This article has been authored by Jayanti Dhingra, 4th Year B.A. LL.B. (Hons.) Student at O.P. Jindal Global University.
Introduction
The question of arbitrability or non-arbitrability of certain disputes has time to time arisen before the Indian Courts. In 2025, the Delhi High Court in the case of Nupower Renewables Private Limited v. Sammaan Capital Limited (2025 SCC OnLine Del 1048) dealt into the issue of debt recovery arbitrations, and the conflict that the Arbitration and Conciliation Act, 1996, (A&C Act) has between the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
Section 7 of the Arbitration and Conciliation Act, 1996 defines what an arbitration agreement is and its essential characteristics. Among the unsettled issues that have repeatedly come under judicial scrutiny is the arbitrability of debt recovery disputes in India. This paper will focus on the arbitrability of debt recovery disputes, the legal tensions involved between arbitration and the Debt Recovery Tribunal, and will focus on the need to expand the scope of arbitrability to such cases.
The RDB Act was established to create tribunals for expeditious disposal of debt recovery. Under this, Debts Recovery Tribunals (DRT) and Debts Recovery Appellate Tribunals (DRATs) were established and were given jurisdiction for debt recovery cases. On the other hand, the SARFAESI Act was enacted to look into the increasing number of Non-Performing Assets (NPAs) in the financial sector and specifically focuses on secured credits and loans. Its aim is to get speedy disposal of cases without court intervention and to reduce the burden on DRTs, as held in M/S Transcore vs Union of India (2008 (1) SCC 125). The SARFAESI Act provides for an enforcement mechanism, whereas the RDB provides for adjudication.
Tracking the Legal Jurisprudence
Tracking the jurisprudence on the issue, the Delhi High Court in the case of HDFC Bank Ltd. v. Satpal Singh Bakshi (2012 SCC OnLine Del 4815) had first recognised that under the RDB Act, DRT has jurisdiction to decide on debt recovery cases. However, relying on the principle of party autonomy, the courts held that cases which do not involve public interest considerations are arbitrable. The special jurisdiction only waives the civil court’s jurisdiction and not the arbitral tribunal’s jurisdiction.
The reasoning of the HDFC Bank case was put forward in the case of M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Ltd. ((2017) 16 SCC 741) where the court now had to deal with the question of arbitration versus SARFAESI Act. It was held that the arbitration proceedings can run simultaneously with the SARFAESI Act. A&C Act is an adjudicatory mechanism whereas SARFAESI Act is an enforcement mechanism. Resorting to arbitration will not preclude the party from enforcing securities under the SARFAESI Act. Though this case is able to resolve some conflict, the Vidya Drolia case presented a complexity between arbitration and the RDB Act.
Vidya Drolia v. Durga Trading Corporation (AIRONLINE 2020 SC 929) came up with a fourfold test to determine arbitrability – the dispute should be pertaining to rights in personam, and not rights in rem, it should not have third party or ‘erga omnes’ effect, no “inalienable sovereign and public interest functions of the State” are involved, and it is not “expressly or by necessary implication” barred by any statute. The court, in the judgement, also delved into the arbitrability of debt recovery claims. It specifically held that – “The claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.”
The court said that both the A&C Act and the RDB Act provide for adjudicatory mechanisms. The court agreed on the nature of such cases to be rights in personam; however, since RDB Act has established DRT, by “necessary implication”, the disputes are non-arbitrable. However, the problem that arises is that this case was neither about RDB nor SARFAESI. It was a landlord-tenant dispute which had nothing to do with the above statutes. No arguments or claims were raised for either of these Acts, and yet Vidya Drolia is now seen as overruling the HDFC Bank case.
In Emaar MGF v. Aftab Singh (2019 (12) SCC 751), where it dealt with consumer protection, the court had stated that-“In the event a person…seek an additional special remedy…does not opt for the additional/special remedy and he is a party to an arbitration agreement, there is no inhibition in disputes being proceeded in arbitration. It is only the case where specific/special remedies are provided for and which are opted by an aggrieved person that judicial authority can refuse to relegate the parties to the arbitration”.
The Consumer Protection Act, 2019 is a welfare legislation. However, still it is not non-arbitrable in toto even though it is a right in rem. Through these cases, the reasoning of the courts seems inconsistent – if certain welfare legislations are not entirely non-arbitrable, then it raises concerns for exclusion of debt recovery disputes from arbitration, although it is not even a welfare legislation.
