In a judgment that could significantly alter the balance of power between lenders and borrowers, the Bombay High Court has set aside a ₹1.01 crore loan recovery arbitration award against borrowers—despite the fact that the award was never challenged earlier.

The ruling delivers a clear message to banks and NBFCs: arbitration awards passed by arbitrators unilaterally appointed by lenders are legally void and unenforceable—even at the recovery stage.

The case involved L&T Finance Ltd., which had obtained an arbitral award against two borrowers in 2019. Nearly seven years later, when the lender approached the court to execute the award and recover money, the entire recovery proceeding collapsed.

What Triggered the Case

L&T Finance had extended a mortgage loan to:

• Sangeeta Bhansali (borrower) and
• Aditya Bhansali (co-borrower)

When disputes arose, the lender:

• Invoked arbitration, and
• Unilaterally appointed a sole arbitrator, without the borrowers’ participation.

In August 2019, the arbitrator passed an award directing the borrowers to pay:

• ₹1.01 crore, plus
• Interest, costs, and arbitrator’s fees.

Crucially, the borrowers did not challenge the award under Section 34 of the Arbitration Act at that time.

Why the Recovery Case Fell Apart Years Later

When L&T Finance initiated execution proceedings before the Bombay High Court to recover the money, the borrowers raised a last-resort defence:

The arbitrator was illegally appointed by the lender alone, making the award void from the beginning.

Ordinarily, courts do not entertain such objections at the execution stage. But this case was different.

Supreme Court’s January 2026 Judgment Changed Everything

While the execution case was pending, the Supreme Court delivered a landmark ruling on January 5, 2026, in Bhadra International vs Airport Authority of India.

The Supreme Court held that:

• Unilateral appointment of a sole arbitrator by one interested party is illegal
• Such an arbitrator is “de jure ineligible”
• Any award passed in such a situation is non-est (legally non-existent)

Most importantly, the Court ruled that:

A challenge to such an award can be raised at any stage—even during execution proceedings.

This meant that even borrowers who never challenged an award earlier could still stop its enforcement.

Bombay High Court Applies Supreme Court Law

Justice Rajesh S. Patil of the Bombay High Court applied the Supreme Court’s ruling directly to the L&T Finance case.

The court held that:

• The arbitrator was unilaterally appointed by the lender
• Such appointment violates Section 12(5) of the Arbitration Act
• The arbitral award dated August 7, 2019 is void ab initio
• A void award cannot be treated as a decree
• The entire execution application must be dismissed

As a result:

• The ₹1 crore recovery claim failed
• The arbitration award was set aside
• L&T Finance must start arbitration afresh, if it wants to pursue recovery

Why This Judgment Matters to Borrowers

This ruling is a major relief for:

• Home loan borrowers
• Personal loan customers
• Business loan borrowers
• Anyone facing recovery based on arbitration awards

Many banks and NBFCs:

• Appointed arbitrators on their own
• Passed ex-parte awards
• Used those awards to attach properties or bank accounts

This judgment makes it clear:

If the arbitrator was appointed unilaterally, the award has no legal value—no matter how old it is.

Even If You Never Challenged the Award Earlier

Perhaps the most significant part of the judgment is this:

• Borrowers do not lose their rights simply because they failed to file a challenge earlier
• If the arbitrator lacked legal jurisdiction, the award is a nullity
• Jurisdictional defects cannot be cured by consent, delay, or silence

This overturns many earlier High Court views and brings uniformity after the Supreme Court’s ruling.

What Happens Next for Lenders

The court has allowed lenders to:

• Start fresh arbitration proceedings
• Exclude the time spent in earlier arbitration for limitation purposes

However, lenders must now:

• Follow a legally compliant arbitrator appointment process
• Ensure borrower participation
• Avoid one-sided clauses that risk invalidation

A Turning Point in Loan Recovery Law

The judgment marks a decisive shift away from one-sided recovery mechanisms and reinforces the principle that fairness in arbitration is not optional.

