Arbitration clause in loan agreements prevails over SARFAESI provisions, allowing financial institutions to seek arbitration despite statutory remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

ORDER :

. 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. Ms. 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 27.08.20