Delhi High Court judge seeks larger-bench review of ruling on lenders’ power to end arbitration after invoking SARFAESI કાર્યવાહી

Tata Capital Housing Finance Limited (TCHFL) sanctioned a loan to the respondents in 2016, secured by an equitable mortgage. After defaults, TCHFL classified the account as an NPA and issued a demand notice under Section 13(2) of the SARFAESI Act.

It later invoked the loan agreement’s arbitration clause under Section 21 of the Arbitration and Conciliation Act, 1996 (“A&C Act”); the respondents disputed the claim and declined to consent to the proposed appointment.

The clause provided for arbitration in Clause 12.11(a), but Clause 12.11(b) permitted TCHFL, in specified circumstances involving SARFAESI or DRT remedies, to terminate the arbitration.

The respondents challenged the clause for lack of mutuality, relying on Tata Capital Housing Finance Ltd. v. Shree Chand Construction & Apartment (P) Ltd.; TCHFL relied on M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd.

Whether Clause 12.11’s provision allowing TCHFL to terminate arbitration rendered the arbitration agreement invalid for lack of mutuality.

Whether TCHFL’s invocation of SARFAESI remedies prevented the parties from proceeding to arbitration.

Whether the Division Bench decision in Shree Chand Construction was contrary to M.D. Frozen Foods and should be considered by an appropriate Bench.

Under Section 11 of the A&C Act, the Court’s inquiry is confined to whether an arbitration agreement exists; other issues may ordinarily be left to the arbitral tribunal unless the claim is ex facie deadwood.

In M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd., the Supreme Court held that SARFAESI enforcement proceedings and arbitration are distinct and complementary remedies that may proceed simultaneously; SARFAESI proceedings are enforcement-oriented, whereas arbitration is adjudicatory.

Sections 35 and 37 of the SARFAESI Act were cited in support of the relationship between SARFAESI and other legal remedies.

The Court read Clause 12.11(a) as providing both parties with the ability to refer disputes to arbitration, while noting that Clause 12.11(b) gave TCHFL an option to terminate proceedings in specified circumstances.

It considered the question of termination to be governed by the A&C Act and stated that the Section 11 inquiry was whether an arbitration clause existed.

The Section 13(2) demand notice did not, in the Court’s view, prevent arbitration, because M.D. Frozen Foods recognised the concurrent operation of SARFAESI enforcement and arbitration.

The Court considered Shree Chand Construction contrary to that Supreme Court decision, but did not itself finally declare the Division Bench judgment per incuriam.

It placed the matter before the Acting Chief Justice for constitution of an appropriate Bench to consider whether Shree Chand Construction was per incuriam.

The judgment did not appoint an arbitrator or finally determine the validity of Clause 12.11.