Bank Of India vs. M/S Sri Nangli Rice Mills Pvt. Ltd.

REPORTABLE
2025 INSC 765
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7110 OF 2025
(Arising out of Special Leave Petition (Civil) No. 16735 of 2022)

BANK OF INDIA ...APPELLANTS(S)

VERSUS

M/S SRI NANGLI RICE MILLS PVT. LTD. & ORS. ...RESPONDENT(S)




J U D G M E N T


Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2025.05.23
15:02:57 IST
Reason:

J.B. PARDIWALA, J.:
For the convenience of the exposition, this judgment is divided in the following
parts: -
INDEX
A. FACTUAL MATRIX ............................................................................................ 3
B. PROCEEDINGS UNDER THE SARFAESI ACT. .......................................... 14
i. First round of proceedings before the DRT. .................................................. 17
ii. Second round of proceedings before the DRT. .............................................. 25
C. IMPUGNED ORDER .......................................................................................... 26
D. SUBMISSIONS OF THE PARTIES .................................................................. 27
i. Submissions on behalf of the Appellant Bank. .............................................. 27
ii. Submissions on behalf of the Respondent Bank. ........................................... 30
E. ISSUES FOR DETERMINATION. ................................................................... 32
F. ANALYSIS ........................................................................................................... 33
i. Legislative History and Scheme of the SARFAESI Act. .............................. 33
ii. Scope of Section 11 and expression “dispute” thereunder. .......................... 39
a. Various Decisions on the subject. .......................................................................... 39
b. Scope and ambit of Section 11 of the SARFAESI Act. ........................................ 52
c. Meaning of the expression “ non-payment of any amount due including interest ”. .. 62
d. Section 11 will not apply to disputes between Bank(s), Financial Institution(s),
ARC(s) or Qualified Buyer(s), who are otherwise a Borrower. ........................... 68
iii. There is no requirement of existence of a written arbitration agreement
under Section 11 of the SARFAESI Act. ........................................................ 74
iv. Section 11 of the SARFAESI Act is mandatory in nature. ........................... 83
G. FINAL CONCLUSION ....................................................................................... 96
Special Leave Petition (C) No. 16735 of 2022 Page 1 of 98


1. Leave granted.

2. This appeal arises from the judgment and order passed by the High Court of
Punjab and Haryana at Chandigarh dated 07.10.2020 in CWP No. 13538 of
2020 (O&M) (hereinafter referred to as the “ Impugned Order ”) by which the
High Court upheld the decision of the Debt Recovery Tribunal-I, Delhi (for
short, the “ DRT ”) which inter-alia held that since the dispute in the present is
between two banks, the DRT has no jurisdiction to adjudicate the same and
accordingly directed the parties herein to resolve the dispute through
arbitration under Section 11 of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (for short,
the ” SARFAESI Act ”) and thereby dismissed the writ petition filed by the
appellant herein.

3. For the sake of convenience, we clarify that the appellant herein, ‘Bank of
India’ is a nationalized bank (hereinafter referred to as the “ appellant bank ”),
the respondent no. 1 herein, ‘M/s Sri Nangli Rice Mills Pvt. Ltd. is a
manufacturing unit dealing in rice and other allied products and the borrower
herein (hereinafter referred to as the “ borrower ”), the respondent no. 2 herein,
‘Punjab National Bank’ is also a nationalized bank, (hereinafter referred to as
the “ respondent bank ”) and the respondent no. 3 herein, ‘National Bulk
Special Leave Petition (C) No. 16735 of 2022 Page 2 of 98

Handling Corporation’ is the collateral manager of the respondent bank
(hereinafter referred to as the “ collateral manager ”).

A. FACTUAL MATRIX

4. It appears from the material on record that the borrower herein on 31.07.2003
had availed credit facility from the appellant bank herein by hypothecating
stocks of paddy and other assets. Pursuant thereto, a Credit Facility Agreement
dated 23.09.2006 was executed between the borrower company and the
appellant bank, with the following relevant terms and conditions: -
“ CREDIT FACILITY AGREEMENT
[...]
4.6 BORROWER NOT TO BORROW MONIES FROM
OTHER BANKS AND FINANCIER WITHOUT
CONSENT' OF THE BANK:
The Borrower confirms that he has not borrowed any monies
from any other Bank or financier and further agrees that so
long as the Borrower continues to be indebted or liable to Bank
in respect of Sanctioned Credit Facilities, the Borrower shall
not without the previous written consent of the Bank borrow
any monies from any other Bank or Financier.

