A. Introduction
The recent judgment by the Supreme Court of India in Bank of India v. M/s Sri Nangli Rice Mills Pvt Ltd. & Ors.1 ("Nangli Rice Mills") marks a significant development in the interpretation of Section 11 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), particularly in the context of disputes inter se financial institutions over priority of claims on secured assets. The case arose from a dispute between banks regarding their respective entitlements over assets of a common borrower, leading to a crucial legal question: whether such disputes fall within the jurisdiction of the Debt Recovery Tribunal (DRT) or are mandatorily referable to arbitration under Section 11 of the SARFAESI Act.
In a decisive judgment, the Supreme Court upheld the Punjab and Haryana High Court's decision mandating arbitration, thereby affirming that the DRT lacks jurisdiction in disputes inter se banks, asset reconstruction companies, or qualified buyers. The judgment delves deeply into the legislative intent, scope, and ambit of Section 11 of the SARFAESI Act, drawing from precedents of the Supreme Court and various High Courts.
In Nangli Rice Mills, the Supreme Court also addressed the following legal issues:
- Whether arbitration under Section 11 of SARFAESI Act is mandatory or directory?
- Whether an express written agreement is required between the parties to refer the disputes to arbitration?
- What is the impact of such disputes on borrower-lender relationships?
- Can the DRT exercise jurisdiction in disputes that do not directly involve the borrower?
The judgment brings clarity to the procedural mechanism governing financial institutions in resolving inter se conflicts, reinforcing arbitration as the exclusive mode of dispute resolution under the statutory framework of the SARFAESI Act.
B. Factual Matrix
This case revolves around a dispute between two nationalized banks - Bank of India (Appellant) and Punjab National Bank (Respondent) regarding competing claims over the assets of Sri Nangli Rice Mills Pvt. Ltd. (Borrower).
In 2003, the Borrower availed credit facilities from the Appellant by hypothecating stocks of paddy and other assets, formalized through a Credit Facility Agreement in 2006. Despite clauses prohibiting the Borrower from creating additional charges on the same assets, the Borrower proceeded to avail another credit facility from Respondent in 2013, pledging the same stocks as security.
When the Borrower defaulted on loan repayments in 2015, the Appellant discovered that the Respondent had affixed pledge tags on the stocks that were already hypothecated to it. As the loan account was classified as a Non-Performing Asset (NPA)2, the Appellant issued a demand notice under Section 13(2) of the SARFAESI Act for an aggregate sum of Rs. 62.10 Crores.
Since the Borrower failed to repay the loan amount, the Appellant took steps to take symbolic possession3 of the secured assets. The Appellant also filed a suit seeking an injunction against the Respondent from selling the stock of paddy and rice. The suit was dismissed by the Civil Judge4 in view of the judgment passed by the DRT for joint sale and auction of the secured assets carried out by the Appellant and Respondent.
The Appellant thereafter initiated proceedings under Section 14 of the SARFAESI Act before the District Magistrate, which was opposed by the Respondent. The District Magistrate allowed the Appellant to take possession of the secured assets except the stocks of paddy and rice pledged with the Respondent. The Appellant preferred a writ petition before the High Court assailing the order passed by the District Magistrate. The High Court dismissed the writ petition directing the Appellant to approach the DRT.
The DRT in its final order dated 10 November 2017 set aside the order passed by the District Magistrate and allowed the Appellant to sell stocks of paddy and rice for realisation of its dues. The order of the DRT was challenged before the Debt Recovery Appellate Tribunal (DRAT), which by its order dated 4 November 2019 held as follows:
- Firstly, the SARFAESI application5 filed by the Appellant before the DRT is not maintainable as the said provision is only maintainable for measures taken for enforcement of security interest6 which the Respondent never initiated.
- Secondly, the SARFAESI application7 cannot be invoked for claiming any reliefs against another bank. The DRAT remanded back the matter to DRT for deciding the matter afresh.
Ultimately, the DRT in its order dated 12 February 2020 held that it lacked jurisdiction as the dispute pertained to competing claims between two banks over the same secured assets. Placing reliance on an earlier decision of DRAT in Oriental Bank of Commerce & Anr. V. Canara Bank & Ors,8 it was held that disputes inter se two banks or creditors must be adjudicated by way of arbitration in terms of Section 11 of the SARFAESI Act.
Aggrieved by this order, the Appellant approached the High Court by way of a writ petition. The High Court affirmed the DRT's order in view of the mandate of Section 11 of the SARFAESI Act which was assailed by the Appellant before the Supreme Court in the special leave petition9.
C. Decision of the Supreme Court
Analysis of Section 11 of the SARFAESI Act and interpretation of the term "any dispute"
The Apex Court examined the legislative history and framework of the SARFAESI Act and judicial precedents to determine the scope of Section 11. The court observed that the legislature's objective was to mandate arbitration or conciliation as the sole mechanisms for resolving disputes between competing secured creditors, thereby ensuring that such disputes do not obstruct the recovery process under the SARFAESI Act. Both the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) and the SARFAESI Act envision the DRTs and DRATs as specialized fora for swift recovery of dues from defaulting borrowers. It is for this reason that the legislature deliberately omitted the term "borrower" from Section 11 of the SARFAESI Act.
