Section 11 of SARFAESI Mandates Arbitration Between Banks in Inter‑se Security Disputes; DRT Lacked Jurisdiction, Appeal Dismissed

A Bench of Justices J.B. Pardiwala and Pankaj Mithal heard an appeal by Bank of India against a Punjab & Haryana High Court order which had affirmed the Debt Recovery Tribunal’s view that a dispute between two banks over priority of charges on the same security must be referred to arbitration under Section 11 of the SARFAESI Act. The core question concerned the scope of Section 11, whether a written arbitration agreement was necessary, and if the DRT retained jurisdiction when competing secured creditors were both banks.

The Court dismissed the appeal and held that Section 11 applied where (i) the dispute arose between a bank, financial institution, asset reconstruction company or qualified buyer and (ii) the dispute related to securitisation, reconstruction or “non‑payment of any amount due including interest.” The Court ruled that Section 11 created a statutory fiction — parties specified therein were to be treated “as if” they had consented in writing to arbitration — and therefore a separate written arbitration agreement was not a prerequisite. It further held that Section 11 was mandatory: where its twin conditions were prima facie satisfied the DRT had no jurisdiction and the dispute must proceed by arbitration under the Arbitration and Conciliation Act, 1996. The Court, in its reasoning, observed: “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. 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.”

Background

The dispute arose after M/s Sri Nangli Rice Mills Pvt. Ltd. (the borrower) had earlier hypothecated stocks of paddy and rice to Bank of India under a 2006 Credit Facility Agreement. While that facility remained outstanding, the borrower obtained further finance from Punjab National Bank in 2013–14 under Agreements of Advance/ Pledge, with National Bulk Handling Corporation (NBHC) acting as collateral manager. Bank of India discovered pledge tags of PNB on stocks during a 2015 inspection after the borrower’s account was declared NPA and served a SARFAESI demand notice. Bank of India asserted its hypothecation charge was prior and wrote that “our hypothecation charge is prior to your pledge,” while PNB maintained its pledge tags were affixed throughout and pointed to prior intimation requests.

Bank of India sought possession and brought proceedings under SARFAESI; the District Magistrate initially protected PNB’s claimed stocks. The DRT first permitted a joint sale because the secured goods were perishable, noting that “the goods in the shape of paddy being perishable item may perish,” and supervised deposit of sale proceeds in SBI. The DRT later accepted Bank of India’s plea of prior hypothecation and allowed sale to realize dues. On appeal the DRAT remanded for consideration of PNB’s preliminary objections. On remand the DRT held, relying on DRAT precedents, that it had no jurisdiction to resolve inter‑se bank disputes and directed arbitration under Section 11; the High Court affirmed. Before the Supreme Court, Bank of India argued Section 31(b) (exclusion for pledge) and absence of any written arbitration agreement precluded Section 11; PNB contended Section 11’s language and purpose covered disputes inter se and international‑style arbitration could be statutorily invoked.

The Supreme Court examined legislative history, prior authorities and the text of Section 11, concluded the phrase “as if the parties to the dispute have consented in writing” created a legal fiction dispensing with a separate written arbitration clause, and held Section 11 mandatory where its conditions were met. The Court dismissed the appeal, directed parties to proceed by arbitration and recorded that parties would bear their own costs; it also directed circulation of the judgment to all High Courts and DRT/DRAT benches.

Case Details: Case No.: Civil Appeal No. 7110 of 2025 (Arising out of SLP (C) No. 16735 of 2022) Case Title: Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors. Appearances: For the Petitioner(s): Mr. Dhruv Mehta, Senior Counsel (for Bank of India) For the Respondent(s): Ms. Ekta Choudhary, Counsel (for Punjab National Bank)