Jurisdictional Debate: Debt Recovery Tribunal and Arbitration Tribunal

*Anant Singh & Pooja Singh

Introduction to the long-standing confusion

Arbitration tribunals have gathered much attention after various laws such as the labor laws and electricity laws have mandated arbitration proceeding before a dispute is entertained by a court. Arbitration is a process of structured dispute settlement where parties negotiate over their issues with an intention to communicate properly and maintain future relations by coming to an amicable settlement.

The Special Tribunals, on the other hand, are created by way of specific enactments in order to distribute the workload of the courts and further handle cases in a specialised manner by appointing experts of different fields to preside over such specialised tribunals. Debt Recovery Tribunal (“DRT”) is formed under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”). However, it entertains matters under the RDDBFI Act and also under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”).

As both the Arbitration Tribunal and the Special Tribunals were created in order to distribute the workload of the courts and thereby solve the disputes between parties, there has been long-standing confusion regarding their conflicting jurisdictions.

Jurisdiction of DRT under the RRDBFI Act

The conflict arises due to the various non-obstante clauses placed in such special enactments leading to the confusion as to which shall prevail over the other. Section 34 of the RDDBFI Act lays down the over-riding effect of the Act over any other law addressing the same issue at hand. On one hand, Section 17 of the RDDBFI Act instills the power and authority, of dealing with issues relating to recovery of debts from banks and financial institutions, with the DRT and on the other hand, Section 18 bars the jurisdiction of any other court other than the Supreme Court and the High Court to exercise jurisdiction over matter specified under Section 17.

The Apex Court in the case of Central Bank of India v. State of Kerala and Ors. stated, that Section 34 of the RDDBFI Act shall give over-riding effect to the provisions of the Act only in cases where an inconsistency occurs between the two enactments, something that was further reiterated in the case of Vishal N. Kalsaria vs. Bank of India and Ors.,. In case of the absence of such an inconsistency, the over-riding provisions of the RDDBFI Act shall not be attracted. Now, such inconsistency arises due to the Arbitration and Conciliation Act, 1996 (“A & C Act”).

Jurisdiction of DRT under Arbitration & Conciliation Act

It is evident that even though the state provides for a judicial system for settlement of issues, Section 8 of the A & C Act provides for the right of the parties to choose a forum which can be an alternative to the regular court or tribunal mechanisms. The A & C Act even provides an opportunity for the parties to resort to alternate dispute mechanisms even after the commencement of a suit.

Section 8 of the A & C Act can only allow for arbitration over matters which are rights in personam i.e. they are rights of a private person and do not affect the public at large. Owing to this reason, certain matters such as criminal offences, matrimonial offences, insolvency proceedings, etc. are rendered as non-arbitrable. Furthermore, these matters can only be dealt with by special courts that are granted the jurisdiction to handle such cases. In addition to nature of the rights in dispute, the subject-matter of the dispute also becomes relevant for determining the arbitrability of a particular dispute. Even though the A & C Act does not specifically lay down any subject matters exempted from arbitration yet the same has been addressed indirectly by Section 34 (2)(a)(iv) which states that in cases where the arbitral award deals with an aspect which cannot be subject to arbitration, the award can be set aside by filing an application for the same.

The landmark judgment of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Ors. marked the differentiation between what is and is not an arbitrable subject matter. In the said case, the Supreme Court elaborated upon the aspect that any dispute upon which a civil court can exercise its jurisdiction is arbitrable. The exceptions to the same are first, those cases where the statute gives special rights to the parties and hence such cases need to be addressed by the designated tribunals or the courts. Therefore, in order to decide which subject is excluded from arbitration, one has to see if any special rights or obligations are created by the statutes or whether the courts are granted any special power to adjudicate the said matter. In the case of the presence of such rights, obligations, or powers the subject matter becomes non-arbitrable. Second exception includes those cases where the rights affected are in rem and not in personam.

Conflicting Jurisdictions – RDDBFI versus Arbitration

In light of the above analysis, the question that becomes pertinent is; can the matter be referred for arbitration under the A & C Act when the jurisdiction of the civil court is barred under the RDDBFI Act.

As aforementioned, the court has considered those matters as arbitrable that can be entertained by the Civil Courts. The Supreme Court has never adjudicated upon the same matter in the past.

The Apex Court in the case of M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Limited (“M. D. Frozen Foods”) reiterated the standing as was laid down by the Delhi High Court in the case of HDFC Bank Ltd. vs. Satpal Singh Bakshi that the Civil Courts are barred from exercising jurisdiction in matters coming within the ambit of Section 17 of RDDBFI Act and the same shall be exclusively tried by the DRT. It was stated that in the case of proceedings under the RDDBFI Act, the DRT does not create any special rights and is a mere substitute to the Civil Court. Furthermore, the Court has characterized the relief under the A & C Act as an alternative to the regular courts for deciding their disputes inter se.

