Supreme Court of India — Landmark Judgment on Statutory Arbitration under the SARFAESI Act, 2002
Author – Tanishka Ranjan (Vivekananda Institute of Professional Studies)
To the Point
A landmark dispute unfolded between Bank of India (BOI) and Punjab National Bank (PNB) concerning the priority rights over secured assets pledged by a borrower, Sri Nangli Rice Mills Pvt. Ltd. The controversy centered on the hypothecation and pledge of stock used as collateral for loans advanced by both banks at different times.
The key legal question was whether such inter-bank disputes—arising from enforcement of security interests under the SARFAESI Act, 2002—should be adjudicated by the Debt Recovery Tribunal (DRT) or through arbitration as per Section 11 of the SARFAESI Act.
The Supreme Court of India, in this 2025 ruling, clarified that arbitration is mandatory for disputes between secured creditors (banks, financial institutions, or asset reconstruction companies), even in the absence of a prior arbitration agreement. This means that Section 11 of the SARFAESI Act operates as a statutory arbitration clause, automatically applying to such disputes and thereby ousting the jurisdiction of the DRT.
This judgment has a significant impact on the banking and finance ecosystem, particularly on how priority conflicts, charge disputes, and enforcement rights are resolved among financial entities.
Use of Legal Jargon
SARFAESI Act, 2002: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act enables banks and financial institutions to enforce security interests without court intervention in case of borrower default.
Hypothecation: A charge created over movable property, where possession remains with the borrower but the lender has rights over the asset in case of default.
Pledge: A transfer of possession of movable property by the borrower to the lender as security for repayment of a debt.
Section 11 (SARFAESI Act): A statutory mechanism mandating that disputes between secured creditors relating to enforcement of security interests must be resolved through arbitration.
Debt Recovery Tribunal (DRT): A specialized quasi-judicial body established under the Recovery of Debts and Bankruptcy Act, 1993 to adjudicate recovery of debts due to banks and financial institutions.
Debt Recovery Appellate Tribunal (DRAT): The appellate forum that hears appeals from orders of the DRT.
Inter-se Dispute: A dispute between parties of the same category — here, between secured creditors — regarding rights or priorities over the same asset.
Statutory Arbitration: Arbitration that arises not from a contract but directly from a legislative mandate, making it obligatory without an explicit arbitration agreement.
9. Collateral Manager: The entity that oversees and manages the pledged goods or assets on behalf of the lending institution to ensure their preservation and value.
The Proof
Factual Background
In 2003, Sri Nangli Rice Mills Pvt. Ltd. obtained a loan from the Bank of India (BOI) by hypothecating its stock of rice, paddy, and other movable assets. The loan documentation expressly prohibited the borrower from creating any further charge or pledge on the same assets without prior consent from BOI.
However, in 2013, the borrower obtained another loan from Punjab National Bank (PNB) by pledging the same stockof paddy and rice, even though BOI’s hypothecation charge continued to subsist.
The Conflict
The borrower subsequently defaulted on both loans. BOI initiated enforcement proceedings under Section 13 of the SARFAESI Act by taking possession of the hypothecated stock. PNB, claiming that it held a valid pledge over the same stock, objected and asserted priority rights.
This led to a conflict between two secured creditors, each claiming superior rights over the same assets.
Proceedings Before Tribunals and Courts
Before the DRT (2017): BOI approached the Debt Recovery Tribunal, which ruled in favor of BOI, holding that the initial hypothecation created a valid and subsisting charge. Since PNB accepted the stock later as a pledge, it was bound by BOI’s prior charge. The DRT concluded that BOI’s rights had priority.
Before the DRAT (2019): PNB appealed before the Debt Recovery Appellate Tribunal (DRAT). The DRAT, instead of determining the merits, observed that Section 11 of the SARFAESI Act provided for arbitration of disputes between secured creditors and thus remanded the matter to be decided through arbitration.
Before the High Court (2020): BOI challenged the DRAT’s direction, arguing that no arbitration clause existed between the parties and, therefore, arbitration could not be imposed. The Punjab and Haryana High Court dismissed BOI’s appeal, affirming that Section 11 creates a statutory arbitration mechanism, which does not require a consensual agreement.
