There Is No Requirement Of Explicit Written Arbitration Agreement Between Parties U/S 11 SARFAESI Act: Supreme Court

The Supreme Court held that there is no requirement of explicit written arbitration agreement between parties under Section 11 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The Court held thus in a Civil Appeal preferred by the Bank of India, challenging the Judgment of the Punjab and Haryana High Court, which upheld the decision of the Debt Recovery Tribunal (DRT).

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice Pankaj Mithal observed, “We are of the considered view that there is a “deemed agreement” between the parties specified in Section 11 of the SARFAESI Act, insofar as the dispute relates to the matters so mentioned and is between the parties so specified thereunder. Thus, there is no need for an explicit written agreement between the parties. Section 11 of the SARFAESI Act creates a legal fiction by using the word "as if," which presumes the existence of an arbitration agreement among the designated parties, namely a bank or financial institution or asset reconstruction company or qualified buyer.”

The Bench added that this provision negates the requirement for a formal written arbitration agreement, as it assumes consent for arbitration or conciliation concerning disputes related to securitization, reconstruction, or non-payment of amount due, including interest.

Senior Advocate Dhruv Mehta appeared for the Appellant while AOR Ekta Choudhary appeared for the Respondents.

Case Background

The Respondent company-borrower had availed credit facility from the Appellant-bank by hypothecating stocks of paddy and other assets. Pursuantly, a Credit Facility Agreement (CFA) was executed between the borrower and bank. While the loan amount under the said credit facility earlier sanctioned by the Appellant bank was still outstanding and yet to be discharged, the borrower, via loan application proceeded to simultaneously avail one another credit facility from the Respondent bank (Punjab National Bank/PNB). Thereafter, an Agreement of Advance/Pledge Agreement was executed between the borrower and the Respondent bank by which the warehouse receipts of certain goods including stocks of paddy and rice, were pledged in favour of the Respondent bank as security with the Collateral Manager (National Bulk Handling Corporation/NBHC). Between 2006 and 2014, the credit facilities sanctioned by the Appellant bank to the borrower were enhanced from time to time. Consequently, the borrower filed a loan application seeking enhancement of credit facilities and the Respondent bank addressed one letter to the Appellant bank, asking for the credit information report.

Since no response was elicited from the Appellant bank, the Respondent bank enhanced the credit facility vide one another agreement. Allegedly in 2015, the borrower defaulted in repayment of loan sanctioned by the Appellant. Resultantly, a demand notice was issued by the Appellant. Subsequently, the Appellant filed an Application under Section 14 of SARFAESI Act, seeking assistance of the District Magistrate for taking physical possession of the secured assets of the borrower with the aid of the police. As the Magistrate partly allowed the Application, the Appellant filed a Securitization Application before the DRT, which held that it has no jurisdiction to adjudicate the dispute since the controversy pertained to competing claims between two banks over the same secured asset. The High Court upheld DRT’s decision, dismissed the Appellant’s Writ Petition, and directed the parties to resolve the dispute through arbitration under Section 11 of SARFAESI Act. Hence, the Appellant was before the Apex Court.

Reasoning

The Supreme Court after hearing the contentions of the counsel, noted, “In the absence of any such mandate as enshrined in Section 11 of the SARFAESI Act, every conflict between secured creditors over a security interest would ultimately just prolong the recovery proceedings against the borrower and thwart any possibility of a meaningful recovery of bad debts. By requiring such disputes to be referred to arbitration, the legislature has effectively sought to avoid a situation where squabbles between secured creditors obstruct or delay the realization of the value of the secured assets.”

The Court said that the nature of proceedings before the DRT is largely summary, intended to enthuse efficiency in recovery of dues to save such proceedings from the perils of pendency and this is the very reason why the legislature consciously omitted the term ‘borrower’ in Section 11 of the SARFAESI Act.

“… the present case at hand, more particularly dispute between the appellant and respondent banks does not pertain to either securitisation or reconstruction. It does not involve any acquisition of financial assets or rights by an asset reconstruction company (ARC). Rather, the crux of the issue is whether the controversy involving the competing claims of rights over the stocks of goods by hypothecation or pledge and the dispute therein falls within the scope of Section 11 of the SARFAESI Act, more particularly the third category of disputes delineated thereunder pertaining to “non-payment of any amount due including interest”, it further remarked.

The Court observed that in cases such as the present one, the authority to determine which bank holds the prior charge over the borrower’s assets becomes a significant issue for consideration.

“There have been instances where such disputes have been referred to the DRT or civil courts for adjudication. The question of determining the priority of charge typically arises after the borrower defaults on their obligations and their assets are classified as NPAs. In such scenarios, two or more banks may assert competing claims over the same secured asset”, it added.

