Supreme Court Defines Scope Of Section 11 SARFAESI | Disputes Between Banks Must Go To Arbitration | Mandates That Section 11 Is Mandatory And Does Not Require Prior Arbitration Agreement
Kiran Raj
The Supreme Court of India Division Bench of Justice J.B. Pardiwala and Justice Pankaj Mithal held that disputes arising between banks under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) must be resolved through arbitration as mandated under Section 11 of the Act. The Court upheld the High Court’s dismissal of a writ petition challenging the Debt Recovery Tribunal’s decision which declined jurisdiction over the dispute, holding that resolution lies exclusively under the arbitration mechanism prescribed in the statute. The Supreme Court directed the parties to proceed in accordance with Section 11 of the SARFAESI Act and dismissed the appeal.
The dispute arose between two public sector banks and a borrower, M/s Sri Nangli Rice Mills Pvt. Ltd., a manufacturing entity engaged in the rice industry. The appellant, Bank of India, had sanctioned credit facilities to the borrower in 2003, securing its loan via hypothecation of the borrower’s stock. A Credit Facility Agreement dated 23.09.2006 specified that the borrower would not create encumbrances or seek further loans without prior consent. Despite this, the borrower availed a second credit facility from Punjab National Bank in 2013 by pledging the same stocks, without the knowledge or consent of the appellant bank.
Pursuant to a pledge agreement executed on 06.12.2013, Punjab National Bank (PNB) sanctioned credit to the borrower based on warehouse receipts issued by National Bulk Handling Corporation (NBHC), acting as a collateral manager. On 16.09.2014, PNB sought a credit report from the Bank of India. As no response was received, PNB enhanced the borrower’s credit facility on 22.11.2014 against similar security.
The Bank of India, upon inspection in 2015, discovered PNB’s pledge tags on the hypothecated goods. It wrote to PNB demanding clarification and asserting priority of its charge. PNB responded that it had independently verified the stocks and tagged them accordingly since 2013. Subsequent joint meetings were held between the banks and the borrower to address the overlapping claims over the security.
Following default by the borrower, Bank of India classified the account as a Non-Performing Asset (NPA) on 30.09.2015 and initiated proceedings under Section 13(2) of the SARFAESI Act, demanding recovery of Rs. 62.10 crore. Symbolic possession of the assets, including the disputed stocks, was taken and a civil suit was filed by Bank of India for permanent injunction to restrain PNB from selling the pledged stocks. The suit was dismissed as infructuous in 2021.
An application under Section 14 of the SARFAESI Act was filed by Bank of India before the District Magistrate, who partially allowed the same but prohibited interference with stocks pledged to PNB. Challenging this, Bank of India filed a writ before the High Court, which was dismissed with liberty to approach the DRT.
In proceedings before the DRT-I, Chandigarh, interim orders permitted joint sale of the perishable stocks. In its final order dated 10.11.2017, the DRT upheld Bank of India's prior hypothecation charge over PNB's pledge and allowed the former to realise dues through sale.
On appeal, DRAT on 04.11.2019 set aside the DRT’s order, observing that the maintainability of a Section 17 application against another bank was not considered. It held that such disputes between banks fell outside the DRT’s purview and directed fresh adjudication.
On remand, DRT on 12.02.2020 held that disputes between banks over secured assets must be resolved through arbitration under Section 11 of the SARFAESI Act, relying on prior DRAT precedent in Oriental Bank of Commerce v. Canara Bank. It dismissed the application for lack of jurisdiction.
A writ petition challenging the above was dismissed by the High Court on 07.10.2020, holding that Bank of India must pursue arbitration under Section 11.
The Supreme Court considered four principal issues: the scope of Section 11, the meaning of the term "dispute" therein, the necessity of a written arbitration agreement, and whether Section 11 is mandatory.
It recorded that "the dispute in the present is between two banks" and "the DRT has no jurisdiction to adjudicate the same" and that "the parties herein [must] resolve the dispute through arbitration under Section 11 of the SARFAESI Act".
The Court held that "Section 11 will not apply to disputes between Bank(s), Financial Institution(s), ARC(s) or Qualified Buyer(s), who are otherwise a Borrower" but "Section 11 of the SARFAESI Act is mandatory in nature".
The Court further recorded: "There is no requirement of existence of a written arbitration agreement under Section 11 of the SARFAESI Act".
Quoting the legislative intent, the Court stated: "A statute must be read as a whole and one provision must be construed harmoniously with the rest." Referring to the origin of the SARFAESI Act, the Court noted its purpose is "to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the court".
The Court rejected the contention that enforcement disputes must only be addressed under Sections 17 or 18, holding that "the expression 'any dispute relating to securitisation or reconstruction or non-payment of any amount due' occurring in Section 11 is of wide import".
It reiterated that where the dispute is "inter se between banks, the same falls squarely within the ambit of Section 11".
The Court also considered the AMRCD Memorandum issued by the Ministry of Finance in 2022, observing it supports arbitration as the preferred route in inter-CPSE disputes.
The Supreme Court upheld the order of the High Court dated 07.10.2020 and dismissed the appeal filed by Bank of India. It recorded: "Thus, for all the foregoing reasons, we have reached the conclusion that there is no infirmity in the impugned order passed by the High Court, directing the appellant and the respondent banks to resolve their dispute by way of arbitration in terms of Section 11 of the SARFAESI Act."
"The appeal fails and is hereby dismissed". The parties shall bear their own costs."
"Pending application(s), if any, shall also stand disposed of."
"The Registry is directed to circulate one copy each of this judgment to all the High Courts and all the benches of the DRTs and DRATs respectively."
Case Title: Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors.
Neutral Citation: 2025 INSC 765
Case Number: Civil Appeal No. 7110 of 2025
Bench: Justice J.B. Pardiwala, Justice Pankaj Mithal
[Read/Download order]