[...]
4.15 SECURITIES TO BE FREE FROM ANY
ENCUMRBACE:
The Borrower hereby declares and assures that the Borrower'
has not created in favour of any person (other than the Bank)
any lien, charge, pledge, mortgage or other encumbrance over
all or any of the Securities which are hypothecated or charged
by the Borrower to the Bank and have not borrowed any
monies against the said Securities from any such persons. The
Borrower further undertakes that so long as the Borrower
continues to be indebted or liable to the Bank under any of the
Special Leave Petition (C) No. 16735 of 2022 Page 3 of 98

Sanctioned Credit Facilities, the Borrower will not without the
previous written consent of the Bank create or attempt to create
in favour of any other person, lien, charge, pledge or
.encumbrance over all or any of the Securities' whatsoever and
further undertakes not to create any lien, charge or other
encumbrance over all or any of the properties the Borrower
may acquire hereafter, ranking either in priority to or pari
passu with or subsequent to the Security in favour of the Bank,
arid will not borrow at monies against such subsequently
acquired without the previous consent in writing with the Bank.

4.16 BORROWER NOT TO REMOVE THE SECURITY
WITHOUT BANK'S CONSENT:
So long as any money remains due in respect of Sanctioned
Credit Facilities, the Borrower shall not remove or cause or
permit to be removed the goods or properties charged to the
Bank from the Borrower's premises, where the same are
represented to have been kept, without the consent in writing
of the Bank or the same may be removed except in the manner
and to the extent permitted by the Bank. The Bank shall be
entitled to put up and the Borrower consents to the Bank to put
up the Bank's name Board at the place where the goods and
properties of the Borrower given as Security to Bank are kept
or stored, for such period and in such manner as the Bank may
deem proper.

4.17 BORROWER TO KEEP THE GOODS CHARGED IN
MARKETABLE CONDITIONS:
The Borrower shall, at all times keep goods or stock or other
properties hypothecated or charged to the Bank as Security for
the Sanctioned Credit Facilities in a marketable state and in
good and substantial repair and condition and in thorough
working order and will not make any alteration therein without
previous written consent of the Bank.

4.23 BORROWER NOT TO CREATE THIRD PARTY
RIGHTS ON THE SECURITY (IES):
Borrower confirms that no lien, charge, pledge, mortgage or
other encumbrance or interest or right has been created over
all or 'my of the Security(ies) offered to the Bank as a Security
for Sanctioned credit facilities nor shall the Borrower create
in'favour of any other person, any lien, charge, pledge,
mortgage or other encumbrance or interest or right over all or
Special Leave Petition (C) No. 16735 of 2022 Page 4 of 98

any of the Security(ies) or other properties either in priority to
or pari passu with the Bank's rights and interests. The
Borrower shall not borrow any monies from any other person
against the Security given to the Bank.
[...]”

5. As per clause 4.6 of the aforesaid credit facility agreement it was stipulated
that the borrower shall not avail any credit facility or loan from any other bank
or financier until the borrower amount in respect of the credit facility
sanctioned by the appellant bank herein is repaid. Furthermore, clause 4.15 of
the aforesaid credit facility agreement that the securities hypothecated in
favour of the appellant bank shall be free from any encumbrances and the
borrower shall not create any charge, lien or pledge in respect of the same
without the prior consent of the appellant bank herein. Clause 4.16 stipulated
that the borrower shall not remove or cause to be removed the securities that
have been hypothecated to the appellant bank. Clause 4.23 stipulated that no
third-party rights or interest shall be created over the securities hypothecated
with the appellant bank, until the amount borrowed against the aforesaid credit
facility sanctioned by the appellant bank is repaid.


6. It appears that while the loan amount under the aforesaid credit facility earlier
sanctioned by the appellant bank was still outstanding and yet to be
discharged, the borrower, on 22.11.2013 by way of a loan application
proceeded to simultaneously avail one another credit facility from the
Special Leave Petition (C) No. 16735 of 2022 Page 5 of 98

respondent bank. Pursuant thereto, an Agreement of Advance / Pledge
Agreement dated 06.12.2013 was executed between the borrower and the
respondent bank, by which the warehouse receipts of certain goods including
stocks of paddy and rice, were pledged in favour of the respondent bank as
security, with the respondent no. 3 acting as the collateral manager.