Applying the aforementioned ratio to the jurisdictional issue at hand, any matter that is brought before the DRT shall be arbitrable as DRT is a mere specialized civil court and the matters under the RDDBFI Act relate to rights in personam where the banks or financial institutions owing to personal agreements between them and the parties try to recover their debts. A claim by a bank or financial institution does not fall under the category of rights in rem as they do not affect the public at large. Thereby the same matter can also be entertained under the A & C Act.

Parallel Proceedings- DRT and Arbitration

Another question that arises is whether the proceedings under DRT can run parallel to arbitration proceedings under the A & C Act. As aforementioned, DRT proceedings can be held under the RDDBFI or the SARFAESI Act.

Where the issue of parallel proceedings under the RDDBFI Act and A & C Act arises, the same is yet to be resolved by the courts. Wherefore, for the time being the matters under the RDDBFI Act shall have to be equated with the matters before the civil court, in lieu of the principle as laid down in the M. D. Frozen Foods case. For considering parallel proceedings before such “substitute civil court” and arbitration, the following becomes relevant.

With respect to arbitration proceedings, the judgment of the Supreme Court in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr. (“Sukanya Holdings case”) becomes relevant as general principles for reference to arbitration were laid down. This case was then applied by the Madras High Court in the matter of R. Ramaswamy Charitable Trust vs Koki’O Spaces Private Ltd., wherein it resolved the issue of whether proceedings before the civil court can run parallel with the arbitral proceedings, in negative. It was argued that Section 8(3) of the A & C Act allowed for the civil court proceedings to run parallel to arbitral proceedings. Court responded with the ratio laid down in the Sukanya Holdings case with special reference to Section 8 (3) of the A & C Act, wherein the Supreme Court stated that to achieve the object of the A & C Act, bifurcating a consolidated cause of action comprised of issues that are arbitrable and non- arbitrable, could not be allowed. In such a scenario, the civil court shall have the jurisdiction over the entire cause of action. Therefore, bifurication of cause of action is not allowed and a particular cause of action shall be regarded as either arbitrable or non-arbitrable, with no middle ground of parallel proceedings. In addition to that, Karnataka High Court in the case of M/S Vaswani Estates Developers vs M/S Bangalore Baptist Church held such simultaneous proceedings as impermissible in law.

However, the case is different for the proceedings under the SARFAESI Act. The Supreme Court has held in the case of M.D. Frozen Foods such parallel proceedings to be permissible, since SARFAESI proceedings are in the nature of enforcement proceedings, while arbitration is an adjudicatory process.

Conclusion

In the recent years, the trend of dispute resolution in India has shifted from conventional courts to the alternate dispute resolution mechanisms, such as arbitration. This shift has been interposed with cropping up of various specialized tribunals. The underlying objective has always been to effectively resolve disputes w.r.t. specialization and time-bound resolution. One of the drawbacks of such way-ward policy of the government has led to conflicting jurisdictions over the years. Many aggrieved parties have been taking advantage of this lacunae to delay the proceedings, thereby making the process tedious.

In light of which it becomes pertinent that the Supreme Court clears the air with respect to whether the proceedings under the RDDBFI Act can run simultaneously to arbitration proceedings, over the same subject matter. Though the aforementioned precedents and ratio so laid down, makes it clear that parallel proceedings shall not be allowed, creating a distinction between proceedings that are adjudicatory in nature (under the RDDBFI Act and A & C Act) vis-à-vis the enforcement proceedings (under the SARFAESI Act), the same are mere in arguments so forwarded by the authors, in absence of a clear mandate.

Where the disputes under RDDBFI Act are commercial in nature, the same demand to be adjudicated in a time bound manner, in the interest of business and trade. At present, the parties under the RDDBFI Act have the option of approaching either the DRT or the Arbitral Tribunal for dispute resolution. And, where DRT is a ‘substitute civil court’ the subject-matter under the RDDBFI Act can be made arbitrable in light of the ratio laid down in M. D. Frozen Foods case. The same shall further the interests of the parties so involved in dispute, by saving their time and providing them the opportunity of choice between two modes of dispute redressal system, whichever suits their convenience. Expanding the jurisdiction over the subject matter, so mentioned under RDDBFI Act helps DRT with its backlog in cases and saving state funds. Such clear-cut distinction of jurisdiction is pertinent for any well-oiled dispute resolution mechanism.

*The authors are final-year students at the School of Law, Christ University, Bangalore.