SARFAESI Involves Enforcement, Not Adjudication; Does Not Bar Arbitration: Bombay High Court

The Bombay High Court on Monday held that initiation of proceedings under the SARFAESI Act does not bar arbitration between a lender and a borrower.

The court clarified that SARFAESI proceedings are meant only for enforcement of security and do not involve adjudication of disputes. Arbitration, it held, is an adjudicatory process and can proceed in parallel.

Justice Sandeep V. Marne made the observations while hearing petitions filed by Tata Capital Housing Finance Ltd seeking appointment of an arbitrator and interim relief against its borrowers under the Arbitration and Conciliation Act.

However, the court observed that proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act stand on a different footing.

It held that proceedings under the RDDB Act are adjudicatory in nature and involve determination of claims by the Debts Recovery Tribunal. Since the statute expressly overrides arbitration agreements, such claims are not arbitrable merely because a loan agreement contains an arbitration clause.

“Like arbitration proceedings, even proceedings under the RDDB Act are adjudicatory in nature as the arbitrator or the DRT adjudicates the claim of the banks or financial institutions. On the other hand, the remedy under the SARFAESI Act is merely in the nature of enforcement where no adjudication takes place. This is yet another reason why mere initiation of proceedings under the SARFAESI Act cannot be a ground for not permitting adjudicatory proceedings under the Arbitration Act and vice versa,” the court observed.

The plea arose from a home equity loan facility sanctioned in November 2019. The loan was restructured in June 2021.

Tata Capital later alleged that the borrowers repeatedly defaulted on repayments and classified the account as a non-performing asset. On February 6, 2023, it issued a demand notice under the SARFAESI Act

To secure the debt, Tata Capital then approached the District Magistrate and obtained assistance of the District Magistrate to take possession of the mortgaged property.

In parallel, Tata Capital issued a loan recall and invoked the arbitration clause through a notice dated May 27, 2025. Later, it approached the High Court seeking interim relief.

The borrowers opposed the move. They contended that once SARFAESI proceedings had been initiated and measures pursued before the District Magistrate, arbitration was no longer permissible.

Rejecting the contention, the court held that SARFAESI proceedings are purely enforcement-oriented and do not adjudicate disputes. Such action, it said, cannot preclude adjudicatory proceedings under the Arbitration Act, and both remedies can coexist.

The court accordingly rejected the borrowers' objections and appointed Pooja Khandeparkar as the sole arbitrator to adjudicate the dispute.