7. As per the aforesaid Agreement of Advance, various stocks of paddy and rice
of the borrower herein were deposited in the godown of the respondent no. 3
herein and the loan amount was sanctioned by the respondent bank herein
against the warehouse receipts issued by the respondent no. 3 in respect of the
aforesaid goods as security. As per the terms and conditions of the said
Agreement of Advance, the sale proceeds realized from the said stock of
paddy and rice were required to be credited directly to the borrower’s loan
account, in discharge of the instalments due thereunder.

8. Between 2006 and 2014, the credit facilities sanctioned by the appellant bank
to the borrower were enhanced from time to time. In connection therewith, the
borrower submitted monthly statements reflecting the securities that had been
hypothecated. Notably, these statements made no reference either to the
aforesaid Agreement of Advance or to the factum of the second charge over
the said security by way of pledge in favour of the respondent bank.

Special Leave Petition (C) No. 16735 of 2022 Page 6 of 98

9. On 08.09.2014, the borrower herein filed a loan application for seeking
enhancement of the credit facilities sanctioned by the respondent bank.
Pursuant thereto, the respondent bank addressed one letter dated 16.09.2014
to the appellant bank, asking for the credit information report in respect of the
said warehouse receipts. The said letter reads as under: -
To,
The Chief Manager,
Bank of India
Library Chowk Gurdaspur

16.09.2014

Reg: Account of M/s Sri Nangli Rice Mill Pvt. Ltd.

With reference to the above subject the party has approached
us for sanction of Cash Credit Limit against Warehouse
Receipts of Rs. 20.00 Crores. As per guidelines we require
Customer Information report on EBA format (enclosed) of the
unit. You are requested to provide the data on urgent basis
within 7 days from the date of receipt of this letter otherwise it
will be construed that there is noting adverse to report from
your side.

Thanking You
Sd/-
CHIEF MANAGER

10. However, since no response was elicited from the appellant Bank, the
Respondent Bank proceeded to enhance the credit facility sanctioned by it to
the borrower vide one another Agreement of Advance / Pledge Agreement
dated 22.11.2014 against the warehouse receipts issued by the respondent no.
3 as the collateral manager in respect of the same stocks of rice and paddy that
Special Leave Petition (C) No. 16735 of 2022 Page 7 of 98

had been earlier pledged with the respondent bank and leased for storage with
the respondent no. 3 herein.

11. Sometime in 2015, the borrower herein defaulted in repayment of the loan
amount sanctioned by the appellant bank herein, whereupon an inspection was
undertaken by the appellant bank of the stocks of paddy and rice that were
hypothecated to it with a view to realize the outstanding dues. It is the case of
the appellant bank that during the course of this inspection, it discovered for
the first time that pledge tags of the respondent bank had been affixed on the
said security.

12. Accordingly, the appellant bank addressed a letter dated 02.04.2015 to the
Chief Manager of the respondent bank, requesting details of the credit
facilities against which the said stocks of paddy and rice had purportedly been
pledged, along with the balance outstanding in the accounts of the borrower,
in order to ascertain whether the pledging of securities was anterior or
posterior to the credit facility agreement 23.09.2006 that was executed by it
with the borrower herein. In response, the respondent bank vide its letter dated
20.04.2015 furnished the details of the various Agreement of Advance /
Pledge Agreements that were executed with the borrower for sanction of
loans, along with the credit information report relating to the warehouse
receipts in respect of the said pledged goods.
Special Leave Petition (C) No. 16735 of 2022 Page 8 of 98


13. Upon perusal of the information furnished by the respondent bank, the
appellant bank addressed one another letter dated 23.05.2015 to the
respondent bank, inter-alia stating that in all previous stock audits conducted
by the appellant bank, no pledge tags of the respondent bank were found
affixed on the said security and that as per the records even the charge created
by the appellant bank over the said stocks of rice and paddy, by way of
hypothecation, was prior in time to the pledge created in favour of the
respondent bank. Accordingly, the appellant bank asserted that all credit
proceeds from the sale or disposal of the said hypothecated goods ought to be
remitted to the appellant bank in satisfaction of its prior and subsisting charge.
The said letter reads as under: -
Gurdaspur Branch Phone No.:01874-
240050
1- Library Road
Gurdaspur
Punjab 143251

Ref. No. GSP:ADV/2015-16/06 Date: 23.05.15

Private and Confidential
The Chief Manager,
Punjab National Bank,
G.T. Road,
Gurdaspur.

