Mere Registration Of FIR Or Pendency Of Proceedings Before DRT Does Not Bar Reference To Arbitration: Bombay High Court

The Court further held that “Merely because the Respondent has chosen to attack the Mortgage Deeds which contain the arbitration clause inter alia on the ground of criminality, forgery, fraud and pending FIR since 2023, the contractual obligations flowing from the said Mortgage Deeds cannot be disowned by the Respondent and discarded at this juncture.”

The court also observed that mere pendency of proceedings before Debt Recovery Tribunal does not ipso facto bar the reference of a dispute to arbitration under section 11 of the Arbitration Act.

Applying the competence–competence principle and Supreme Court judgments in A. Ayyasamy v. A. Paramasivam and MD Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd., the Court concluded that the court under section 11 of the Arbitration Act is prohibited from conducting a mini trial at this stage on merits of the allegations raised by the respondent.It therefore allowed the application under Section 11 filed by the Applicant and appointed former Chief Justice Naresh H. Patil as sole arbitrator to adjudicate the disputes.

Background:

Mangal Credit and Fincorp Limited (“Applicant”) alleged that Ulka Chandrshekhar Nair (“Respondent”) took loans from the Applicant to the tune of Rs.3.44 crore against mortgage of property located at Andheri, Mumbai. Clause 21 of the mortgage deeds contained an arbitration clause. After the Respondent defaulted, the Applicant issued a notice under Section 21 of the Arbitration Act on 7 January 2023 invoking arbitration. The Respondent, through her advocate, denied knowledge of the mortgage deeds, sought disclosure of documents, and refused to submit the disputes to arbitration.

Contentions:

The Petitioner submitted that the Respondent has duly received such amount, paid the statutory charges following execution of the said Mortgage Deeds as would be clear from the bank account statement of the Respondent.

It was further argued that It is therefore not open to the Respondent to deny and dispute her liability arising from the said Mortgage Deeds. Such dispute, would squarely fall within the scope and ambit of the arbitration clause contained in the said Mortgage Deed which has rightly been invoked by the Applicant by their Notice issued on 7 January 2023.

Per contra, the Respondent submitted that she never signed the mortgage deeds or related loan papers and that the signatures are forged. The claim of forgery of the signatures is also backed by a handwriting expert's report of 26 July 2023.

It was further argued that an FIR has been filed on 26 October 2023 against Mr. Meghraj Jain for fraud and forgery and that the DRT, Mumbai, by its 20 February 2024 order, has directed both sides to maintain status quo over the property.

Lastly, it was submitted that these are serious allegations which are pending adjudication before criminal and civil courts to have the documents declared void. Therefore, it would be unfair to force the Respondent into arbitration.

Findings:

The court observed that it is an admitted position that an FIR was lodged but no chargesheet has been filled till date and criminal proceedings have also not been started. Therefore, under such circumstances, it would be imprudent and speculative to accept the contention that merely because the FIR was registered, the parties must not be referred to the arbitration especially when the said criminal case was filed against the partner of the Applicant, not directly against the applicant.

The court further held that at this stage, the allegations raised by the Respondent regarding forgery, fraud or criminality appear quite unconvincing and do not appear persuasive.

It further held that in my prima facie view, the matter is not as straightforward as the Respondent suggests regarding the disputes arising from the Mortgage Deeds. The Respondent's allegation of not being a signatory or being unaware of these deeds squarely falls within the scope of arbitrability under the Arbitration Act.

It further observed that there is no legal bar preventing an arbitrator from deciding such questions, including challenges to the very arbitrability of the dispute. These issues can also be raised by the Respondent as preliminary objections before the arbitrator, who is expressly empowered under Section 16 of the Act to rule on his or her own jurisdiction.

The court held that “Merely because the Respondent has chosen to attack the Mortgage Deeds which contain the arbitration clause inter alia on the ground of criminality, forgery, fraud and pending FIR since 2023, the contractual obligations flowing from the said Mortgage Deeds cannot be disowned by the Respondent and discarded at this juncture.”

Case Title: Mangal Credit and Fincorp Limited Versus Ulka Chandrshekhar Nair

Case Number: ARBITRATION APPLICATION (L) NO. 29984 OF 2023

Order Date: 01/10/2025