Introduction

The Supreme Court of India in its landmark judgment in Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors., Civil Appeal No. 7110 of 2025, decided on 23rd May 2025, has decisively interpreted Section 11 of the SARFAESI Act, 2002, declaring that arbitration is the mandatory dispute resolution mechanism for inter-se disputes among banks, financial institutions, asset reconstruction companies (ARCs), and qualified buyers under certain circumstances. This judgment has significant implications on how inter-creditor disputes are to be resolved under SARFAESI.

Legislative Context: Section 11 of the SARFAESI Act

Section 11 provides:

"Where any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest arises amongst any of the parties, namely, the bank, or financial institution, or securitisation company or reconstruction company or qualified institutional buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute have consented in writing…"

Supreme Court's Key Rulings

1. Arbitration Mandate Under Section 11 is Compulsory, Not Optional

The Supreme Court has unequivocally held that Section 11 of the SARFAESI Act is couched in mandatory language. The use of the word “shall” in the provision clearly denotes a legislative intent to obligatorily refer qualifying disputes to arbitration or conciliation. It is not open to parties to choose alternative forums such as the Debt Recovery Tribunal (DRT) when the dispute squarely falls within the ambit of Section 11. The Court emphasized that once the conditions of the section are fulfilled, the jurisdiction of the DRT stands excluded, and parties must proceed under the Arbitration and Conciliation Act, 1996.

2. Twin Threshold Conditions for Invoking Section 11

The Court laid down a structured test comprising two cumulative preconditions for Section 11 to apply:

• First, the dispute must arise amongst the specified class of parties, namely banks, financial institutions (FIs), asset reconstruction companies (ARCs), or qualified buyers (QIBs).

• Second, the subject matter of the dispute must relate to “securitisation,” “reconstruction,” or “non-payment of any amount due including interest.”

Unless both these conditions are simultaneously satisfied, the dispute cannot be referred to arbitration under Section 11. This test prevents unwarranted or mechanical invocation of arbitration in cases that do not truly involve inter-institutional financial conflicts arising from enforcement of securitised assets.

3. Expansive Meaning Attributed to “Dispute” and “Non-Payment”

The Supreme Court adopted a broad and purposive interpretation of the expression “dispute relating to... non-payment of any amount due including interest.” The Court observed that the phrase is intentionally wide in its sweep, designed to cover not only straightforward repayment defaults but also derivative disputes arising between secured creditors during or after enforcement proceedings. For example, where two financial institutions are in conflict over entitlement to sale proceeds of a securitised asset, such a conflict squarely falls within Section 11.

4. Lender-Borrower Relationship Excluded from Section 11

A significant clarification was provided regarding the nature of the parties to the dispute. The Court observed that Section 11 contemplates inter-creditor disputes and not disputes between a lender and a borrower. Even if the borrower happens to be a financial institution, Section 11 will not apply where the dispute arises in its borrower capacity. Thus, the capacity in which the parties are engaged becomes a critical factor for assessing arbitrability under this provision.

5. Statutory Fiction Dispenses with the Need for Arbitration Agreement

In an important legal pronouncement, the Supreme Court clarified that a written arbitration agreement is not a prerequisite for arbitration under Section 11. The provision itself creates a statutory fiction of mutual consent, and parties are deemed to have agreed to arbitration by operation of law. The phrase “as if the parties to the dispute have consented in writing” must be interpreted as legislatively incorporating an arbitration clause for such disputes. Hence, the usual requirements of Section 7 of the Arbitration and Conciliation Act, 1996 do not apply to arbitration initiated under Section 11 of SARFAESI.

6. Clarification of Conflicting Precedents and Affirmation of Correct View

The Court resolved earlier judicial divergence by endorsing the view taken in Oriental Bank of Commerce v. Canara Bank, 2011 DRAT Delhi, where arbitration under Section 11 was upheld as mandatory. It expressly overruled the contrary decision in Federal Bank Ltd. v. LIC Housing Finance Ltd., 2010 DRAT Mumbai, which had interpreted the provision as merely directory or optional. This ruling provides long-awaited clarity and judicial certainty regarding the interpretation of Section 11.

• Oriental Bank of Commerce v. Canara Bank https://indiankanoon.org/doc/153993168/ 

• Federal Bank Ltd. v. LIC Housing Finance Ltd. https://indiankanoon.org/doc/146708899/ 

7. Binding Direction to DRTs and DRATs Across India

To ensure uniformity in the implementation of its interpretation, the Supreme Court directed that its judgment be circulated to all Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs). The Court effectively cautioned all quasi-judicial forums under SARFAESI not to entertain disputes falling under Section 11, and to refer such disputes to arbitration without delay.

Implications for Practice

For Banks:

• Ensure that disputes with other financial entities under SARFAESI are routed through arbitration.

• Avoid filing such cases in DRTs, which no longer have jurisdiction.

• Use Section 11 of the Arbitration Act, 1996 for appointment of arbitrators.

For Legal Practitioners:

• Screen whether the parties and subject matter meet Section 11’s twin conditions.

• Avoid invoking SARFAESI recovery procedures for disputes that are now arbitrable.

• Be prepared to contest jurisdiction of DRT if arbitration applies.

Conclusion

This judgment solidifies Section 11’s role as a statutory arbitration mandate for inter-creditor disputes. It advances SARFAESI’s objective of speedy asset recovery while ensuring a structured, expert-based resolution mechanism. Practitioners and lenders must reorient dispute resolution strategies accordingly.