Sir,
Re:- Credit Facilities of M/s Nangali Rice Mills Pvt. Ltd.

We refer to your letter No Nil dated 20.04.2015 on the
captioned matter. During inspection, we observe that all our
stock hypothecated to our bank is pledged in your favour in the
Special Leave Petition (C) No. 16735 of 2022 Page 9 of 98

godowns in the factory premises through NBHC. Earlier, we
have not noted any tags on the attacks which could raise any
doubt of your pledged stock. Please reply us the following
immediately.

1. Details of Original as well as latest sanction of the
limit(s).
2. Our charge has been duly registered with ROC on all
hypothecated stocks / assets and covered under
insurance duly assigned in our favour by Insurance
Company.
3. Stock audit has recently been carried out by statutory
auditors and all hypothecated stocks lying at premises /
godowns of borrower company have been verified by
them and found to be in order, it is pertinent to note that
during stocks audit no such tags were seen affixed
indicating the stocks as a pledged security of your bank
and it is nothing sort of afterthought exercise from you.
4. Whether the NBHC and your bank take permission from
our bank for storing the pledged stock in the factory
premises to store pledged stocks.
5. Whether you have obtained status reports/ NOC from us
before considering credit limit(s) to our borrower(s).
6. You have never intimated the details of credit limit(s)
extended by you to our borrower(s).
7. It has come to our notice that you have affixed pledge
tags to our hypothecated attacks lying at premises of
borrower company where bank’s name board. Also
being displayed fully knowing well that the stocks are
hypothecated to Bank of India. In this process, you have
connived with the borrower(s) with an intention to
deceive Bank of India and indulge in breach of trust and
also took action to deprive us from our right with an
intention to put us to suffer probable loss.
8. You are hereby put to notice that our hypothecation
charge is prior to your pledge and hence all credit
proceeds should be routed through company cash credit
account maintained at our branch. Please send us the
whole credit proceeds since inception immediately to us
failing which we shall take up the matter with Reserve
Bank of India and also it is fit case of initiating filing of
FIR with concerned authority.

Special Leave Petition (C) No. 16735 of 2022 Page 10 of 98

You are requested to reply us immediately.

Thanking you,
Yours faithfully,
Sd/-

14. In response to the above, the respondent bank sent a letter dated 04.06.2015
inter-alia denying that its pledge tags had not been affixed at the time of
sanctioning the credit facilities and stated that the stocks of rice and paddy
pledged with it were duly tagged and earmarked all throughout. It further
clarified that the credit facilities extended by it, sometime in 2013, were
against the warehouse receipts of the stock of rice and paddy pledged in its
favour, and that the said security had no concern or connection with the goods
allegedly hypothecated to the appellant bank. The respondent bank also stated
that it had, vide letter dated 16.09.2014, duly intimated the appellant bank of
its intention to extend additional credit facilities to the borrower against the
said warehouse receipts which was ignored by the appellant bank. The said
letter reads as under: -
Punjab National Bank
G.T. Road Gurdaspur (018700) Punjab
Tel.: 01874-221860, Fax: 01874-221878
Email: bo01870 @pnb.co.in

To, Dt: 04-06-2015
The Chief Manager,
Bank of India
Library Road
Gurdaspur

Special Leave Petition (C) No. 16735 of 2022 Page 11 of 98

Dear Sir,
Reg: Credit Facilities of M/s Nangali Rice Mills Pvt. Ltd.

With reference to your letter No. GSP: ADV/2015-16/6 dt.
23.05.2015 on the above captioned subject we may advise as
under:
We have already shared the credit information with you vide
CIR sent under the cover of our letter 20.04.2015. further we
ay inform you we have financed the party under WHR scheme
since 2013 and every time during the checking we have found
our pledge stock intact with stock card attached along with
board of our collateral Manager NBHC displaying the name
of our Bank.
1. The details has already been shared with you vide CIR
& our letter dt. 20.04.2015 conveying detail of limit
sanctioned and balance outstanding. The details has
also been already conveyed to you time to time during
your visit along with Sh. Sham Lal Sr. Mgr (Credit) to
our office in month of Oct/Noc 2014 and January 2015.
2. We are only concerned with the stock pledged to us
under the custody of National Bulk handling
Corporation Ltd (nominated as collateral manager
under the tripartite agreement with Bank) also is taking
care pledge & release of stock) Bank is financing on the
basis of WHR issued by collateral management
company. Further as per New company law, we have
also got ROC registered for pledge limit of Rs. 20.00
crores.
3. Our stock is a pledged stock under the management of
NBHC (Collateral Manager. We are checking our stock
through various officials at irregular interval. The stock
of all the parties including Sri Nagali has also been
checked only by our Sr. functioning from controlling
office, where we found that all the stock in order with
proper stacking and stack card attached along with
display board of NBHC confirming stock pledged to our
Bank.
4. It is the party/borrower who offer the godown for
pledge. Then the godowns are surveyed by collateral
manager and after it is found in order. the godown is
considered to be handed over to collateral Manager on
Special Leave Petition (C) No. 16735 of 2022 Page 12 of 98

