. The fundamental objection regarding jurisdiction deserves consideration in the present proceedings. There can be no doubt about the fact that if the law laid down by the Supreme Court in the case of Vidya Drolia and others Vs. Durga Trading Corporation (supra) applies in the present proceedings, the petitions as well as the application will have to be dismissed, for the petitioner to be relegated to appropriate remedies under the SARFAESI Act. In order to consider the rival submissions, it would be appropriate to refer to the relevant provisions of the SARFAESI Act as well as the RDDB Act.
19. The relevant provisions of the SARFAESI Act are as follows:-
“2. Definitions.-(1) In this Act, unless the context otherwise requires,-
(a) to (l) …
(m) “financial institution” means-
(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956);
(ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);
(iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958);
(iiia) a debenture trustee registered with the Board and appointed for secured debt securities;
(iiib) asset reconstruction company, whether acting as such or managing a trust created for the purpose of securitisation or asset reconstruction, as the case may be;
(iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act;
17. Application against measures to recover secured debts.- (1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application along with such fee, as may be prescribed, to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken.
34. Civil court not to have jurisdiction.– No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”
20. The relevant provisions of the RDDB Act are as follows:-
“2. Definitions.– In this Act, unless the context otherwise requires,-
(a) to (g) …
(h) “financial institution” means-
(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956);
(ia) the securitisation company or reconstruction company which has obtained a certificate of registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(ib) a debenture trustee registered with the Board and appointed for secured debt securities;
(ii) such other institution as the Central Government may, having regard to its business activity and the area of its operation in India, by notification, specify;
18. Bar of jurisdiction.- On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17:
Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Law (Amendment) Act, 2012 (1 of 2013) under the Multi-State Co-operative Societies Act, 2002 (39 of 2002) shall be continued and nothing contained in this section shall, after such commencement, apply to such proceedings.”
21. On 27.08.2018, the Ministry of Finance of the Central Government issued notification including the petitioner as a ‘financial institution’ under Section 2(1)(m)(iv) of the SARFAESI Act. The relevant portion of the said notification reads as follows:-
“ MINISTRY OF FINANCE
(Department of Financial Services)
NOTIFICATION
New Delhi, the 27th August, 2018
S.O.4176 (E).- In exercise of the powers conferred under the sub-clause (iv) of clause (m) of sub-section (1) of section 2 read with section 31A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), the Central Government hereby specifies the following Non-Banking Financial Companies including Non-Banking Financial Companies-Deposit Taking, which are covered under clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) and are registered with Reserve Bank of India, having assets worth five hundred crore rupees and above as per their last audited balance sheet, as ‘Financial Institution’, and hereby directs in the public interest that all provisions of the said Act, shall apply to such financial institutions with the exception that the provisions of sections 13 to 19 shall apply only to such security interest which is obtained for securing repayment of secured debt with principal amount of one crore rupees and above, namely:-
