Delhi High Court rules financial institutions cannot invoke arbitration under SARFAESI Act

Delhi High Court rules financial institutions cannot invoke arbitration under SARFAESI Act

The rules did not cover a simple lender-borrower dispute

The Delhi High Court has held that a borrower, a financial institution, cannot resort to arbitration provided under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

The bench comprising Justice Anup Jairam Bhambhani held that SARFAESI Act provided a remedy in cases of inter se dispute between the financial institution. It did not cover a simple lender-borrower dispute if the borrower was a financial institution.

In 2019, the parties entered into a Rupee Facility Agreement by which the respondent (bank) provided the petitioner (Non-Banking Finance Company) a loan of Rs.10 crores against a security interest created in the respondent's favor.

Later, a dispute arose between the parties and the petitioner's account was declared a Non-Performing Asset (NPA).

The respondent filed the proceedings under the SARFAESI Act for the enforcement of security interest before the Debt Recovery Tribunal (DRT), Jaipur.

The aggrieved petitioner issued the notice of arbitration and requested the respondent to choose an arbitration from a panel of three names given by it. On failure of the parties to mutually appoint the arbitrator, the petitioner requested the appointment of an arbitrator.

The petitioner maintained that it was an NBFC, qualifying as a financial institution under the SARFAESI Act, which entitled it to invoke arbitration when the dispute was between two financial institutions. The arbitration arose not out of a contract but out of a statute. Consequently, the proceedings filed before DRT and any consequent decision taken therein were of no consequence as the DRT had no jurisdiction. Also, since the respondent failed to agree to the arbitrator's appointment, the petitioner had to approach the high court.

The respondent objected to the maintainability of the petition and said its claim was simply for the recovery of its dues. The petitioner was a borrower and covered the definition of a 'borrower' under the SARFAESI Act. Merely because it was also a financial institution, it was not entitled to claim arbitration. The agreement between the parties conferred exclusive jurisdiction upon the courts. But since no cause arose within the jurisdiction of the court, it did not have the territorial jurisdiction to decide the application.

However, the court held that since the arbitration was not out of an agreement, the concept of the seat did not apply, and the jurisdiction would be decided based on the Arbitration and Conciliation (A&C) Act. Also, since the principal branch of the respondent was in Delhi and the agreement was stamped and executed there, the court had the jurisdiction to decide the application.

On the applicability of the SARFAESI Act to the dispute between the parties, the court referred to certain clauses of the agreement. It held that the petitioner was a borrower and fell within the definition of the borrower under the Act. The word 'any person' was used in the context of a 'borrower' that was very wide and took a financial institution within its fold.

However, the Act provided for a remedy by way of arbitration only in cases of inter se dispute between the financial institution but did not cover a simple lender-borrower dispute, even if the borrower was a financial institution.

Thus, dismissing the petition, Justice Bhambhani held that the A&C Act provided a right to the lender to enforce the security. It also provided for a special forum, the DRT, to decide a controversy between the lender and the borrower. Since the dispute was non-arbitrable, the petitioner too could not choose arbitration over the remedy before DRT.