Rethinking Section 11 Of SARFAESI Act: Is Statutory Arbitration Limited To Secured Creditors?

 However, on the other hand Section 11 of the Act which provides for resolution of disputes, does not talk about a secured creditor or security interest. Instead, it states that “where any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest arises amongst any of the parties, namely, the bank or financial institution or asset reconstruction company or qualified buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996 as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly.” This raises an important question i.e. whether an entity who is neither a secured creditor within the meaning of Section 2(1)(zd) of the Act, nor the holder of any “security interest” as defined under Section 2(1)(zf), invoke the remedy under Section 11 of the Act? The question gains further relevance where there exists no agreement governing the inter se rights of the parties and no security interest has been created in favour of any of them.

Section 2(1)(zd) of the Act defines a “secured creditor” as a bank, financial institution, asset reconstruction company, trustee, or similar entity in whose favour a security interest has been created by the borrower and Section 2(1)(zf) defines “security interest” as any right, title, or interest in property created in favour of a secured creditor, including a mortgage, charge, hypothecation, or assignment. Importantly, while the Act defines “secured creditor” and “security interest”, it does not recognise or define an “unsecured creditor”.

In Bell Finvest India Limited & Ors. v. AU Small Finance Bank Limited, ARB.P. 453 of 2021, the Delhi High Court held that the petitioner, being a financial institution as defined under Section 2(1)(m)(iv) of the Act, cannot invoke the statutory arbitration regime under Section 11 of the Act against the bank. The dispute in the present case arose from a Rupee Facility Agreement, under which the bank had extended credit facilities to the petitioner. Upon petitioner's account being classified as an NPA, the bank initiated proceedings before the DRT for enforcement of its security interest, in response to which the petitioner invoked arbitration, contending that Section 11 constituted a statutory arbitration agreement operating inter se financial institutions. The Delhi High Court, however rejected this contention, holding that the petitioner, though a financial institution, was, for the present dispute, actually a “borrower” under Section 2(1)(f) of the Act. It was further held that Section 11 of the Act is only confined to disputes between secured creditors inter se and does not extend to disputes between a secured creditor and a borrower. The judgments in Transcore v. UOI, Civil Appeal No. 3228 of 2006 and Vidya Drolia v. Durga Trading Corpn., Civil Appeal No. 2402 of 2019, were relied upon by the Delhi High Court to come to a conclusion that the Act concerns the rights of secured creditors and not disputes between a secured creditor and a borrower and that Section 11 of the Act applies only to inter se disputes among secured creditors, and its omission of the word "borrower" confirms that a financial institution which is, in substance, a borrower cannot resort to arbitration under the Act.

The scope of Section 11 of the Act was subsequently clarified by the Supreme Court in BOI v. Sri Nangli Rice Mills (P) Ltd., 2025 LiveLaw (SC) 616, wherein it was held that Section 11 is confined by two conjunctive conditions i.e. the dispute must arise between a bank, financial institution, asset reconstruction company or qualified buyer; and that the dispute must relate to securitisation, reconstruction, or non-payment of any amount due, including interest. Where these twin conditions are prima facie satisfied, it was held that the DRT would have no jurisdiction, and the only recourse would lie through arbitration under Section 11 of the Act read with the Arbitration and Conciliation Act, 1996. Elaborating on the underlying object of the provision, the Supreme Court explained that Section 11 is intended to serve as the exclusive mechanism for resolving disputes between secured creditors inter se so that discord among competing creditors does not impede or derail the recovery proceedings mandated under the Act against the borrower. It was held that the legislature had consciously omitted the word "borrower" from the provision. In this regard, a clear distinction was drawn between proceedings under Section 17, which concern a borrower's challenge to recovery measures taken by a secured creditor, and disputes under Section 11, which concern the rights and entitlements of secured creditors inter se  including questions of priority and apportionment of recovery proceeds, independent of the borrower's own liability. Significantly, it was held that the expression "non-payment of any amount due, including interest" is of wide import and is not confined to amounts owed directly between the disputing banks but it extends to a broad range of scenarios connected to unpaid amounts, including those arising indirectly from a common borrower's default, such as a dispute over priority of charge triggered by that very default. The Supreme Court further clarified that any dispute between two banks, financial institutions, asset reconstruction companies or qualified buyers where the jural relationship between them is that of a lender and borrower would fall outside the scope of Section 11 altogether; since the definition of "borrower" under Section 2(f) employs the expression "any person," even a bank or financial institution that avails financial assistance from another such entity dons the character of a borrower for that transaction, and a "lender-turned-borrower" would accordingly be governed by the same statutory framework as any ordinary borrower, with its classification turning on the nature of the transaction rather than its inherent status. It was further held that Section 11 does not require the existence of a written arbitration agreement between the parties, the expression "as if the parties to the dispute have consented in writing" creates a statutory legal fiction that deems such consent to exist, regardless of whether an actual agreement subsists.