lease. This is the duty of borrower to share the
information if any is to provided to you.
5. We have given you a letter dt. 16.09.2014 for our
intension to provide finance to party advising you to
send your observation. The limit is considered against
WHR as pledge. CIR from the CIBIL & Equifax are
checked for getting status of party. This is for you to
respond within stipulated time. However, the
information of our finance/intended finance has been
freely shared with your goodself and also with Sh. Sham
Lal Sr. Manager, during visit of these officials to our
office in Oct/Nov/Jan. to pay that you have no
knowledge of our finance is not acceptable. The
sanctioned limit might also be checked from the CIBIL,
Experian, Equifax but you have ignored all these online
information.
6. The information of our limits was always shared with
you when ever you visited our office. Also CIR was sent
you on 20.04.2015 in response to your letter. Further, if
appears that you have never checked CIR available
online and also the stock was not checked seriously by
you officials and the information shared with Sh.
Harjinder Singh & Sh. Sham Lal Sr. Manager during
their visit to our office was not taken for consideration.
7. Your use of baseless and intemperate language only
suggest that your officials has performed the duty
casually. When we have always found our stock duly
stacked with stack card displaying thee each commodity
and board of collateral manager showing our
charge/pledge of stock, we have also found the signature
of collateral manager officials on stock card & stock
register.

Further we have always found stock in order and
properly stacked with signature of official of NBHC.

It is pertinent to mention again stock was always found
in order while checking by one of our Sr. official from
controlling office.

8. We are only dealing with WHR of pledge stock (Pledge
under tripartite agreement). The party is dealing with us
since 2013. The conduct of a/c is satisfactory.
Special Leave Petition (C) No. 16735 of 2022 Page 13 of 98


For your hypothecation limit you can pursue with party.
Our charge is legitimate charge under pledge scheme.
However we have advised the party to satisfy your
authorities for proper conduct of account. You may also
explore the possibility to go into multiple Banking to sale
your account.
Yours Faithfully,
Sd/-
CHIEF MANAGER

B. PROCEEDINGS UNDER THE SARFAESI ACT.

15. Since, the borrower defaulted in repayment of the loan amount sanctioned by
the appellant bank herein, the loan account was classified a s Non-Performing
Asset (NPA) on 31.09.2015 and the appellant bank issued a demand notice
dated 17.10.2015 under Section 13 sub-section (2) of the SARFAESI Act to
the borrower herein for repayment of the principal amount along with interest,
cost, charges etc. As per the aforesaid demand notice, an aggregate sum of Rs.
62.10 crore was due and payable by the borrower to the appellant bank herein.

16. Owing to the failure of the borrower in repaying the outstanding amount
referred to above, the appellant bank proceeded to take symbolic possession
of the factory premises, plant and machinery along with the stocks of rice and
paddy that were hypothecated to it as security, and sealed the godown of the
respondent no. 1 that had been leased to the respondent no. 3 in relation to the
Agreement of Advance / Pledge Agreement with the respondent bank.
Special Leave Petition (C) No. 16735 of 2022 Page 14 of 98



17. It also appears from the material on record that, several joint meetings were
convened between the directors of the borrower herein along with the officials
of both the appellant and respondent banks. Two such meetings were
convened on 30.04.2015 and 12.08.2015, respectively, i.e., prior to the
appellant bank classifying the loan account of the borrower as NPA, and one
another meeting thereafter on 22.08.2015. During the course of these joint
meetings discussions were held in respect of the credit facilities extended to
the borrower by both banks, the outstanding liabilities thereunder, the revenue
streams of the borrower and the total value of the stocks of rice and paddy
lying with it including those that were pledged in favour of the respondent
bank.

