A CASE FOR ARBITRABILITY OF DEBT RECOVERY DISPUTES

Saikishan B Rathore*

Owing to the unprecedented effect of the global pandemic, debt recovery has proven to be a herculean task. The interests of both the parties are at stake in this process. By delaying repayment of loans, the interests of lenders as well as the collection agencies which solely depend on the lenders for recovery assignments are adversely affected. On the other hand, compelling the borrower to repay the loan in addition to the attributed interest at a time where businesses have been drying up, is another challenge. Adding to the woes of the debt recovery process in India, the Supreme Court has rejected arbitrability of debt recovery disputes. The 3-judge bench in the recent Vidya Drolia case ruled that the Debt Recovery Tribunals have exclusive jurisdiction to settle such disputes, thereby interdicting the application of the Arbitration and Conciliation Act, 1996.

In this context, the author attempts to make an argument for the arbitrability of debt recovery disputes by pointing out the fallacies in the Vidya Drolia judgement, in order to not only settle the disputes expeditiously but to also ensure that neither party’s interest is absolutely compromised.

Evolution of the law prior to Vidya Drolia

The Supreme Court in Booz Allen v. SBI Home Finance Ltd. dealt with this issue by holding that disputes that arise out of rights in personam would be amenable to arbitration, whereas disputes arising out of rights in rem would be resolved by Courts and other public fora. In A Ayyasamy v. A Paramasivam, the court further held that once the nature of the rights is determined, the test for determining arbitrability is whether the dispute is covered by any special legislation. It was settled that when there is exclusive jurisdiction conferred on any forum by a statute, and the intent of the Legislature has been to provide distinctive remedies through the special forum, the dispute cannot be subjected to arbitration.

However, the specific question regarding arbitrability of debt recovery disputes came up for the first time before the Delhi High Court in HDFC Bank v. Satpal Singh Bakshi. The Court had to decide whether the proceedings initiated under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (hereafter ‘RDB Act’) excludes the provisions of the Arbitration and Conciliation Act, 1996. The Court answered the question in the negative being of the opinion that notwithstanding the judicial fora established by the State for the administration of justice, the parties are at liberty to choose an alternate redressal mechanism to settle their inter se disputes. Any dispute resolution mechanism, after all, is nothing but the means for determination of lis or resolution of conflicts between parties.

Hence, the Court upheld the autonomy of parties to submit their disputes to arbitration upon a valid arbitration agreement, thereby adopting a progressive position on arbitrability of disputes. However, this victory was short lived as the Supreme Court in Vidya Drolia v. Durga Trading Corporation (hereafter ‘Vidya Drolia’) has overruled the judgement of the Delhi High Court.

Four-Fold test: Progressive intent but regressive application

In Vidya Drolia, the Supreme Court propounded a four-pronged test to determine arbitrability of a dispute. A dispute would be amenable to arbitration when, the dispute relates to actions in personam; the dispute neither affects third party rights nor requires centralized adjudication; the dispute should not involve inalienable sovereign and public interest functions of the State; and the dispute is not expressly or by necessary implication rendered non-arbitrable under mandatory statutes.

Applying this test (the fourth point specifically) to debt recovery disputes, the Supreme Court observed that though the rights in question are in personam, the exclusive jurisdiction vests in the Debt Recovery Tribunal created by a special legislation. Hence, by virtue of necessary implication in the RDB Act, the Court held that there exists an implicit prohibition on arbitration of debt recovery disputes. At this juncture, the author argues that notwithstanding the praise showered on this judgement by the legal fraternity, the application of the four-fold test is incoherent for the following three reasons:

Firstly, there is no explicit legislative intent in the RDB Act to oust jurisdiction of Arbitral Tribunals. The special legislation in this case was enacted with the intent to redirect the cases pending before the Civil Courts, three years prior to the enactment of the Arbitration and Conciliation Act of 1996; thereby, no implicit prohibition of arbitration can be deduced from the statute. Moreover, as suggested by the various reports that led to the legislation in 1993, the debt recovery process was introduced in India primarily to reduce the burden on Civil Courts and provide for an alternative mechanism. Thus, there is potentially no explicit or necessary implication that interdicts arbitration of debt recovery disputes.

Secondly, the RDB Act is not a welfare legislation. The Supreme Court in M/S Emaar MGF Land Limited v. Aftab Singh, denied the arbitrability of consumer disputes because the Consumer Protection Act is a welfare legislation and the rights of the consumer(s) are in rem. However, in RDB Act the rights of the two parties are woven inter se and thus, as per section 8(1) of the Arbitration and Conciliation Act, 1996 upon the existence of a valid arbitration agreement, the parties ought to be allowed to settled the dispute via arbitration.

Thirdly, the Delhi High Court’s view upholding party autonomy is good in law. This argument is supported by the fact that the RDB Act does not confer wide powers on the Debt Recovery Tribunals. The Civil Courts still continue to exercise considerable amount of jurisdiction in ancillary matters of the debt recovery process. Thus, by allowing parties to opt for arbitration the dispute is confined to one forum in contrast to two forums and more importantly, the burden on the Civil Courts is further reduced (which necessitated the setting up of Debt Recovery Tribunals in the first place).

Conclusion

The Supreme Court’s ruling in Vidya Drolia to the extent that arbitrability is ousted merely because of the existence of special forum is a regressive take on the parties’ freedom to opt for alternative dispute resolution mechanisms. It is unequivocally argued that the reasoning of the Supreme Court is flawed as there is no discernible legislative intent behind the RDB Act to prohibit resolution by arbitration. Moreover, the Debt Recovery Tribunals which were established to reduce the burden of Civil Courts, are itself overburdened with cases. By allowing arbitration of such disputes, the burden on both the fora can be effectively reduced. Thus, it is the author’s firm opinion that the Supreme Court ought to reconsider its decision and allow arbitrability of debt recovery disputes for the expeditious disposal of cases as per the parties’ choice.


*The author is a third-year student at Gujarat National Law University, Gandhinagar. He can be reached via his LinkedIn.

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