However, recently in Aditya Birla Housing Finance Limited v. Axis Bank Limited & Ors., Commercial Arbitration Application No. 95 of 2026, the Bombay High Court, while deciding an application under Section 11 of the Arbitration and Conciliation Act, 1996, dealt with an important question of law i.e. whether the statutory arbitration mechanism as provided under Section 11 of the Act could be invoked between a secured creditor and a financial institution that was yet to become a secured creditor over the same borrower's property? The dispute in the present case arose out of a loan takeover transaction, whereby the applicant had sanctioned credit facilities to the borrowers against a mortgage of property already secured in favour of a bank, and had directly remitted the outstanding dues to the Bank for release of its charge so that its own security interest could be created. Owing to a minor shortfall of about Rs. 2.36 lakh arising from a timing gap between the foreclosure statement and actual disbursal, the bank refused to release the title documents, thereby preventing the Applicant from perfecting its mortgage, even as the bank itself continued to hold a subsisting security interest over the same property. However, the bank opposed the Section 11 reference on the ground that the Applicant, admittedly not being a secured creditor, could not invoke the Act at all, relying on the Supreme Court's judgement in L. Doulo Builders and Suppliers Co. to argue that a creation of a security interest is a prerequisite for secured-creditor status and on Sri Nangli Rice Mills Pvt. Ltd, to buttress the argument that Section 11 is confined to disputes between secured creditors inter se. After hearing the parties at length, the Bombay High Court held that the plain language of Section 11 does not use the expression "secured creditor" and does not require that the bank or financial institution invoking it must itself hold that status; it merely requires that the dispute arise between the categories of entities named in the provision and that it relate to securitisation, reconstruction, or non-payment of any amount due, including interest. Distinguishing L. Doulo Builders and Suppliers Co. as a judgement that confined to the question of invoking enforcement measures under Sections 13 and 14 of the Act in the absence of a valid mortgage and Sri Nangli Rice Mills to hold that the judgement clearly indicate that wide range of disputes connected to unpaid amounts between two banks/financial institutions can be subjected to arbitration under Section 11 of the Act, as the same would not restrict itself only to secured creditors only. The Bombay High court by further referring to the judgement of Sri Nangli Rice Mills stated that the expression “non-payment of any amount due including interest” is widely phrased, therefore its meaning would include “various range of scenarios” where disputes are connected to unpaid amounts, including those arising due to third party defaults such as indirect default of the borrowers and even to disputes where the charge is specifically excluded from the ambit of the Act under Section 31(b). Therefore, the Bombay High Court concluded that the dispute between the Applicant and bank, triggered by the borrowers' non-payment and bank's consequent refusal to release title deeds, fell squarely within Section 11 of the Act and accordingly appointed a sole arbitrator to adjudicate the disputes between the Applicant, Bank, and the borrowers.

However, an important distinction from the judgement of the Supreme Court in Sri Nangli Rice Mills is that the dispute there was between two existing secured creditors, both asserting competing security interests. In comparison, the decision of the Bombay High Court in Aditya Birla housing finance Ltd., involved the bank and an entity that was yet to become a secured creditor. Therefore, a conspectus of the above, reveals that although the Act is fundamentally premised on the concepts of a "secured creditor" and "security interest", the scope of Section 11 has not been construed as being confined to disputes involving only existing secured creditors. In Aditya Birla housing finance Ltd., the Bombay High Court has thus given a wider interpretation to Section 11 by placing emphasis on the language of the provision, which states that "non-payment of any amount due including interest" rather than requiring the existence of a security interest as a prerequisite for resorting to arbitration as a dispute resolution mechanism. It would be interesting to see the Supreme Court's view on the Bombay High Court's interpretation of Sri Nangi Rice Mills, to ascertain whether the wider interpretation will pass the muster of law.

Author is an Advocate practicing at Supreme Court of India and Delhi High Court. Views are personal.