Aryan JHA
KEYWORDS: Arbitration, SARFAESI Act, Inter Creditor Disputes
Excerpt
The arbitrability of disputes arising between financial institutions has been a contested issue under Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. This article aims at analysing the recent judgement by the apex court in the case of Bank of India v. M/s Sri Nangli Rice Mills Rice Mills Ltd. and Ors. wherein the apex court has emphasised on statutory fiction under Section 11 of SARFAESI Act which obligates referring the inter creditor disputes to arbitration. The court in its recent judgment highlighted the increasing trend of referring financial disputes to Arbitration so as to effectively resolve the dispute without causing loss to the stakeholders involved in the dispute.
Introduction
The Hon’ble Supreme Court of India in its recent 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 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
The dispute arose between Bank of India and Punjab National Bank as a result of borrower’s default in payment of debt and thereby, leading to conflicting claims over the same secured asset which was put in as collateral with the bank. The borrower company M/s Sri Nangli Rice Mills Ltd. availed credit facility in the year 2006 from Bank of India (appellant bank) providing hypothecated stocks of rice and paddy as security to the bank. While the credit facility agreement between the appellant bank and the borrower was in subsistence the lender also availed credit facility from the Punjab National Bank pledging the hypothecated stocks of rice and paddy with the Punjab National Bank. In 2015, the borrower defaulted on the loan with the appellant bank and under the credit facility agreement the hypothecated stocks were not to be pledged or advance to another financial institution or banks. Upon default by the borrower, the appellant bank carried out an inspection of the hypothecated stocks of rice and paddy where pledge tags in favour of Punjab National bank were found upon the concerned securities. Since the borrower had defaulted in repayment of loan the credit facility was designated as a Non-Performing Asset. The dispute arose as a result of the appellant bank seeking to sell-off the security so as to settle the debt due to it by the borrower however, Punjab National Bank had a conflicting claim over the said security. As a result, the dispute reached Debt Recovery Tribunal upon the direction of High Court which passed an order providing for sale of stocks of rice and paddy and clear the dues of the appellant bank. After preliminary rounds of litigation in DRT and DRAT the appellant bank aggrieved by the order filed the writ petition in High Court which held that the matter shall be referred to Arbitration under Section 11 of SARFAESI Act aligning with the order of DRAT. Being dissatisfied with the decision of High Court the appellant filed an appeal before the Hon’ble Supreme Court of India. The apex court in its judgement defined the scope of Section 11 of SARFAESI act stating that a dispute shall come within the ambit of Section 11 of SARFAESI if the two conditions are satisfied: That the dispute arises between any bank, financial institution, asset reconstruction company or any qualified buyer and that the dispute relates to securitization of financial assets, reconstruction of assets and non-payment of any debt amount due and/or interest. Section 11 of SARFAESI Act deals with disputes pertaining to rights and entitlements of secured creditors inter se and does not relate to borrower’s liability. The court reiterated that disputes satisfying the requisite conditions laid down under Section 11 of SARFAESI Act shall be mandatorily be resolved through Arbitration or conciliation and the jurisdiction of DRTs shall stand ousted.
Analysis
The judgement by the Hon’ble Supreme Court of India has set a remarkable precedent with respect to adjudication of disputes pertaining to enforcement of rights and entitlement arising between secured creditors under Section 11 of SARFAESI Act, 2002. It has highlighted the legislative intent behind Section 11 of SARFAESI Act and has mandated the dispute to be referred to arbitration thereby, taking away the jurisdiction from DRT under Section 17 of the SARFAESI Act. The judgement while delving into the legislative history of SARFAESI Act has also taken note of need for arbitration in resolving conflict over enforcement of security collaterals in cases of inter creditor conflicts.
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.
Aryan JHA is a fourth-year student of B.A. LL.B. (Hons.) at the National Law University Odisha
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