Supreme Court Upholds Mandatory Statutory Arbitration u/s 11 SARFAESI Act for Inter-Creditor Disputes Involving Priority of Charge Between Banks on the Same Secured Asset
- REEDLAW
- May 29
- 3 min read
The Supreme Court has upheld mandatory statutory arbitration under Section 11 of the SARFAESI Act for inter-creditor disputes involving the priority of charge between banks on the same secured asset, while excluding borrower-lender conflicts from its scope.
On 23 May 2025, a Supreme Court Bench comprising Justice J.B. Pardiwala and Justice Pankaj Mithal reviewed an appeal and held that Section 11 of the SARFAESI Act mandates statutory arbitration for disputes exclusively between specified financial entities—such as banks and financial institutions—relating to securitisation, asset reconstruction, or non-payment of dues. This includes inter-creditor disputes involving conflicting claims or priority of charge over the same secured or hypothecated asset, while excluding borrower-creditor conflicts, which remain subject to other remedies under the Act.
In this case, the Supreme Court adjudicated upon a complex legal dispute involving conflicting claims by two banks—Bank of India and Punjab National Bank—over the same secured asset hypothecated and pledged by a common borrower, M/s Sri Nangli Rice Mills Pvt. Ltd. The dispute originated when the borrower, while still indebted to Bank of India under a 2006 credit facility, secured an additional loan from Punjab National Bank in 2013 by pledging the same stock of paddy and rice. This action contravened the explicit terms of the original hypothecation agreement with the Bank of India, which prohibited the borrower from creating any further encumbrances without prior consent.
The controversy intensified after the appellant bank discovered in 2015 that the pledged stock bore the respondent bank's tags. Accusations of collusion between the borrower and Punjab National Bank were raised, with Bank of India asserting its priority over the security. Although the respondent bank claimed it had informed the appellant about the proposed pledge and that it acted based on warehouse receipts, no formal objection had been raised at the time. Disagreements regarding the priority of claim and control over sale proceeds escalated, culminating in litigation and regulatory proceedings under the SARFAESI Act.
The Debt Recovery Tribunal initially ruled in favour of the appellant bank, recognising the earlier hypothecation charge. However, on appeal, the DRAT remanded the case, directing reconsideration of jurisdictional questions. The DRT later declined jurisdiction altogether, relying on precedent which mandated arbitration under Section 11 of the SARFAESI Act in inter-bank disputes involving securitised assets or unpaid dues. The High Court upheld this view, leading to the present appeal before the Supreme Court.
The Supreme Court, in interpreting Section 11, emphasised that it applied only where two conditions were met: the dispute must be between specified financial entities (banks, financial institutions, ARCs, or qualified buyers), and the subject matter must relate to securitisation, reconstruction, or non-payment of any amount due. The Court concluded that the present dispute, arising out of a borrower's default and resulting in inter-se claims of charge priority between two banks, fell squarely within this scope. It rejected arguments suggesting that a written arbitration agreement was necessary, clarifying that Section 11 created a statutory presumption of consent to arbitration.
Furthermore, the Court reiterated that Section 11 was mandatory in nature, and that disputes among secured creditors could not be routed through the DRT or civil courts. Importantly, it also distinguished such disputes from borrower-creditor disputes, which continued to fall under Section 17 of the SARFAESI Act. The Court acknowledged previous jurisprudence, affirming that statutory arbitration under Section 11 was intended to expedite resolution among financial institutions and prevent derailment of recovery proceedings.
In conclusion, the Supreme Court upheld the High Court’s direction to resolve the matter through arbitration, affirming the DRT’s lack of jurisdiction. The appeal was dismissed, reinforcing the mandatory and exclusive nature of the statutory arbitration regime under Section 11 of the SARFAESI Act for disputes between financial entities regarding securitised or hypothecated assets.
Mr. Dhruv Mehta, Senior Advocate, represented the Appellant.
Ms. Ekta Choudhary, Advocate, appeared for the Respondent Bank.
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