The Court said that the present dispute between the Appellant and the Respondent banks is regarding their respective rights over the stocks and the manner in which the charge was created, be it by pledge or hypothecation, is irrelevant to the determination of priority between the two banks.

“The said issue will only assume importance, once the rights of each of the banks are crystalized, and thereafter enforcement of security on the strength of such rights is sought. Hence, the present case falls under the ambit of Section 11 of the SARFAESI Act”, it held.

Section 11 will not apply to disputes between Bank(s), Financial Institution(s), ARC(s) or Qualified Buyer(s), who are otherwise a Borrower:

The Court enunciated that Section 11 of the SARFAESI Act does include borrowed loan amount under the “non payment of any amount due including interest”; however, when a lender assumes the role of a borrower, the legal relationship between the parties undergoes a shift.

“In such circumstances, the entity that typically extends credit now becomes obligated to fulfil the borrowed amount as per the contractual arrangements between the bank and the lender-turned-borrower. This changes the traditional lender-borrower relationship, requiring the lender-turned-borrower to adhere to the same obligations that may in the usual circumstances apply to any other borrower”, it further explained.

The Court also remarked that if every dispute between a lender and a lender-turned-borrower becomes arbitrable under Section 11 of the SARFAESI Act, then it would render the entire mechanism of the SARFAESI Act otiose.

There is no requirement of existence of a written arbitration agreement under Section 11 of the SARFAESI Act:

The Court noted that Section 11 of the SARFAESI Act, creates a legal fiction as regards the existence of an arbitration agreement notwithstanding whether such agreement exists or not in actuality.

“Hence, it is crystal clear, that the use of the words “as if” in conjunction with the expression “parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration” stipulates a legal deeming fiction whereby it shall be ‘presumed’ that there existed an arbitration agreement and a written arbitration agreement between the bank or financial institution or asset reconstruction company or qualified buyer is not required. By eliminating the necessity of an actual agreement between the concerned parties, effectively binds them to arbitration or conciliation and the provisions of the Act, 1996 apply accordingly”, it also elucidated.

The Court was of the view that the term "as if" must be given a meaningful effect, whereby the parties are to be treated as if they had willingly provided written consent and consequently, the legal presumption under Section 11 of the SARFAESI Act exists independently of a formal arbitration agreement.

Section 11 of the SARFAESI Act is mandatory in nature:

The Court said that the dispute resolution mechanism envisaged under Section 11 of the SARFAESI Act has been statutorily provided and mandated.

“The dispute also pertains one between two banks in connection with the right of one of the banks for enforcement of a common security interest given to them by the borrower”, it added.

Conclusion

The Court, therefore, summarized the following points of conclusion –

(I) Section 11 of the SARFAESI Act deals with resolution of disputes relating to securitisation, reconstruction or non-payment of any amount due between the bank or financial institution or asset reconstruction company or qualified buyer.

(II) In order to attract the provision of Section 11 of the SARFAESI Act, twin conditions have to be fulfilled being; first, the dispute must be between any bank or financial institution or asset reconstruction company or qualified buyer and secondly, the dispute must relate to securitisation or reconstruction or non-payment of any amount due including interest.

(III) The expression “non-payment of any amount due, including interest” used in Section 11 of the SARFAESI Act is of wide import and would include a various range of scenarios of ‘disputes’ connected to unpaid amounts including those arising due to third-party defaults, such as indirect defaults of the borrowers.

(IV) Any dispute between two banks, financial institutions, asset reconstruction companies or qualified buyers etc., where the jural relation between the two is of a lender and borrower, then Section 11 of the SARFAESI Act will have no application whatsoever.

(V) Section 11 of the SARFAESI Act, provides for a statutory arbitration for any dispute mentioned therein between any of the parties enumerated thereunder. There is no need for an explicit written agreement to arbitrate between such parties in order to attract Section 11 of the SARFAESI Act.

(VI) Section 11 of the SARFAESI Act is mandatory in nature. The use of the word “shall” therein, the mandate of the said provision cannot be bypassed or subverted by the parties by seeking recourse elsewhere.

Accordingly, the Apex Court dismissed the Appeal.

Cause Title- Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors. (Neutral Citation: 2025 INSC 765)

Appearance:

Appellant: Senior Advocate Dhruv Mehta, AOR Pranab Kumar Mullick, Advocates Soma Mullick, and Sebat Kumar Deuria.

Respondents: AORs Ekta Choudhary, Siddhartha Chowdhury, Advocates Divyank Dutt Dwivedi, Snehasish Mukherjee, and Shaffi Mather.

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