Registered Mortgage Does Not Bar Arbitration In Simple Money Recovery Claims: Madras High Court

The Madras High Court on 1 July held that a simple money recovery claim is arbitrable even if the underlying loan transaction is secured by a registered mortgage deed, provided the lender does not seek enforcement, foreclosure or sale of the mortgaged property.

Justice S. Sounthar dismissed an appeal filed by borrowers Marsalin and Mary Rani Subi, upheld an arbitral award directing them to pay Rs. 15,70,637 to Shriram City Union Finance Limited, and affirmed the Principal District Judge, Tirunelveli's order refusing to set aside the award.

Drawing a distinction between a money recovery claim and enforcement of mortgage rights, the Bench observed:

“In cases, where the claim is filed seeking recovery of money, the mortgage deed entered between the parties can be relied on for the purpose of proving the loan transaction. Merely because, the mortgage deed entered between the parties were marked as evidence of loan transactions, the claim cannot be treated as the one for enforcement of mortgage. The award passed by the sole Arbitrator at the most can only be treated as award for money against the person of the appellant and it is not an award against the property.”

Marsalin and Mary Rani Subi borrowed Rs. 15 lakh from Shriram City Union Finance Limited and agreed to repay the loan in 60 monthly installments. They executed a registered mortgage deed as security for the loan.

After repaying Rs. 9,53,625 until 9 March 2020, they defaulted. Shriram City Union Finance Limited invoked the arbitration clause and sought recovery of the outstanding loan amount before a sole arbitrator. On 12 February 2021, the arbitrator allowed the claim and awarded Rs. 15,70,637 with interest at 18 per cent in favour of the finance company.

The borrowers challenged the award before the Principal District Judge, Tirunelveli under Section 34 of the Arbitration and Conciliation Act, 1996 (which allows courts to set aside arbitral awards on limited grounds). They argued that they had not received proper notice of the arbitral proceedings and that the arbitrator awarded excessive interest in violation of the Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003.

On 3 March 2026, the District Judge rejected both contentions and dismissed the challenge. The borrowers then filed an appeal before the Madras High Court under Section 37(1)(c) of the Arbitration and Conciliation Act.

Before the High Court, the borrowers argued that the registered mortgage deed made the dispute non arbitrable under the Supreme Court's decision in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors. They contended that only civil courts could decide disputes involving mortgage rights.

Shriram City Union Finance Limited responded that it had sought only recovery of the outstanding loan amount and had not sought to enforce the mortgage or any right against the mortgaged property.

The Bench accepted the finance company's contention and held that the Supreme Court's ruling in Booz Allen applies only to proceedings that seek to enforce mortgage rights, not to simple money recovery claims that rely on a mortgage deed only to prove the loan transaction. It observed:

“In the case on hand, as mentioned earlier the relief sought for in the claim petition was not for sale of mortgaged property or foreclosure or redemption of mortgaged property but it was only a simple claim for recovery of money and the mortgage deed was relied on only for the purpose of proving the loan transactions between the respondent and the appellants. In such circumstances, the decision relied upon by the learned counsel appearing for the appellants does not apply to the facts and circumstances of the present case.”

Accordingly, the High Court dismissed the appeal and upheld the arbitral award, holding that the arbitral award created only a personal liability against the borrowers and did not operate against the mortgaged property.

Appearances for appellants (Marsalin & Mary Rani Subi): Advocate C.K.M. Appaji.

Appearances for respondent (M/s Shriram City Union Finance Limited): Advocate S. Manoj Kumar.