Bombay High Court Rules in Favor of Arbitration, Dismisses Objection in Loan Default Case

New Delhi, Dec 5 (KNN) In a significant ruling, the Bombay High Court reaffirmed that the role of a referral court under Section 11 of the Arbitration and Conciliation Act, 1996, is limited to verifying the existence of an arbitration agreement. 

The court emphasised that it is not within the referral court’s purview to delve into the substantive validity of the arbitration agreement. 

This decision came in response to an application filed by Aditya Birla Finance Limited, seeking the appointment of a sole arbitrator to resolve a dispute arising out of a loan agreement with Paul Packaging Private Limited.

The court’s ruling aligns with the Supreme Court’s established jurisprudence, particularly its interpretation of Section 11(6) of the Arbitration Act. 

The referral court is tasked only with ensuring that an arbitration agreement exists and that its formal validity is in order. The substantive validity or any issues regarding the agreement’s effectiveness are to be decided by the arbitral tribunal itself.

The dispute began when Aditya Birla Finance Limited entered into a loan agreement with Paul Packaging Private Limited on September 13, 2018, involving a sanctioned loan of Rs. 6.75 crore. 

While the respondent made payments initially, it later defaulted on its equated monthly instalments (EMIs), breaching the terms of the loan agreement.

In response to the defaults, Aditya Birla Finance issued a statutory demand notice under Section 13(2) of the SARFAESI Act on June 20, 2022, demanding repayment of Rs. 6.11 crore. 

The respondent failed to make payment within the statutory 60-day period, leading the applicant to initiate possession proceedings under Section 14 of the SARFAESI Act.

Despite these enforcement proceedings, the applicant invoked the arbitration clause in the loan agreement and sought the appointment of a sole arbitrator. 

The respondent raised an objection, questioning the invocation of the arbitration clause while SARFAESI proceedings were pending.

The court, however, pointed to the Supreme Court’s ruling in M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Limited (2017), which clarified that SARFAESI and arbitration proceedings can proceed in parallel. The respondent’s objection to the invocation of arbitration was thus deemed without merit.

Moreover, the court highlighted the existence of a valid arbitration agreement under Section 7 of the Arbitration Act, reinforcing the applicability of the arbitration clause in the loan agreement. 

The court’s interpretation of Section 11(6) was in line with the Supreme Court’s stance that the referral court’s examination should be confined to the existence and formal validity of the arbitration agreement, leaving substantive issues for the arbitral tribunal.

As a result, the court granted the application and appointed a sole arbitrator to adjudicate the dispute.

(KNN Bureau)