It was also observed that the term "dispute" appearing in Section 11 is limited to issues relating to (i) securitisation; (ii) reconstruction; or (iii) non-payment of any amount due, including interest. Notably, the SARFAESI Act uses the broad term "any amount", indicating it applies to all unpaid dues beyond their due date. However, when two banks act as creditors, a dispute may not arise directly between them but arise from the borrower's default which can lead to a conflict between the banks over the priority of their charges on the borrower's assets. It was held that such a dispute falls within the scope of Section 11 and must be resolved through arbitration or conciliation.
Applicability of Section 11 when one party is a Bank but acts as a Borrower
The Court clarified that Section 11 will not apply to disputes involving banks, financial institutions, ARCs, or qualified buyers who are otherwise a borrower since the same would undermine the purpose of the SARFAESI mechanism. This was clarified in the scenario where a lender becomes a borrower i.e., when a bank or financial institution borrows from another bank or financial institution, its legal status shifts, and it is treated as a borrower under the same statutory framework. The classification as a borrower depends on the nature of the transaction and not the inherent identity of the party.
Necessity of written Arbitration Agreement under Section 11 of the SARFAESI Act
Section 7 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) mandates that disputes can be resolved through arbitration only if there is an existing arbitration agreement. Similarly, Section 8 of the Arbitration Act empowers a judicial authority to refer parties to arbitration when such an agreement is in place. The Supreme Court observed that the language used in Section 11 of the SARFAESI Act "...as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration..." is significant. The Court observed that the legislature has deliberately chosen this language to create a legal presumption that an arbitration agreement exists between the parties, even in the absence of an actual written agreement. It has therefore been clarified that a written arbitration agreement is not required under Section 11 of the SARFAESI Act.
Section 11 of the SARFAESI Act, whether mandatory or directory
The key question before the Court was whether the use of "shall" in Section 11 rendered the provision mandatory or merely directory, given that arbitration is typically considered an alternative dispute resolution mechanism. The Court observed that the remedy under Section 11 is available exclusively to banks, financial institutions, Asset Reconstruction Companies (ARCs), and qualified buyers and that the deliberate exclusion of borrowers from Section 11 reflects the legislature's intent to make the provision mandatory.
D. Comment
In view of Nangli Rice Mills, the test of whether a dispute falls within the scope of Section 11 or not is two-fold:
- the dispute must involve a bank, financial institution, asset reconstruction company, or qualified buyer; and
- the dispute must relate to securitisation, asset reconstruction, or the non-payment of any amount due, including interest.
If the above conditions are satisfied, the jurisdiction of the DRT is ousted, and disputes must be mandatorily resolved through arbitration, as an arbitration agreement is deemed to be in existence.
The decision in Nangli Rice Mills serves as an important precedent, reinforcing the use of alternative dispute resolution mechanisms for financial institutions, thereby reducing the burden on DRTs and DRATs, which are already overburdened with cases.
While Nangli Rice Mills is a landmark judgment concerning the interpretation of Section 11 of SARFAESI Act, there are some grey areas such as what happens when the DRT/DRAT proceeds with recovery cases during the pendency of an arbitration inter-se banks? Without the rights of the banks over the assets of the borrower being crystalised, the DRT/DRAT may find itself constrained in effectively adjudicating the recovery process which may have been initiated by a third-party. Some other issues that may require consideration are which lender's rights are to be given priority over the other? Until crystallisation of the lender's rights, are the recovery proceedings before the DRT/DRAT to be kept in abeyance? If the DRT no longer has jurisdiction, what happens if the borrower creates third-party interests on the secured assets during the pendency of the arbitration between the banks? Even where a bank secures an interim award/award from the arbitral tribunal in its favour, such an award would be enforceable only through a civil court and not before the DRT/DRAT. The ultimate legislative intent of speedy recovery proceedings and limiting the jurisdiction of DRT/DRAT to aid this process, may not be met if the recovery proceedings before the DRT/DRAT are kept in abeyance till conclusion of the arbitration proceedings.
Conversely, allowing recovery proceedings before the DRT/DRAT and inter-se disputes between banks before the arbitral tribunal to proceed concurrently increases the risk of conflicting decisions regarding the borrower's assets which may be the subject-matter of adjudication in both the proceedings. Given the increasing incidents of secured assets being mortgaged or hypothecated in favour of multiple financial institutions or consortium of banks for availing credit facilities, these issues are likely to be considered and tested in an appropriate case in the future. Following the Nangli Rice Mills decision, the contentious issues surrounding disputes inter-se banks with respect to the same secured assets has come to the fore. The legislature may consider amending Section 11 of the SARFAESI Act suitably to address the myriad issues which arise in disputes inter-se banks.
Footnotes
1. 2025 INSC 765
2. Section 2(1)(o) of the SARFAESI Act, 2002
3. Section 13(4) of the SARFAESI Act 2002
4. Civil Judge, Senior Division, Gurudaspur
5. Section 17 of the SARFAESI Act, 2002
6. Section 13 of the SARFAESI Act, 2002
7. Ibid
8. 2010 SCC Online DRAT 8
9. SLP(C) No.16735 of 2022
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