Rajasthan HC: SARFAESI Proceedings No Bar to Arbitration; S.21 Notice Dispensable if Respondent Aware of Arbitration Invocation (S.11 Arbitration Act) - 2025-05-31

Rajasthan High Court Appoints Arbitrator, Clarifies Stance on Parallel SARFAESI Proceedings and Section 21 Notice

Jaipur , Rajasthan – The High Court of Rajasthan, Jaipur Bench, in a significant order, has allowed an application for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, holding that ongoing proceedings under the SARFAESI Act, 2002, do not bar arbitration and that a formal notice under Section 21 of the Arbitration Act can be dispensed with in peculiar circumstances where the respondent is already aware of the invocation of arbitration.

The order was delivered by Justice Anoop KumarDhand on May 30, 2025 (as per judgment records), in the case of Shekharchand Sacheti & Anr. vs. S.M.F.G. India Home Finance Company Limited (ARBAP / 81 / 2024).

Case Background

The petitioners, Shekharchand Sacheti and Smt. Sudha Sacheti , had entered into a loan agreement dated January 23, 2017, with S.M.F.G. India Home Finance Company Limited (formerly Fullerton India Homes Finance Company Ltd.). The agreement contained an arbitration clause (Article 23) for dispute resolution.

Subsequently, disputes arose, the petitioners' loan account was classified as a Non-Performing Asset (NPA), and the respondent finance company initiated proceedings under the SARFAESI Act, 2002, taking possession of the mortgaged property. The petitioners had also filed a partition suit concerning the property before the District Judge, Ajmer. However, the respondents objected to the civil suit, arguing that the matter should be resolved via arbitration as per the loan agreement. Consequently, the plaint was returned to the petitioners on June 1, 2024, under Order 7 Rule 10 of the Code of Civil Procedure. Following this, the petitioners approached the High Court seeking the appointment of an arbitrator.

Arguments Presented

Petitioners' Contentions (Represented by Mr. Dilip Sharma ): * The loan agreement contains a valid arbitration clause. * The civil suit was withdrawn specifically to initiate arbitration proceedings, based on the respondents' own objection. * A formal notice under Section 21 of the Arbitration Act was not mandatory as the respondents were fully aware of the dispute and the intention to arbitrate, a stance supported by a coordinate bench in Suresh Chandra Gupta Vs. Kishan Gopal Gupta . * Relying on M.D. Frozen Foods Exports Private Limited & others Vs. Hero Fincorp Limited and Aditya Birla Finance Limited Vs. Paul Packaging Private Limited , petitioners argued that arbitration and SARFAESI proceedings can run concurrently.

Respondents' Contentions (Represented by Mr. Naman Yadav & Mr. Jitendra Choudhary ): * SARFAESI proceedings had been initiated and culminated, with the property allegedly auctioned and third-party rights created. An application by the petitioners under Section 17 of the SARFAESI Act was pending before the Debt Recovery Tribunal (DRT), Jaipur , where their plea for interim relief was rejected. * The arbitration application was not maintainable because no prior notice under Section 21 of the Arbitration Act was served. * Citing Vidya Drolia & Others Vs. Durga Trading Corporation and Alupro Building Systems Pvt. Ltd. Vs. Ozone Overseas Pvt. Ltd. , the respondents argued that since the matter was sub-judice before the DRT and SARFAESI proceedings had progressed, the arbitration application was not maintainable.

Court's Analysis and Rulings

Justice Dhand identified two primary legal issues:

1. Whether a dispute between a borrower and a financial institution regarding non-payment can be referred to arbitration when the matter is sub-judice before the DRT, in light of Vidya Drolia .

2. Whether an arbitration application is maintainable without serving a notice under Section 21 of the Arbitration Act.

On the First Issue: Arbitrability and Parallel Proceedings

The Court extensively discussed the Supreme Court's decision in Vidya Drolia , which held that claims covered by the DRT Act are non-arbitrable as the legislation overrides the contractual right to arbitration. However, the Court distinguished this by heavily relying on the Supreme Court's ruling in M.D. Frozen Foods Exports Private Limited : > "SARFAESI proceedings are in the nature of enforcement proceedings, while arbitration is an adjudicatory process... SARFAESI proceedings and arbitration proceedings, thus, can go hand in hand.”

The Court found that the objection regarding the invocation of the arbitration clause due to ongoing DRT/SARFAESI proceedings was contrary to this Supreme Court precedent. Further, referencing the Constitution Bench decision in In Re: Interplay between arbitration agreement... and the Indian Stamp Act, 1899 and subsequent judgments like Tata Capital Limited , the Court reiterated that its role under Section 11(6A) is confined to a prima facie examination of the existence of an arbitration agreement. The judgment noted: > "Applying it to the present facts, evidently there is an arbitration agreement which manifests itself in the arbitration clause contained under Article 23 of the loan agreement... The Applicants had invoked the said clause to refer the disputes or differences arising out of loan agreement to arbitration. Thus, the objection taken by the respondent on the invocation of the arbitration clause, is sans merit in the given facts and circumstances."

On the Second Issue: Necessity of Section 21 Notice

The Court acknowledged the importance of Section 21 notice, citing Arif Azim Co. Ltd. Vs. Aptech Ltd. , which emphasizes that a valid notice marks the commencement of arbitration and is crucial for limitation. However, the Court carved out an exception based on the specific facts: > "But in the instant case, the respondents were not taken by surprise regarding invocation of the arbitration clause by the applicants for the first time before this Court inasmuch as the applicants submitted a suit for partition of property against the respondents before the Court of ADJ, where an application was submitted by none other than the respondents themselves under Sections 8 and 5 of the Act of 1996 that Civil Suit is not maintainable and an Arbitration Application under Section 11 of the Act is maintainable, hence accepting their prayer, the learned ADJ returned the plaint to the applicants..."

The Court concluded: > "Thus, it can safely be said that the respondents were not taken by surprise by the filing of this arbitration application... It is inconceivable to suggest that the respondents were unaware of the dispute... Hence, the respondents were well versed with the entire dispute raised against them. Therefore, under these peculiar circumstances, this application under Section 11 of the Act of 1996 is maintainable even without issuing a proper notice to the respondent under Section 21 of the Act of 1996 by the applicants."

Final Decision and Implications

The High Court allowed the arbitration application and appointed Justice Sabina (Former Acting Chief Justice), High Court of Himachal Pradesh , as the Sole Arbitrator to adjudicate the disputes between the parties. The appointment is subject to her declaration under Section 12 of the Act.

Crucially, the Court clarified: > "Before parting with the order, it is made clear that the respondents being secured creditors would be at liberty to proceed further against the applicants in terms of the judgment passed by the Hon’ble Apex Court in the case of M.D. Frozen Foods Exports Private Limited (supra)."

This decision reinforces the principle that arbitration can coexist with SARFAESI enforcement actions and provides a pragmatic exception to the formal Section 21 notice requirement when the respondent's conduct demonstrates full awareness and prior insistence on arbitration. It underscores the court's role in facilitating arbitration where an agreement exists, while respecting the rights of secured creditors under special enactments.