Way Forward
The Narasimham Committee 1 Report on Problems of Banks & Financial Institutions in India has highlighted that in order to curb NPA, DRT and SARFAESI Act was implemented to reduce the burden of such cases on civil courts, not for granting exclusive jurisdiction on these tribunals. DRT was introduced to have expeditious proceedings and reduce the burden on civil courts. Moreover, it was enacted 3 years before the A&C Act came. At that point, there cannot be any “necessary implication”. Moreover, the expeditious disposal of cases has hardly been done by the DRT. The Report of the Working Group to Review the functioning of DRTs, which was under the Chairpersonship of N V Deshpande, had stated that 30 cases should ideally be handled by DRT at a particular time. But the figures have plunged to lakhs in number. One of the problems with DRT and their conflict with A&C Act was pointed out in the HDFC bank case, which though overruled, still continues to hold true even today. While SARFAESI was enacted to speed up the enforcement mechanism for secured creditors, they are given an alternative option to approach arbitration other than the DRTs. However, for unsecured creditors, they will still get stuck with DRT and given the huge pendency of cases piling up in DRT, the parties would want to approach arbitration as an alternative means to resolve their disputes.
Arbitrability of debt recovery matters can be a mutually beneficial solution for both the borrowers and the lenders. Including arbitration and bringing it in consonance with the RDB Act might be a better alternative in debt recovery disputes. For borrowers, arbitration can be seen as a means to come to a negotiating table and lower their payment or suggest other alternative means. For lenders, arbitration might become useful if the borrower is nearing bankruptcy. Unlike court litigation, where an official liquidator takes over, arbitration may offer a quicker path to partial recovery. Unsecured creditors might find arbitration a more effective route for recovering bad debts who, during insolvency, are later in priority than secured creditors. Of course, there are also negative sides attached to it as well – like for lenders, arbitration might mean lesser money being given in contrast to the original amount, even though they are the stronger party and have high negotiation power. For the borrowers, though arbitration might be of some relief, however, it decreases their credit score and credit rating which can affect their future lending power and creditworthiness.
If specifically delving into these statutes, Section 34 of the SARFAESI Act bars civil courts from hearing matters under the DRT jurisdiction. Section 18 of the RDB Act says that “no court or other authority” shall be allowed to adjudicate on disputes written under Section 17 of the Act. What will constitute “other authorities” has not been expressly explained in the law. However, courts in cases like Bhagwandas Auto Finance v. HDFC Bank (2011 SCC OnLine Cal 4375) and AmritJal Ventures Pvt. Ltd. v. SREI Infrastructure Finance Ltd. (2016 SCC OnLine Cal 4245) have held the exclusion of arbitration from the ambit of “other authorities”, as arbitration arises from party autonomy and consensual agreement to resolve disputes, rather than from the exercise of statutory authority. Also, Section 5 of the A&C Act talks about minimum judicial intervention. Tribunals are quasi-judicial bodies, included within the ambit of Section 5. If the parties have mutually agreed for an arbitration clause, it should be given full effect to. Hence, weaving DRTs into Section 5 of the A&C Act, an amendment would be required under the RDB Act to allow DRTs the power to refer matters to arbitration, either expressly or by “necessary implication.”
Another solution could be to adopt “second look doctrine” for DRT, like the way adopted in the European Union and United States for anti-trust law cases. Second look doctrine refers to when courts review awards that have been passed during the enforcement stage. The same can be adopted by DRT to ensure that the award rendered is compliant with the provisions of RDB Act and SARFAESI Act. Through this, the tribunal can assume the role of an amicus curiae orparens patriae, similar to EU and US. This would give power to the tribunal to ensure that the requirements of the RDB Act and SARFAESI Act are not being deliberately bypassed. But for this, certain amendments have to be made to the statutes and establish arbitration as an alternative for the parties, similar to what was held in the Emaar MGF case – that an alternative should always be available to the parties concerned to pursue either statutory remedies or resort to arbitration.
Conclusion
Therefore, the main aim of establishing DRT should not be forgotten, and neither parties should be stripped off from their autonomy. While arbitration can have positive and negative sides for both parties, they should always be presented with options for adjudication. Hence, no party should be prevented from taking up alternative remedies, and when there is a huge pendency of cases in DRTs, there remains no difference between DRTs and court litigation in terms of long delays in disposal of cases. In such situations, arbitration becomes the natural choice for all parties.