18. It is the case of the respondent bank herein that during the course of the
aforementioned joint meetings, the appellant bank did not raise any dispute in
respect of the stocks of rice and paddy that had been hypothecated and
simultaneously also pledged with the appellant and respondent bank,
respectively, and that the said issue was raised for the first time only after the
borrower defaulted in repayment of the loan dues and the account was
classified as NPA by the appellant bank herein.

Special Leave Petition (C) No. 16735 of 2022 Page 15 of 98

19. On 14.10.2015, the appellant bank herein instituted a suit being CS No. 127
of 2015 against the respondent bank inter-alia seeking a decree of permanent
injunction to restrain the respondent bank from selling the stock of paddy and
rice allegedly pledged with it, by contending that the said goods in question
had already been hypothecated in its favour under a pre-existing charge prior
to the pledge. It is pertinent to mention that the said suit ultimately came to be
dismissed as infructuous by the judgment and order dated 11.11.2021 passed
by the Civil Judge, Senior Division, Gurdaspur in view of the subsequent joint
sale and auction of the secured asset carried out by the appellant and
respondent bank pursuant to the directions issued by the DRT.

20. In the interregnum, the appellant bank herein preferred an application under
Section 14 of the SARFAESI Act seeking assistance of the District Magistrate
for taking physical possession of the secured assets of the borrower herein
with the aid of the police. The respondent bank in turn also filed an application
lodging its objections thereto and contending that certain stocks of paddy and
rice had already been pledged to it. The District Magistrate upon consideration
of the material on record and in view of the objections raised by the respondent
bank, partly allowed the appellant bank’s application vide its order dated
12.10.2016, permitting the appellant bank to take physical possession of the
secured assets, save and except the stocks of paddy and rice pledged with the
respondent bank are concerned, and further directed the appellant to not
Special Leave Petition (C) No. 16735 of 2022 Page 16 of 98

interfere with or take possession thereof. The relevant paragraphs of the said
reads as under: -
“After going through file and record available and further
after hearing the parties, the application under section 14 of
the Securitisation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act 2002 for taking
possession of secured assets as well as for police assistance is
allowed subject to following conditions that there should not
be any6 stay granted by any competent court of law or higher
authorities, In case of violation of any legal order than the
authorized officer is responsible. Further, the stock of Punjab
national Bank should be not touched and the Naib Tahsildar is
deputy as Duty Magistrate.”

21. Aggrieved by the aforesaid, the appellant bank preferred a writ petition being
CWP-COM No. 177 of 2017 before the High Court, assailing the aforesaid
order dated 12.10.2016 passed by the District Magistrate insofar as it
restrained the appellant bank from taking physical possession of the secured
assets purportedly pledged with the respondent bank. The High Court vide its
order dated 26.05.2017 directed the appellant bank to approach the DRT
instead, and thereby dismissed the writ petition as withdrawn.

i. First round of proceedings before the DRT.

22. Accordingly, the appellant bank filed a securitization application being S.A.
No. 285 of 2017 before the DRT-I, Chandigarh challenging the aforesaid order
dated 12.10.2016 passed by the District Magistrate.
Special Leave Petition (C) No. 16735 of 2022 Page 17 of 98


23. The Debts Recovery Tribunal, vide its interim order dated 14.06.2017,
observed that although a dispute subsists between the appellant and
respondent banks regarding their respective claims over the security
comprising of stocks of paddy and rice, yet there is no dispute insofar as the
selling of the secured asset is concerned against the outstanding dues.
Furthermore, in view of the perishable nature of the said secured asset the
DRT held that the same should be disposed expeditiously notwithstanding the
dispute to eschew any risk of depreciation or monetary loss to the public funds.
Accordingly, the DRT permitted the appellant and respondent banks to
conduct a joint sale of the secured assets to facilitate maximum realization
towards the outstanding dues and further directed them to deposit the sale
proceeds with the State Bank of India in the from of a fixed deposit, which
shall then be apportioned after the final adjudication of the inter-se rights of
the two banks. The relevant observations read as under: -
“Before this dispute is resolved as whose charge is the first and
better than the other, the first priority at this stage before this
Court is, as during the course of arguments the Ld. Counsel for
the parties have also stated that since the adjudication of the
matter will take little more time, the goods in the shape of
paddy being perishable item may perish or because of rainy
season it will diminish in value causing not only personal loss
but national loss too, therefore, the same shall be sold out. Both
the counsel for the parties and their respective officers have
made a statement on previous date that they have no objections
if they were allowed to sell stocks and both have shown their
inclination to sell on their respective side and to keep the sale
proceeds with them. Meaning thereby that there is no dispute
for selling the stocks to get maximum at the earliest and which
Special Leave Petition (C) No. 16735 of 2022 Page 18 of 98