4. Before the Supreme Court (2025): Dissatisfied with the High Court’s reasoning, BOI approached the Supreme Court of India, arguing that:
* Arbitration under Section 11 requires a pre-existing arbitration clause.
* DRT is the competent authority to adjudicate disputes related to security enforcement.
* Statutory arbitration without consent violates the principle of party autonomy under the Arbitration and Conciliation Act, 1996.
Supreme Court’s Analysis
The Supreme Court undertook a detailed interpretation of Section 11 of the SARFAESI Act, emphasizing the legislative intent behind its enactment.
The Court observed that:
* Section 11(1) clearly stipulates that “if any dispute arises among secured creditors relating to the enforcement of security interest, such dispute shall be resolved by arbitration.”
* This provision forms part of Chapter III of the SARFAESI Act, which deals with the enforcement of security interests, and thus has overriding effect due to Section 35 (which provides the Act’s supremacy over other laws).
* The absence of a contractual arbitration clause is immaterial because Section 11 itself serves as a statutory arbitration clause—a concept recognized in several Indian statutes.
* The DRT’s jurisdiction is confined to borrower-debt disputes, not inter-se conflicts among financial institutions.
Hence, inter-bank disputes under the SARFAESI framework must compulsorily go to arbitration.
Final Judgment
The Supreme Court dismissed BOI’s appeal, upholding the High Court’s and DRAT’s orders. It ruled that:
“Disputes between secured creditors under the SARFAESI Act, 2002, concerning enforcement of security interests, are mandatorily referable to arbitration under Section 11, irrespective of the existence or absence of an arbitration agreement.”
This judgment ousted the jurisdiction of the DRT in such matters and confirmed that Section 11 acts as a self-contained dispute resolution clause for secured creditors.
Abstract
This case stands as a turning point in defining the jurisdictional boundaries between DRT and arbitration under the SARFAESI Act.
By interpreting Section 11 as a statutory arbitration clause, the Supreme Court has:
* Strengthened the efficacy and autonomy of arbitration as a dispute resolution mechanism;
* Clarified that secured creditors (banks, financial institutions, ARCs, etc.) cannot invoke DRT for inter-se disputes;
* Promoted efficiency, specialization, and confidentiality in the resolution of financial conflicts.
This ruling harmonizes the objectives of the SARFAESI Act—to ensure expeditious recovery and minimal judicial intervention—with the broader national policy favoring alternative dispute resolution mechanisms.
In essence, the judgment reflects a shift toward institutional arbitration for financial sector disputes, providing clarity on jurisdiction and preventing overlapping litigation before DRTs and civil courts.
Case Laws and Supporting Precedents
Bank of India v. Sri Nangli Rice Mills Pvt. Ltd., Civil Appeal No. 7110 of 2025 (Supreme Court of India): Established that Section 11 of the SARFAESI Act operates as a statutory arbitration clause, mandating arbitration for inter-bank disputes.
M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd. (2017) 16 SCC 741: Clarified that SARFAESI proceedings and arbitration can operate simultaneously as they address different rights and remedies.
Vidya Drolia v. Durga Trading Corporation (2020) 20 SCC 406: Reiterated that arbitration can be mandatory under certain statutory frameworks, and public policy does not restrict it if expressly legislated.
Transcore v. Union of India (2008) 1 SCC 125: Explained that SARFAESI remedies are additional and not inconsistent with other recovery mechanisms, thereby supporting the concept of parallel statutory forums.
K.L. Tripathi v. State Bank of India (1984) 1 SCC 43: Highlighted the principle that disputes between banks must adhere to the legislative intention of specialized dispute resolution mechanisms to avoid duplication.
ICICI Bank Ltd. v. Official Liquidator (2010) 10 SCC 1: Recognized that priority disputes among secured creditors are distinct from borrower defaults and may warrant separate resolution mechanisms.
7. Punjab and Haryana High Court (2020 Judgment): Held that absence of an arbitration agreement is immaterial when Section 11 SARFAESI expressly provides for arbitration in inter-creditor disputes.
