S. 11 SARFAESI Act | DRT Can't Decide Disputes Between Banks Over Secured Assets; Must Be Referred To Arbitration : Supreme Court

In a significant ruling under the SARFAESI Act, 2002 (“Act”), the Supreme Court today (May 23) held that inter-creditor disputes (between secured creditors) must be resolved through arbitration under Section 11 of the Act read with the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). Unlike the Arbitration and Conciliation Act, which requires a written agreement for reference, Section 11 of the Act creates a statutory mandate for arbitration, eliminating the need for any such agreement, the court said. “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. The said provision creates a legal fiction as regards the existence of an arbitration agreement notwithstanding whether such agreement exists or not in actuality.”, the court added. Further, the Court clarified that DRT would lose its jurisdiction to adjudicate the dispute, and the dispute would be settled through an arbitration under Section 11 upon fulfilment of twin conditions i.e., 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. “Where the aforesaid two conditions are found to be prima-facie satisfied, there the DRT will have no jurisdiction and the proper recourse would only be through Section 11 of the SARFAESI Act read with the Act, 1996.”, the court said. The Case A bench of Justices JB Pardiwala and Pankaj Mithal heard a dispute involving conflicting claims by Bank of India (BOI) and Punjab National Bank (PNB) over the same secured asset. BOI had extended credit to M/s Sri Nangli Rice Mills Pvt. Ltd. in 2003, secured by hypothecated stock. After the borrower defaulted in 2015, BOI discovered that PNB had also claimed rights over the same stock via warehouse receipts issued in 2013, asserting a valid pledge through its collateral manager.BOI issued a demand notice under the SARFAESI Act and approached the DRT, which in 2017 ruled in its favour. However, in 2019, the DRAT overturned this, stating the DRT lacked jurisdiction in inter-bank disputes and directed arbitration. The Delhi High Court upheld this view in 2020.Aggrieved by the High Court's ruling, the Appellant-BOI approached the Supreme Court. Issue Before the Supreme Court, the central questions concerned the applicability of Section 11 to inter-creditor disputes, whether the provision required a written arbitration agreement, and whether the DRT retained jurisdiction in such cases. Section 11 of the SARFAESI Act deals with resolving disputes related to securitization, reconstruction, or non-payment of dues between parties like banks, financial institutions, asset reconstruction companies, or qualified buyers. These disputes are settled through conciliation or arbitration, following the Arbitration and Conciliation Act, 1996, as if the parties have agreed to arbitration in writing. Decision Affirming the High Court's ruling, the Judgment authored by Justice Pardiwala held that disputes like the one between BOI and PNB, which arose from the borrower's non-payment and involved conflicting claims over secured assets, fell squarely within the scope of Section 11. “The dispute stems from the borrower's failure to discharge their debt obligations, including the amounts they were bound to pay to the banks. This non-payment gives rise to a conflict between the creditors regarding the hierarchy of their respective charges over the borrower's assets. Consequently, the issue of priority of charge is inherently and intrinsically linked to the borrower's “non-payment of any amount due” as contemplated under Section 11 of the SARFAESI Act. This provision, therefore, would undoubtedly bring such disputes within its ambit, and thereby mandate resolution of such disputes through conciliation or arbitration as prescribed under the Act, 1996.”, the court observed. The Court also clarified that Section 11 creates a legal fiction by stating disputes shall be resolved “as if the parties have consented in writing,” thereby removing the need for a formal arbitration agreement. This statutory fiction was held sufficient to override earlier decision of DRAT in Federal Bank Ltd. v. LIC Housing Finance Ltd. 2010 SCC OnLine DRAT 138 that required express consent. “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 ...

S. 11 SARFAESI Act | DRT Can't Decide Disputes Between Banks Over Secured Assets; Must Be Referred To Arbitration : Supreme Court

Yash Mittal

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