Written by Aryan Jha
National Law University Odisha,
February 2026
KEYWORDS: Arbitration, SARFAESI Act, Inter Creditor Disputes
Excerpt
Under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 the arbitrability of disputes between financial institutions has been a contentious topic. In the recent ruling in Bank of India v. M/s Sri Nangli Rice Mills Rice Mills Ltd. and Ors., the Supreme Court emphasized statutory fiction under Section 11 of the SARFAESI Act, which requires that intercreditor disputes be referred to arbitration. The purpose of this article is to analyze the ruling. In its recent ruling, the court emphasized the need of growing tendency to send financial disputes arising between creditors to arbitration in order to settle them amicably and without resulting in losses for all parties.
Introduction
The Hon’ble Supreme Court of India in its judgement on the case of Bank of India v. M/s Sri Nangli Rice Mills Ltd. and Ors. (2025) 257 Comp Cas 196 has stated that in inter creditor disputes arising between secured creditor shall be compulsorily referred to arbitration under Section 11 of SARFAESI Act read with Arbitration and Conciliation Act, 1996. The apex court further went on to state that the Debt Recovery Tribunal (DRT) shall not have jurisdiction upon disputes between secured creditors and it shall be referred to be arbitrated under Arbitration and Conciliation Act, 1996. Ordinarily, there is a need for an explicit agreement between the parties so as to refer the dispute for Arbitration however, it has been stated in the judgement that despite there being no agreement between secured creditors to refer the dispute for Arbitration it shall be mandatorily referred to Arbitration under Section 11 of SARFAESI Act. The apex court stated that Section 11 of SARFAESI Act creates a legal or statutory fiction to resolve the disputes between secured creditors through arbitration or conciliation and it shall be deemed that there is presence of an arbitration agreement between the disputing parties. Debt Recovery Tribunal shall not retain on such disputes according to the judgement if the dispute satisfies all the condition laid down under Section 11 of SARFAESI Act. The judgement authored by Justices JB Pardiwala and Pankaj Mithal overruled the decision of DRAT and upheld the view of Delhi High Court with respect to dispute arising between Bank of India and Punjab National Bank.
SARFAESI Act was enacted primarily for the purpose of reducing the hindrances faced by banks and financial institution in recovering loans and enforcing securities. The legislative history of SARFAESI Act dates back to 1990’s when the parliament enacted Recovery of Debts Due to Banks and Financial Institutions, 1993 (RDBFI Act) however, the civil courts lacked the adequate infrastructure and personnels for speedy adjudication of disputes related to recovery of loans and therefore, a Tiwari Committee was formed which recommended setting up of special tribunals so as to adjudicate disputes under RDBFI Act. However, due to continuing rise of NPAs in bank and the process of recovery of loan under the existing framework of regulation and procedures was tedious and long which overburdened the courts and tribunals established under RDBFI Act, 1993. Therefore, the Narasimham Committee and Andyarujina Committee were set up so as to suggest reforms in banking recommendations which further led to enactment of SARFAESI Act, 2002. SARFAESI Act was primarily enacted for the purpose of reducing the difficulties of banking and financial institutions in recovering their debts through various dispute resolution mechanisms including Arbitration which was emerging as one of the most effective dispute resolution mechanisms in banking and finance sector.
Overview of Judgement
Bank of India and Punjab National Bank were embroiled in a dispute because the borrower failed to pay the debt, which resulted in competing claims on the same secured asset that was pledged as security to the bank. The appellant bank, Bank of India, granted the borrower company, M/s Sri Nangli Rice Mills Ltd., a credit facility in 2006 in exchange for hypothecated rice and paddy stocks as collateral. The lender secured a credit facility from the Punjab National Bank, guaranteeing the hypothecated rice and paddy stocks held by the bank, in accordance with the provisions of the subsistence credit facility agreement between the appellant bank and the borrower. When the borrower fell behind on the loan with the appellant bank in 2015, the hypothecated equities were prohibited from being pledged or advanced to another bank or financial institution under the terms of the credit facility agreement. The appellant bank inspected hypothecated paddy and rice stocks after the borrower failed to pay their loan and found that pledge tags showing the securities were pledged to Punjab National Bank. Because the borrower was in default, the appellant bank designates these loans as non-performing assets based on the borrower’s inability to repay the loan.
