In cases where multiple banks and financial institutions lend to a corporate debtor against security created over the same asset, disputes amongst the lenders often arise, especially regarding the enforcement of security interests. The Hon'ble Supreme Court of India, in its order dated May 23, 2025, in the case of Bank of India v. Sri Nangli Rice Mills Private Limited (Civil Appeal No. 7110 of 2025), examined whether disputes between banks, non-banking financial companies (NBFCs), financial institutions, and qualified buyers holding security receipts in securitization trusts must be resolved through arbitration when enforcement actions are initiated under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The issues arose when Sri Nangli Rice Mills Private Limited borrowed from Bank of India (BOI) in 2006 by hypothecating its stocks. In 2013, without BOI's approval, the debtor also secured facilities from Punjab National Bank (PNB) against specific stock and inventory. In 2015, after defaulting on repayments, BOI discovered PNB had a security interest over some stock and initiated enforcement action under Section 13 of the SARFAESI Act, taking possession of the inventory. BOI filed an application with the Debt Recovery Tribunal (DRT) seeking to prevent PNB from taking any adverse enforcement action. The DRT ordered a joint auction and ruled that BOI had the primary charge while PNB held only a subordinate charge. On appeal, the Debt Recovery Appellate Tribunal (DRAT) remanded the case back to the DRT for reconsideration, stating the DRT could not have heard proceedings by one bank against another bank. Upon re-hearing the matter, the DRT determined it lacked jurisdiction over the competing claims, which needed to be resolved through arbitration under Section 11 of the SARFAESI Act.
The DRAT has previously taken contradictory views on whether disputes between lenders must be resolved through arbitration under Section 11 of the SARFAESI Act, particularly when enforcement actions are initiated under the SARFAESI Act, and there is no existing arbitration agreement between the parties involved, in Oriental Bank of Commerce v. Canara Bank (2011 SCC OnLine DRAT 8), in Federal Bank Limited v. LIC Housing Finance Limited (2010 SCC OnLine DRAT 138) and in Standard Chartered Bank v. LIC Housing Finance Limited (2011 SCC OnLine DRAT 112).
The authors in this article endeavour to analyse the findings of the Hon'ble Supreme Court of India, and its guidance to market participants with respect to adjudication of inter-se disputes relating to priority of creditor interests.
Our analysis of key findings
Before discussing the judgment of the Hon'ble Supreme Court of India, it is important to note that the Recovery of Debts and Bankruptcy Act, 1993 (RDBA) was enacted to establish specialized debt recovery tribunals, namely the Debt Recovery Tribunal (DRT) and the Debt Recovery Appellate Tribunal (DRAT). The purpose of these tribunals was to resolve disputes related to the recovery and enforcement of security, as civil courts were struggling to ensure timely adjudication due to a lack of infrastructure and manpower. However, since the RDBA did not fully achieve its objectives and delays in adjudication persisted within these specialized tribunals, the SARFAESI Act was enacted in 2002. This legislation aimed to empower banks and financial institutions to take direct possession of secured assets and sell them without needing court or tribunal intervention.
The Hon'ble Supreme Court of India in this judgment has held that, given the aforementioned background and objective of enactment of the SARFAESI Act, the SARFAESI Act under Section 11 has mandated arbitration and ousted the jurisdiction of the DRT and DRAT from adjudicating such disputes under Section 17 so that competing creditors and their disputes do not hinder or derail the enforcement process. The Hon'ble Supreme Court of India held that the requirement under Section 11 to be mandatory instead of merely directory as it was in furtherance of the legislative intent and objective behind enactment of the SARFAESI Act.
Therefore, if the twin conditions under Section 11 are met i.e. dispute has arisen between any bank, NBFC, asset reconstruction company or any 'qualified buyer' holding security receipts, and such dispute relates to securitization, asset reconstruction or any non-payment of any amounts due, then recourse must be made mandatorily for adjudication through arbitration under the aegis of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Further, the Hon'ble Supreme Court of India held that the existence of a separate arbitration agreement as mandated under Section 7 and Section 8 of the Arbitration Act was not necessary as the SARFAESI Act had consciously provided for a 'deeming fiction' whereby such arbitration agreement and consent of parties is presumed to be in existence for adjudication of disputes through arbitration.
The Hon'ble Supreme Court of India has also clarified that where a financial institution is primarily a debtor and has availed borrowings from another financial institution, it cannot take recourse to arbitration under Section 11 of the SARFAESI Act as debtors have intentionally been left out from the scope of the aforesaid provision. Basis the directions of the Hon'ble Supreme Court of India in this judgement, if there is any common security interest available to lenders which are subject to inter-se disputes and any enforcement action has been initiated under the SARFAESI Act, such dispute must be mandatorily adjudicated only through arbitration under the Arbitration Act.
Key implications
The judgment has clarified that disputes and competing claims between lenders and financial institutions primarily concern the distribution of recovery proceeds. Therefore, enforcement actions should proceed without interruption, regardless of any pending disputes in arbitration. This ruling from the Hon'ble Supreme Court of India has settled the law regarding the applicability of Section 11 of the SARFAESI Act. Previously, different courts and tribunals, including the DRT and DRAT, had taken divergent views on this matter. This decision provides much-needed clarity and facilitates the resolution of disputes and competing claims of creditors concerning secured assets through arbitration. As a result, the DRT and DRAT can concentrate primarily on cases against debtors, ensuring timely and efficient resolutions. This will help prevent the deterioration in the value of secured assets and protect public funds that are tied up in unproductive business ventures and assets.
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