For borrowers, it is a reminder that:

An illegal process cannot create a legal debt recovery—even years later.

Also Read: Your Home Loan Interest To Remain Unchanged

The post Bombay High Court Shocks Lenders: Loan Arbitration Award Worth ₹1 Cr Thrown Out at Recovery Stage appeared first on Square Feat India.

The case — Sanjeev Divekar vs. Pegasus Assets & Ors. (WP 16679/2025) — involved a flat in a project in Navi Mumbai (flat No. 701 at “Sea Palace”, as per the order), originally sold by the petitioner to homebuyers in 2014.

Background & What Happened

• The original buyers had taken a housing loan (sanctioned by a bank) and later defaulted. The loan account was assigned to Pegasus Assets Reconstruction Company Ltd. (the secured creditor). The creditor initiated recovery proceedings under SARFAESI, seeking to auction the flat in question.
• The flat-seller (the petitioner) claimed that he was not a borrower, guarantor or mortgagor, and that he had refunded the entire amount received from the buyers (plus financing cost) between February and June 2018, when it became clear that the flat did not have approved residential-unit status.
• Despite the refund, the secured creditor continued with recovery proceedings and moved to take possession of the flat. The debtor-recovery case passed through the Debts Recovery Tribunal (DRT) and later the Debt Recovery Appellate Tribunal (DRAT), which had directed the petitioner — despite being a non-borrower — to deposit 25% (part of pre-deposit requirement) of the amount claimed by the creditor. The DRAT later dismissed the appeal for non-compliance with the deposit directive.

High Court’s Decision & Legal Findings

• The High Court observed that under Section 18(1) of SARFAESI read with Section 2(1)(f), the pre-deposit requirement applies only to “borrower” (or guarantor/mortgagor) defined under the Act — and not to an unrelated third-party such as a former seller or flat-seller who had refunded the full sale amount.
• Since the petitioner was neither borrower nor guarantor, the court held that the requirement of 25% (or 50%) pre-deposit for entertaining an appeal was not applicable. The earlier DRAT orders mandating pre-deposit were therefore unconstitutional in his case.
• The court quashed those DRAT orders and restored the appellant’s appeal — directing the DRAT to hear the matter on merits by 15 February 2026. All contentions of the parties remain open.

What This Means for Home-buyers, Sellers and Real-Estate Stakeholders

• The ruling offers protection to sellers / developers / flat-sellers who have refunded amounts to buyers in cases where the sale agreement was cancelled or the flat lacked valid approval — shielding them from being dragged under SARFAESI loan-recovery actions.
• It draws a clear distinction between actual borrowers (who took loan) and unrelated third-parties, asserting that recovery mechanisms under SARFAESI cannot be expanded indiscriminately.
• Lenders and asset-reconstruction firms must now exercise caution before issuing recovery notices or demanding pre-deposits from persons who are not loan parties.

What Remains Unclear / Pending

• The public order does not name the flat-buyers. The project name appears only as “Sea Palace, Navi Mumbai” (flat No. 701), but the builder / developer’s name is not specified.
• The exact amount claimed by the secured creditor — which triggered the 25% pre-deposit demand — is also not stated in the order summary.
• The case is back before the DRAT for adjudication on merits; hence, the ultimate outcome (possession, sale, refund, etc.) is still pending.

Why It Matters

For everyday home-buyers: this judgment underscores that only those who took the loan are liable under recovery laws — not sellers or third-parties.
For developers/sellers: a cautionary note to ensure that if they refund sale consideration (or cancel deals) they maintain records — to avoid being wrongly dragged into recovery suits.
For lenders / ARCs: — to practice due diligence before sending notices; broad-brush recovery against all associated parties may no longer hold.

Also Read: Bombay High Court: Borrowers Can’t Force Banks to Settle Defaulted Loans

The post High Court Rules: Those Who Didn’t Take Home Loan Cannot Be Forced to Pay appeared first on Square Feat India.