The High Court held that SARFAESI and arbitration proceedings could proceed simultaneously and reiterated that its scope under Section 11(6) of the Arbitration Act was limited to examining the existence of the arbitration agreement.
The Single-Judge Bench of Justice Advait M. Sethna of the Bombay High Court held that proceedings under the SARFAESI Act and arbitration can proceed simultaneously, as the SARFAESI Act serves as an enforcement mechanism, whereas arbitration is adjudicatory in nature. The Court further clarified that under Section 11(6) of the Arbitration and Conciliation Act, 1996, its role is limited to a prima facie examination of the existence of a valid arbitration agreement, leaving substantive issues to be decided by the Arbitral Tribunal under Section 16.
The High Court considered an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator to adjudicate disputes arising out of a loan agreement dated 13 September 2018. The applicant, a registered non-banking financial company, had extended a loan to the respondent pursuant to a sanction letter dated 16 August 2018. Following the respondent’s default on loan repayment, the account was classified as a Non-Performing Asset (NPA) on 7 May 2022. The applicant issued a demand notice under Section 13(2) of the SARFAESI Act on 20 June 2022, demanding repayment of ₹6.11 crore, but the respondent failed to comply. The applicant subsequently initiated proceedings under the SARFAESI Act and invoked the arbitration clause in the loan agreement on 10 February 2023, proposing the appointment of a sole arbitrator.
Despite due service of notice through various modes, including court notice and email, the respondent chose not to appear or contest the application. The Court proceeded ex parte, noting that the arbitration clause in the loan agreement was clear and unambiguous, stipulating that disputes be resolved through arbitration with the seat of arbitration in Mumbai. The Court relied on the Supreme Court’s decision in M.D. Frozen Foods Exports Pvt. Ltd and Ors. v. Hero Fincorp Limited, REEDLAW 2022 SC 09201, which clarified that SARFAESI proceedings are enforcement mechanisms, whereas arbitration is an adjudicatory process. The Supreme Court further held that both SARFAESI and arbitration proceedings can proceed simultaneously.
The Court examined the scope of judicial interference under Section 11 of the Arbitration Act, limiting it to a prima facie determination of the existence of an arbitration agreement under Section 7. Relying on the principles laid down in Interplay and Tata Capital Limited v. Priyanka Communications (India) Pvt. Ltd., the Court reiterated the doctrine of competence-competence, which reserves substantive questions of jurisdiction and validity of arbitration agreements for the Arbitral Tribunal under Section 16 of the Act.
The Court concluded that the arbitration clause in para 23.16 of the loan agreement constituted a valid arbitration agreement, which the applicant had duly invoked. The respondent’s objection, if any, was deemed meritless and contrary to the settled legal position. Accordingly, Justice Sadhana Jadhav (Retd. Judge, Bombay High Court) was appointed as the sole arbitrator to adjudicate the disputes. The arbitration proceedings were directed to be conducted in Mumbai, with costs and fees to be equally shared by the parties, in accordance with the Fourth Schedule of the Arbitration Act. The application was allowed, with no order as to costs.
Mr. Vishal Maheshwari, Ms. Kamini Pansare a/w. Mr. Mihir Beradia, i/b. VM Legal represented the Appellant.
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