Supreme Court Mandates Arbitration for Inter-Bank Disputes under SARFAESI Act.


23 May 2025 Sarfaesi >> Corporate Law  

In a comprehensive judgment delivered on May 23, 2025, the Supreme Court of India clarified the scope and mandatory nature of Section 11 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), ruling that disputes between banks and other specified financial entities must be resolved through arbitration. The bench, comprising Justice J.B. Pardiwala and Justice Pankaj Mithal, dismissed an appeal by the Bank of India against a Punjab and Haryana High Court order that had directed arbitration in a dispute with Punjab National Bank.

The core of the dispute revolved around competing claims over hypothecated and pledged stocks of a common borrower, M/s. Sri Nangli Rice Mills Pvt. Ltd. The Bank of India (appellant) had provided credit facilities to the borrower since 2003, with stocks of paddy and other assets hypothecated as security. A key condition of this agreement was that the borrower would not obtain further credit or create encumbrances on the securities without the Bank of India's prior written consent.

 
 

However, in 2013, the borrower simultaneously availed a credit facility from Punjab National Bank (respondent), pledging warehouse receipts of the same stocks. The Bank of India alleged that it discovered the second charge only in 2015 when the borrower defaulted and its loan account was classified as a Non-Performing Asset (NPA). This led to a series of legal proceedings, including a civil suit, applications under Section 14 of the SARFAESI Act, and securitization applications before the Debt Recovery Tribunal (DRT).

The DRT initially permitted a joint sale of the secured assets but later ruled in favor of the Bank of India, holding its hypothecation charge as prior. This decision was appealed to the Debt Recovery Appellate Tribunal (DRAT), which remanded the matter back to the DRT, raising preliminary objections about the maintainability of an application under Section 17 of the SARFAESI Act for disputes between banks.

On remand, the DRT concluded it lacked jurisdiction to adjudicate inter-bank disputes concerning secured assets and directed the parties to resolve the matter through arbitration under Section 11 of the SARFAESI Act. This decision was upheld by the High Court, leading to the appeal before the Supreme Court.

Key Interpretations by the Supreme Court:

The Supreme Court meticulously analyzed the legislative history and scheme of the SARFAESI Act, noting its purpose to facilitate expeditious recovery of dues from defaulting borrowers by empowering banks and financial institutions to take possession and sell securities without court intervention. The Court then addressed four key issues:
  • Scope of Section 11 and the Expression "Dispute": The Court held that Section 11 applies to disputes relating to "securitization or reconstruction or non-payment of any amount due including interest" that arise among banks, financial institutions, asset reconstruction companies (ARCs), or qualified buyers. The term "any amount due" is broad enough to include amounts owed by a borrower to multiple banks, which can indirectly lead to disputes between those banks regarding the priority of charges over the borrower's assets. Thus, the present dispute, concerning the priority of charge between the Bank of India and Punjab National Bank over the borrower's stocks, falls squarely within the ambit of Section 11.
  • Parties to Section 11 Disputes: Section 11 is specifically designed for inter-se disputes between specified financial entities (banks, FIs, ARCs, QBs) and does not include disputes with a borrower. The Court clarified that if a financial institution also acts as a borrower, then for the purpose of that transaction, it assumes the role of a borrower and Section 11 would not apply to disputes arising from such a lender-turned-borrower relationship.
  • Requirement of a Written Arbitration Agreement: The Supreme Court explicitly stated that Section 11 of the SARFAESI Act creates a legal fiction, implying a "deemed agreement" to arbitrate. Therefore, there is no need for an explicit written arbitration agreement between the parties for Section 11 to be invoked. The Court overruled previous decisions of the DRAT that held otherwise, affirming that the view expressed in Oriental Bank of Commerce and D. Dhanamjaya Rao on this point lays down the correct position of law.
  • Mandatory Nature of Section 11: The Court interpreted the use of the word "shall" in Section 11 as mandatory, emphasizing that conciliation or arbitration is the prescribed and sole mechanism for resolving such disputes. Allowing these disputes to be litigated in other forums, such as DRTs, would undermine the efficiency and purpose of the SARFAESI Act, which is designed for swift debt recovery.
The Supreme Court also dismissed the respondent's argument that the dispute should be resolved under the 'Administrative Mechanism for Resolution of CPSEs Disputes (AMRCD) Memorandum'. The Court found that the AMRCD Memorandum applies only to disputes arising from "commercial contracts" between CPSEs, whereas the current dispute arose from separate agreements with the borrower. Moreover, a statutory provision like Section 11 of the SARFAESI Act cannot be supplanted by an executive guideline.

In light of these findings, the Supreme Court found no infirmity in the High Court's order directing arbitration and dismissed the appeal. The Registry has been directed to circulate copies of this judgment to all High Courts, DRTs, and DRATs for wider dissemination and compliance. 


Section 11, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act - 2002  

Section 17, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act - 2002  

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002