Court’s decision
The Bombay High Court dismissed two Commercial Arbitration Petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996, challenging arbitral awards passed under Section 84 of the Multi-State Co-operative Societies Act, 2002. The Court held that a multi-state co-operative bank is statutorily entitled to choose recovery proceedings under the MSCS Act, even where remedies under the Recovery of Debts and Bankruptcy Act, 1993 and the SARFAESI Act are available or invoked. It ruled that there is no jurisdictional error and no conflict between the statutes. The Section 34 petitions were dismissed.
Facts
The respondent, a multi-state co-operative bank registered under the MSCS Act, extended financial facilities to the petitioners. Upon default in repayment, the bank invoked Section 84 of the MSCS Act and referred the dispute to statutory arbitration. Parallelly, the bank also initiated proceedings under the SARFAESI Act for enforcement of security interest.
The arbitral tribunal appointed under Section 84 passed awards in favour of the bank. The petitioners challenged these awards under Section 34 of the Arbitration and Conciliation Act, primarily on jurisdictional grounds.
As recorded on page 4 of the judgment, the challenges were confined to legal issues and not factual findings, given the limited scope of interference under Section 34.
Issues
The core issue was whether a multi-state co-operative bank, engaged in banking activity under Entry 45 of List I, could resort to arbitration under Section 84 of the MSCS Act for debt recovery, or whether the exclusive forum lay under the RDB Act or SARFAESI Act.
A related issue was whether invoking SARFAESI proceedings barred recourse to statutory arbitration under the MSCS Act.
The Court also examined whether the arbitrator had jurisdiction to rule on objections to its own jurisdiction.
Petitioners’ arguments
The petitioners argued that recovery of debts is a banking function governed by central legislation enacted under Entry 45 of List I. Therefore, only the RDB Act and SARFAESI Act could apply, and the mechanism under the MSCS Act stood excluded.
It was contended that once SARFAESI proceedings were initiated, the bank could not simultaneously invoke arbitration under Section 84. The petitioners also argued that a statutory arbitrator could not determine objections regarding its own jurisdiction.
Reliance was placed on constitutional distribution of legislative powers and Supreme Court precedents relating to arbitrability and statutory override.
Respondents’ arguments
The bank submitted that Section 84 of the MSCS Act expressly covers disputes touching the business of a multi-state co-operative society, including recovery of debts from members.
It relied upon Section 19(1A) and (1B) of the RDB Act (as amended), which expressly grant multi-state co-operative banks the option to initiate proceedings under the MSCS Act instead of approaching the Debt Recovery Tribunal.
The bank further argued that SARFAESI proceedings are enforcement proceedings, whereas arbitration under Section 84 is adjudicatory in nature. Both remedies can coexist.
Analysis of the law
The Court referred to the Constitution Bench decision in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. (2020), which held that SARFAESI applies to co-operative banks and that recovery of debt is an essential banking function under Entry 45 of List I.
However, the Court noted that the RDB Act itself, through Section 19(1A), expressly permits a multi-state co-operative bank to opt for proceedings under the MSCS Act instead of approaching the DRT. This statutory option defeats the argument of exclusive jurisdiction.
Section 84 of the MSCS Act contains a non obstante clause and specifically includes claims for debt due from a member as disputes touching the business of the society. The petitioners conceded membership, bringing the dispute squarely within Section 84.
The Court also relied on Section 16 of the Arbitration and Conciliation Act, 1996, which empowers an arbitral tribunal to rule on its own jurisdiction.
Precedent analysis
The Court considered Pandurang Ganpati Chaugule (2020), affirming Parliament’s competence to legislate on banking matters concerning co-operative banks.
It also referred to Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd. (2018) and Transcore v. Union of India (2008), which held that SARFAESI proceedings and other recovery mechanisms can proceed simultaneously and are not mutually exclusive.
Further reliance was placed on M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd. (2017), which affirmed that SARFAESI and arbitration proceedings may go hand in hand.
The Court found no conflict between the MSCS Act and SARFAESI Act, observing that SARFAESI’s overriding effect applies only in case of demonstrated inconsistency.
Court’s reasoning
The High Court held that the RDB Act itself preserves the statutory option for multi-state co-operative banks to proceed under the MSCS Act. Therefore, it cannot be contended that arbitration under Section 84 is without jurisdiction.
The non obstante clause in Section 84 reinforces its overriding application in disputes touching the business of the society.
The Court rejected the contention that initiation of SARFAESI proceedings bars arbitration, clarifying that enforcement of security interest is distinct from adjudication of debt liability.
It also dismissed the argument regarding arbitrator’s jurisdictional competence, noting that Section 16 of the Arbitration Act expressly empowers the tribunal to rule on its own jurisdiction.
Conclusion
Finding no patent illegality, jurisdictional error, or ground warranting interference under Section 34, the Bombay High Court dismissed both commercial arbitration petitions and upheld the arbitral awards dated 5 December 2022 and 3 July 2023.
Implications
This ruling reinforces that multi-state co-operative banks enjoy statutory flexibility in choosing recovery mechanisms. The RDB Act does not create exclusive jurisdiction barring MSCS arbitration.
The decision clarifies that SARFAESI enforcement proceedings and arbitration under Section 84 are complementary, not conflicting remedies.
For financial institutions, the judgment strengthens strategic choice in recovery proceedings. For borrowers, it signals limited scope to challenge statutory arbitration on jurisdictional grounds where membership and debt are admitted.
Case law references
- Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. (2020) 9 SCC 215
Held SARFAESI applies to co-operative banks and affirmed Parliament’s competence under Entry 45 List I. - Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd. (2018) 14 SCC 783
Recognised complementary existence of SARFAESI and arbitration remedies. - Transcore v. Union of India (2008) 1 SCC 125
Rejected doctrine of election in debt recovery context. - M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd. (2017) 16 SCC 741
Held SARFAESI and arbitration proceedings can proceed simultaneously.
FAQs
1. Can a multi-state co-operative bank choose arbitration instead of DRT proceedings?
Yes. Section 19(1A) of the RDB Act expressly allows a multi-state co-operative bank to opt for proceedings under the MSCS Act instead of approaching the Debt Recovery Tribunal.
2. Does initiating SARFAESI proceedings bar arbitration?
No. SARFAESI proceedings are enforcement measures, while arbitration is adjudicatory. Both remedies can operate simultaneously unless statutory conflict is shown.
3. Can a statutory arbitrator decide objections to jurisdiction?
Yes. Under Section 16 of the Arbitration and Conciliation Act, an arbitral tribunal is competent to rule on its own jurisdiction.