The issues arose for the appellant bank when they attempted to liquidate the stocks, they had placed under hypothecation to recover any amounts owed by the borrower, and were challenged by competing claims from Punjab National Bank, who claimed a superior interest in the same collateral. The Debt Recovery Tribunal, acting upon the orders of the High Court, directed the liquidation of the rice and paddy stocks in order to liquidate the liabilities due to the Appellant Bank. After various layers of adjudication at both DRT and DRAT levels, dissatisfied with all of these determinations, the Appellant Bank filed an application for a writ before the High Court. Ultimately, the High Court concluded that the dispute fell to arbitration pursuant to Section 11 of the SARFAESI Act, which reflected the opinion of the DRAT. In due course, the Appellant Bank appealed to the Hon’ble Supreme Court of India. The Supreme Court of India provided two very important stipulations that have to be fulfilled in order for the statutory presumption of Section 11 of the SARFAESI Act to apply to a matter between the parties. The disagreement must be related to asset securitisation, asset reconstruction or payment of financial obligations owed (i.e., debts) and must occur between banks, financial institutions, asset reconstruction companies, or buyers qualified under the Act. Section 11 of the SARFAESI Act relates only to determination of the respective rights and interests of secured creditors and not to any liability of a creditor to the debtor. The court also reiterated the DRT’s authority will be overruled and that disputes falling within the scope of the parameters of the SARFAESI Act must be resolved through either arbitration or conciliation only.
Analysis
The judgment of the Hon’ble Supreme Court of India has laid down an important precedent in relation to the adjudication of disputes concerning the enforcement of rights and entitlements between secured creditors under Section 11 of the SARFAESI Act, 2002. The Court clarified the legislative intent underlying Section 11 and held that such disputes must be referred to arbitration, thereby excluding the jurisdiction of the Debt Recovery Tribunal under Section 17 of the Act. In examining the legislative history of the SARFAESI Act, the judgment also underscored the necessity of arbitration as an effective mechanism for resolving inter-creditor disputes relating to the enforcement of security interests.
The appellant bank in the present case stated that High Court and Debt Recovery Tribunal erred in law by relying upon the decision of DRAT on the case of Oriental Bank of Commerce & Anr. v. Canara Bank & Ors. (2011) 4 BC 14 (DRAT) wherein it was stated that despite there being no arbitration agreement between the parties the inter creditor disputes shall be referred to Arbitration under Section 11 of SARFAESI Act. The appellant bank rather placed reliance on Federal Bank Ltd. v. LIC Housing finance Ltd. & Ors. (2010) 2 BC 158 (DRAT) wherein it was held that Section 11 of SARFAESI Act shall only apply when there is an arbitration agreement subsisting between the parties. The apex court delving into the conflict between the two decisions of the DRAT stated that decision of DRAT in Oriental Bank of Commerce with respect to assumption of statutory fiction related to arbitration agreement reflects the correct position of law while decision of DRAT in the case of Federal Bank does not stand valid as far as the proposition of law is concerned under Section 11 of SARFAESI Act. The decision of the apex court has fixated the proposition with respect to mandatory referring of inter creditor disputes to arbitration under SARFAESI Act. This shall ensure that commercial disputes are resolved with expediency which shall save various interests of the stakeholders involved in such disputes. It has also highlighted the broader perspective with respect emergence of arbitration in resolving commercial disputes particularly the disputed relating to collateral securities. The judgment taking into account the need for aiding the speedy resolution of commercial disputes and easing the burden of DRTs across the countries has created the framework for effective adoption of arbitration as a means of resolving inter creditor disputes with the requisite legal framework in place.
Conclusion
The judgement by Hon’ble Supreme Court has not only highlighted the increasing significance of Alternative Dispute Resolution mechanisms in resolving commercial disputes in India but has also delved into the purpose of enacting the SARFAESI Act which was primarily enacted to ensure that disputes pertaining to securities and financial assets are resolved in speedy and efficient manner so as to reduce the financial damages that maybe caused as a result of legal dispute. Therefore, the Supreme Court’s interpretation of the statute in favour of the creation of a legal fiction which mandates arbitration is an endeavour to align the provision with the legislative intent behind enacting the SARFAESI Act. Though the decision is expected to reduce the burden on DRTs with respect to inter-creditor disputes, India at present lacks adequate infrastructure for institutional arbitration, which results in many of the arbitral awards getting challenged in the courts, and the time taken in resolving the conflict related to such awards at times ends up defeating the purpose of referring the disputes to arbitration. However, in recent times, India has emerged as a global hub for International Commercial Arbitration, and the exponential economic growth of the country makes the decision of the apex court make the country all the more investor-friendly and seeks to promote Ease of Doing Business, thereby strengthening India’s commitment to a commerce-friendly dispute resolution ecosystem.
