RDB Act Does Not Bar MSCS Arbitration For Debt Recovery By Multi-State Co-Op Banks: Bombay High Court

The Bombay High Court has recently held that a multi-state co-operative bank can recover its loan dues through arbitration under Section 84 of the Multi-State Co-operative Societies Act, 2002, which provides for statutory dispute resolution in matters concerning the business of such societies, and is not confined to approaching the Debt Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993.

Dismissing challenges to arbitral awards obtained by Abhyudaya Co-operative Bank Ltd, Justice Sharmila U. Deshmukh ruled that there is no exclusive jurisdiction with the Tribunal under the RDB Act.

The Court said, “The statutory provision of RDB Act does not place an absolute embargo on the mechanism provided under the MSCS Act and on the contrary, admits of the right of a multi State co-operative society to initiate proceedings under MSCS Act to recover debts”

Further, observing that an amendment to the RDB Act introduced Section 19(1A), which expressly allows a multi-state co-operative bank to initiate proceedings under the MSCS Act instead of approaching the Tribunal, the Court said the statutory scheme itself preserves this option.

It noted, “As the option is made available by the statute itself, it cannot be accepted that the exclusive jurisdiction vested in the Tribunal constituted under the RDB Act and the Arbitrator had no jurisdiction under Section 84 of the MSCS Act.”

The Court noted that Section 19(1A) of the RDB Act provides that a multi-state cooperative bank may, at its option, initiate proceedings under the MSCS Act to recover debts instead of making an application before the Tribunal under that Act.

The case arose after the borrowers defaulted on repayment of financial assistance availed from the bank. The bank invoked arbitration under Section 84 of the MSCS Act for recovery of its dues. In addition, it invoked the SARFAESI Act, a law that enables banks to enforce security interests without intervention of courts or tribunals, for enforcement of its security.

Arbitral awards were passed in the bank's favour. The borrowers challenged those awards under Section 34 of the Arbitration and Conciliation Act, 1996.

The petitioners argued that banking falls under Entry 45 of List I of the Constitution and that recovery of debts due to banks must be governed exclusively by central legislation such as the RDB Act and the SARFAESI Act.

They contended that the proper forum for recovery was the Tribunal under the RDB Act and that once action under the SARFAESI Act had been initiated, arbitration under the MSCS Act could not be pursued. They also challenged the arbitrator's jurisdiction to decide the dispute.

Rejecting these submissions, the Court noted that Section 84 of the MSCS Act is prefaced with a non obstante clause and mandates that disputes “touching the constitution, management, or business” of a multi-state co-operative society be referred to arbitration.

It recorded that the petitioners were members of the bank and that recovery of loans formed part of its business. The Court further held that under Section 16 of the Arbitration and Conciliation Act, an arbitral tribunal is competent to rule on its own jurisdiction.

On the SARFAESI issue, the Court said there was no inconsistency between the two laws and no legal bar preventing the bank from pursuing remedies under both statutes. It held that initiating proceedings under one enactment does not preclude action under the other. Finding no ground to interfere with the awards, the Court dismissed the petitions and upheld the arbitral awards.