Conclusion
The Supreme Court’s decision in Bank of India v. Sri Nangli Rice Mills Pvt. Ltd. (2025) provides an authoritative interpretation of Section 11 of the SARFAESI Act, cementing its position as a statutory arbitration clause.
Key Takeaways:
1. Mandatory Arbitration: Arbitration under Section 11 is compulsory for disputes between secured creditors—banks, financial institutions, or ARCs—relating to the enforcement of security interests.
2. DRT Jurisdiction Excluded: The Debt Recovery Tribunal cannot adjudicate inter-bank or inter-creditor disputes since its jurisdiction is confined to borrower-debt recovery matters.
3. Statutory Override: Section 11, being a part of the SARFAESI Act, enjoys overriding effect under Section 35, superseding provisions of other laws, including the Recovery of Debts Act or the Arbitration and Conciliation Act where inconsistent.
4. Party Autonomy Balanced with Legislative Intent: While arbitration typically rests on consent, statutory arbitration reflects legislative policy promoting efficient dispute resolution in the financial sector.
5. Efficient Dispute Resolution: The ruling ensures that conflicts between financial institutions are settled swiftly and professionally by arbitrators familiar with banking and finance law, reducing procedural complexity and litigation burden.
6. Wider Implications: The decision will influence future inter-creditor disputes, including those involving Asset Reconstruction Companies (ARCs) and Non-Banking Financial Companies (NBFCs) operating under similar frameworks.
Ultimately, this judgment reinforces the integrity and efficiency of India’s financial legal architecture, ensuring that inter-bank disputes do not clog judicial forums and are resolved in a specialized, time-bound, and expert-driven environment.
FAQs
Q1. Does arbitration under Section 11 of the SARFAESI Act require a pre-existing arbitration agreement?
A1. No. The Supreme Court clarified that Section 11 itself constitutes a statutory arbitration clause. Hence, disputes between secured creditors must be referred to arbitration even without a contractual arbitration clause.
Q2. Can the DRT entertain disputes between banks or financial institutions under the SARFAESI Act?
A2. No. The DRT’s jurisdiction is limited to borrower-related disputes. Inter-se disputes among secured creditors fall exclusively within the scope of Section 11 arbitration.
Q3. What if two banks have conflicting security interests on the same asset?
A3. Such conflicts are categorized as inter-se disputes between secured creditors. They must be resolved through arbitration under Section 11 of the SARFAESI Act, ensuring neutrality and avoiding jurisdictional overlap.
Q4. Does this judgment apply to Asset Reconstruction Companies (ARCs) as well?
A4. Yes. Section 11 encompasses all secured creditors, including ARCs and financial institutions, not just scheduled banks.
Q5. How does this ruling affect recovery proceedings under SARFAESI?
A5. It enhances efficiency by removing jurisdictional ambiguity. Inter-creditor disputes will be handled via arbitration, allowing DRTs to focus solely on borrower recoveries.
Q6. What is the policy rationale behind statutory arbitration in banking disputes?
A6. The rationale lies in ensuring speedy, specialized, and cost-effective resolution of financial disputes while avoiding protracted litigation before courts or tribunals.
Q7. How does Section 35 of the SARFAESI Act support this interpretation?
A7. Section 35 gives SARFAESI overriding effect over other laws, confirming that its provisions—including Section 11’s arbitration mandate—supersede inconsistent mechanisms under any other statute.
Q8. What is the long-term impact of this ruling on Indian financial law?
A8. It creates a uniform, predictable framework for resolving inter-creditor disputes, encourages institutional arbitration, and reinforces confidence in India’s financial recovery regime.
Final Thought
The Bank of India v. Sri Nangli Rice Mills Pvt. Ltd. (2025) judgment is more than just a resolution of a banking dispute—it is a systemic reform in how India’s financial institutions resolve their internal conflicts. By establishing statutory arbitration as the rule and litigation as the exception, the Supreme Court has laid a robust foundation for efficient, expert-led, and future-ready dispute resolution in the financial sector.