in turn will reduce the liability of the borrower ultimately. But
who will sell and keep the sale process is the question of hour.
Therefore, till the pleadings are complete and the matter is
adjudicated upon finally qua rights and interest of each of the
claimants after adducing the evidence and giving them fair
chance to defend, being guarded by Sec. 19(25) of RDDBI &
FI Act, the directions should have to be issued to give effect to
its order and to prevent misuse of process and to secure ends
of justice. Hence, at this stage the following order is passed:

“The concerned AGM of Applicant Bank as well
Resp. Bank No. 1 and one officer from National Bulk
Handling Corporation Ltd. are hereby directed to
jointly start the process of selling stocks immediately
by taking joint exercise under the authority of all
three to get the stocks released as well as sold in the
open market as per rules. The Authorised Officer of
the Applicant Bank, i.e. Bank of India, shall reopen
the premises which they claim to have been in their
physical possession and mortgaged with them and
allow access to the above officers to get the stocks
transferred for the purpose of selling as per their own
procedure. Except with the joint written permission of
these officers, no one shall be allowed access or to
sell the stocks for which full inventory shall be made
in details and be kept preserved. The whole process
shall be completed within 45 days from the date of
receipt of this order.

It is made clear that the process of disposing of these
stocks will be maintained by all three parties jointly
under their signatures and the sale proceeds received
shall be deposited with the main Branch of State Bank
of India, Gurdaspur in the shape of FDR with
accruing maximum interest and the in charge of the
concerned SBI Branch shall keep the same in its
custody till the adjudication of the matter or as
directed by this Tribunal.”

The Applicant as well as Resp. Bank No.1 shall supervise all
these actions and shall undertake necessary formalities to be
completed keeping national interest over Institutional Interest,
Special Leave Petition (C) No. 16735 of 2022 Page 19 of 98

and expenses incurred shall be borne equally by both of the
Banks, i.e. Applicant Bank and Resp. No.1 Bank.

Thus the interim prayer is disposed of.”

(Emphasis supplied)

24. Thereafter, the DRT vide its final order dated 10.11.2017 allowed the S.A. No.
285 of 2017 filed by the appellant bank herein and held that that the charge
created in its favour by way of hypothecation over the stocks of paddy and
rice was prior in time and, consequently, would take precedence over any
subsequent charge that may have been created in favour of the respondent
bank by way of pledge. It observed that the appellant bank had extended the
credit facilities against the said stocks of paddy and rice as early as 2003
whereas the respondent bank had extended the credit facility only in 2013 and
failed to undertake any meaningful verification as to whether an existing
encumbrance or charge subsists over the said stocks. It found that the appellant
bank had duly established that the stocks in question were lying the properties
mortgaged with them and had been hypothecated in their favour, and thus,
held that any charge or encumbrance created in favour of the respondent bank
would be subservient to the charge in favour of the appellant bank herein. The
relevant observations read as under: -
7. [...] In fact after going through the pleadings and the
documents/evidence produced by the parties, who have
diagnosed the epicentre that both financial Institutions are
claiming their right of hypothecation/pledge on the moveable
stocks of rice, paddy which are lying in the premises of Resp.
Special Leave Petition (C) No. 16735 of 2022 Page 20 of 98

No.2. So far as mortgage of immoveable property is
concerned; there is no controversy but the stocks which are
perishable in nature and moveable are under the controversy
of charge being hypothecated and pledge.

[...] Now after going through the scheme, terms and condition
of agreement, it transpired that NHBC has taken some
warehouse on rent which was already mortgaged with the
Applicant Bank along with stocks lying in the premises being
hypothecated to the Applicant Bank. The said stocks were
shown to the NHBC who verified the quantity without
verification of charge over stocks over which now the
Applicant Bank and Resp. No.1 are claiming to have their right
being hypothecated and pledged with them respectively.
Meaning thereby that Resp. No.3 was aware that the
warehouse godowns which were given on rent to the NHBC
itself were built on the property which was mortgaged with
Applicant Bank in violation of terms and conditions of
agreements executed between Resp. No.3 and the Applicant,
certainly which are prior to the pledge. It also transpired that
no proper verification has been carried out either by Resp.
No.1 PNB or Resp. No.3 NHBC for non-encumbrance of
immoveable property and nothing is placed on record to prove
that except few letters being exchanged between the Banks.

