Arbitration Act | Notice U/S 21 Not Always Necessary If Other Party Was Aware Of Dispute: Rajasthan High Court

Rajasthan High Court ruled that since the respondent was already aware of and was not taken by surprise regarding petitioner's invocation of arbitration clause, their plea that the application for appointment of arbitrator was not maintainable since no notice was served under Section 21 of the A&C Act 1996, lacked merit.

The bench of Justice Anoop Kumar Dhand also reiterated the principle laid down in the case of M.D. Frozen Foods Exports Private Limited & others v. Hero Fincorp Limited that the SARFAESI Proceedings were in the nature of enforcement while arbitration was an adjudicatory proceedings. Hence, both could proceed parallel.

The Court was hearing an application under Section 11 of the 1996 Act. The applicants had obtained loan from the respondent by mortgaging a 6318 sq ft of a 12000 sq ft. property under an agreement that had an arbitration clause. Applicant's loan account was classified as a Non-Performing Asset and proceedings under the SARFAESI Act were initiated against them.

The respondent took the possession of the entire 12000 sq ft without making any sub-division, and the entire property was put for auction. Securitization application was filed by the applicants which was pending before the Debt Recovery Tribunal (DRT). Meanwhile, the applicants also filed a civil suit seeking partition of the 6318 sq ft. of property.

This civil suit was challenged by the respondents, in light of the arbitration clause appearing in the loan agreements, in light of which the plaint was returned to the applicants, and subsequently, application was filed before the Court for appointment of arbitrator.

This application was objected to by the respondents on two grounds: 1) the arbitration clause could not be invoked since the matter was sub-judice before the DRT; 2) no prior notice was given to the respondents, as required under Section 21 of the 1996 Act, before invocation of the arbitration clause.

The objection were answered by the Court in the following manner:

1. No prior notice under Section 21

After perusing Section 21, the Court held that the Section served certain purposes owing to which it was necessary to provide the notice under Section 21.

“Firstly, it notifies the opposing party of the nature of the claim, even when the Arbitrator has already been named by the parties; secondly, it provides an opportunity for the opposing party to challenge the admissibility of the claim at the outset; thirdly, it allows the other party to raise objections regarding impartiality or disqualification of the arbitrator; and finally, it marks the date of receipt of the notice, which is crucial for determining the commencement of the arbitration.”

In this background, the Court opined that, however, in the present case, it was inconceivable that the respondents were unaware of the dispute concerning the dispute regarding the property's partition. The Court highlighted that opposing the civil suit of partition, the respondents had themselves contested that it was not maintainable and instead an arbitration application was maintainable.

Hence, it was safe to say that the respondents were not taken by surprise by filing of the arbitration application. In these circumstances, application filed by the applicants was held to be maintainable even without issuance of prior notice to the respondents.

2. Matter sub-judice before DRT

In relation to this objection, the Court referred to the Supreme Court case of M.D. Frozen Foods Exports Private Limited & others v. Hero Fincorp Limited and held that the Apex Court made it absolutely clear that both SARFAESI and Arbitration proceedings being of different natures, could exist parallel.

The Court further said that in testing the merit of such objection what had to be seen was whether there was existence of a valid arbitration agreement between the Parties, as was ruled by Bombay High Court in the case of Tata Capital Limited v. Priyanka Communications (India) Pvt. Ltd., and Ors.

It was highlighted that existence of arbitration agreement was clear in light of the arbitration clause in the loan agreement that had not been disputed by either of the Parties.

Hence, it was held that in this light, respondents' argument of non-maintainability of arbitration proceedings due to sub-judice matter before DRT was without any merit and contrary to the decisions.

Accordingly, the arbitration application was allowed by the Court followed by appointment of the arbitrator.

Title: Shekharchand Sacheti & Anr. v S.M.F.G. India Home Finance Company Limited & Anr.

Citation: 2025 LiveLaw (Raj) 205

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