The Bombay High Court holds that the SARFAESI and Arbitration Acts can coexist

The case of Tata Motors Finance Solutions Ltd. v. Naushad Khan (2023) revolved around the interaction between arbitration proceedings and statutory remedies under the SARFAESI Act.

Background and Facts:

1. Parties Involved: Tata Motors Finance Solutions Ltd. (Petitioner) provided loans to Naushad Khan and Praveen Travels Pvt. Ltd. (Respondents) under Loan-cum-Hypothecation-cum-Guarantee Agreements.
2. Loan Defaults: The respondents failed to fulfill their repayment obligations. The petitioner sought recovery of the dues.
3. Arbitration Clause: The agreements included an arbitration clause, prompting the petitioner to initiate arbitration proceedings.
4. Respondent’s Argument: The respondents contended that the petitioner, being a financial institution under the SARFAESI Act, was required to seek recovery through the Debt Recovery Tribunal (DRT), thus precluding arbitration.

Issues: Whether the jurisdiction under the SARFAESI Act bars a lender from invoking arbitration proceedings for debt recovery.

Judgment:

The Bombay High Court highlighted that the SARFAESI Act primarily facilitates enforcement mechanisms but does not adjudicate debt claims. Arbitration, being a process to determine debt, complements SARFAESI’s enforcement framework. The Court held that arbitration and SARFAESI mechanisms could operate concurrently. Lenders may determine the quantum of debt through arbitration and then use SARFAESI for enforcement.

The SARFAESI Act addresses enforcement, whereas the Recovery of Debts Due to Banks and Financial Institutions Act (RDB Act) provides a comprehensive adjudication mechanism. Financial institutions under the RDB Act are restricted from arbitration due to its detailed statutory framework. The Court validated the petitioner’s right to arbitration, stating the SARFAESI Act’s scope does not render arbitration clauses void unless explicitly barred. This ruling emphasizes the concept that arbitration and statutory remedies can coexist as long as they address different procedural goals, such as establishing liability versus enforcement.