Bombay High Court Refers Dispute under Mortgage Deeds to Arbitration Despite Allegations of Fraud

Headnote:

The Bombay High Court, while hearing an application under Section 11 of the Arbitration and Conciliation Act, 1996, held that disputes arising from Mortgage Deeds containing an arbitration clause must be referred to arbitration, notwithstanding allegations of forgery and fraud. The Court observed that issues relating to arbitrability, including allegations of fraud, can be determined by the arbitral tribunal under Section 16 of the Act. The Court appointed Hon’ble Justice Naresh H. Patil (Former Chief Justice of Bombay High Court) as the Sole Arbitrator.

Background:

1. The Applicant, Mangal Credit and Fincorp Ltd., a Non-Banking Financial Company, sanctioned loans totaling ₹3.44 crore to the Respondent, Ulka Chandrshekhar Nair, secured against her bungalow property through Mortgage Deeds executed in December 2020 and February 2022.
2. The Mortgage Deeds contained an arbitration clause allowing disputes to be resolved through arbitration in Mumbai.
3. Upon default, the Applicant invoked arbitration via a notice dated 7 January 2023.
4. The Respondent denied knowledge of the Mortgage Deeds and loan documents, alleging forgery of signatures, fabrication of documents, and fraud by the Applicant’s director.
5. A handwriting expert’s report supported the Respondent’s claim, and an FIR was lodged in October 2023 under IPC Sections 420, 467, 468, and 471.
6. Parallel proceedings were also initiated under the SARFAESI Act before the DRT, and the Respondent filed a civil suit seeking to declare the Mortgage Deeds void.
7. The key issue before the Court was whether such disputes, involving allegations of fraud and forgery, could be referred to arbitration.

Court Observations:

1. The Court held that the existence of the arbitration agreement in the Mortgage Deeds was established prima facie.
2. Allegations of forgery and fraud, though serious, do not automatically exclude arbitrability unless they involve complex issues of public importance; here, they could be decided by the arbitrator.
3. The competence-competence principle under Section 16 ACA empowers the arbitral tribunal to rule on issues of arbitrability and validity.
4. Reliance was placed on A. Ayyasamy vs. A. Paramasivam (2016), distinguishing between “serious fraud” (non-arbitrable) and “fraud simplicitor” (arbitrable).
5. The Court cited MD Frozen Foods v. Hero Fincorp (2017), affirming that SARFAESI and arbitration proceedings may proceed in parallel.
6. The unilateral clause giving the Applicant sole authority to appoint an arbitrator was declared invalid per Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2019).
7. Consequently, the Court appointed Hon’ble Justice Naresh H. Patil (Former CJ, Bombay HC) as the Sole Arbitrator.

Legal Provisions Concerned:

1. Section 7, Arbitration and Conciliation Act, 1996 – Arbitration agreement.
2. Section 11, Arbitration and Conciliation Act, 1996 – Appointment of arbitrators by Court.
3. Section 16, Arbitration and Conciliation Act, 1996 – Competence of arbitral tribunal to rule on its jurisdiction.
4. SARFAESI Act, 2002 – Enforcement proceedings regarding secured assets.
5. Sections 420, 467, 468, 471 IPC – Criminal charges alleged in FIR against Applicant’s director.

Case Details:

Case Title: Mangal Credit and Fincorp Ltd. v. Ulka Chandrshekhar Nair

Citation: Arbitration Application (L) No. 29984 of 2023

Coram: Justice Advait M. Sethna

Pronounced On: October 1, 2025

Court: High Court of Judicature at Bombay (Original Side)

Arbitrator Appointed: Hon'ble Justice Naresh H. Patil (Former Chief Justice, Bombay HC)