[...] Further, it seems that Resp. No.2 and 3 using their good
office has managed and manipulated by getting the stocks
pleadged with Resp. No.1 which were duly hypothecated with
the Applicant Bank. The involvement of officers of both the
Banks along with handiwork of NBHC and Resp. No.2 cannot
be ruled out. The Scheme under which the Resp. No.1 Bank has
financed has been found to be defective and there is nothing on
record produced by the Resp. Bank that they had verified the
encumbrance/ charge upon the stocks and the properties where
these stocks were kept.

[...] Once the Applicant Bank has duly proved that the stocks
are lying in the properties mortgaged with them and are
hypothecated whatever Resp. No.1 has claimed by tagging
through NHBC but kept on changing stance is “subsequent” to
“hypothecation” since it had not verified the encumbrance on
both immoveable and moveable stocks.

Special Leave Petition (C) No. 16735 of 2022 Page 21 of 98

The Applicant Bank at the very first instance had asked
information from the Resp. No.1 vide letter dt. 02.04.2015
which was replied on 20.04.2015. It has been observed that
both the banks were exchanging incomplete information.
Thereafter in a Joint Lenders Meeting held on 30.04.2015
which was attended by GM/ZM of both the Banks as well as
SBOP, nothing was discussed over such controversy rather it
seems that they were helping the defaulters at one stage.
Further, letter dt. 23.05.2015 itself reflects that Bank of India
verified its stocks which are duly hypothecated and had
conveyed the same to the Resp. No.1 PNB that there was no
such tags seen or affixed on the security [...]

(Emphasis supplied)

25. Accordingly, the DRT vide its final order dated 10.11.2017 in S.A. No. 285
of 2017 set aside the order dated 12.10.2016 passed by the District Magistrate
and allowed the appellant bank to sell the stocks of rice and paddy
hypothecated in its favour for the purpose realizing the outstanding dues from
the sale proceeds thereof. The operative portion of the said order reads as
under: -
[...] since the prayer of the Applicant Bank is for setting aside
of orders of DM which is otherwise creating hindrance in the
sale of perishable goods, is allowed and order dt. 12.10.2016
is set aside. The Bank is at liberty to sell the produce
immediately by any means so that foodgrains, which is
perishable item and national assert as each grain of crop is
property of every human of this nation, should not go waste in
the hands of irresponsible officers of banks and delinquent
defaulters who played a fraud with banks.

8. Accordingly SA is allowed to that extent. Any application
pending stands disposed of.


Special Leave Petition (C) No. 16735 of 2022 Page 22 of 98

26. Aggrieved by the aforesaid, the respondent bank preferred an appeal bearing
no. 500 of 2017 before the Debt Recovery Appellate Tribunal (for short, the
“ DRAT ”). The DRAT vide its order dated 04.11.2019 held that the DRT
whilst passing its order dated 10.11.2017 failed to take into consideration the
preliminary objection that was raised by the respondent bank herein to the
effect that the application filed by the appellant bank under Section 17 of the
SARFAESI Act was not maintainable; first , because the remedy under the said
provision is available only against measures taken in terms of Section 13 of
the SARFAESI Act which the respondent bank had never initiated and
secondly, because Section 17 of the SARFAESI Act cannot be invoked for
claiming any reliefs against another bank. Accordingly, the DRAT remanded
the matter to the DRT for deciding the matter afresh after considering the
preliminary objections of the respondent bank. The relevant observations read
as under: -
“6. The main grievance of PNB raised by its learned counsel
and also in his written submissions and which grievance, in my
view, is well justified is that the learned DRT has not focussed
himself on the objection raised by PNB whether respondent
no.1 bank could invoke Section 17(1) of SARFAESI Act at all
for claiming the reliefs sought for in the S.A. against another
bank which was claiming itself to be a pledgee/pawnee of some
of the rice/paddy/wheat stocks stored in some godowns which
respondent no.3, PNB’s collateral manager, had taken on
lease from the bank’s borrower. Learned counsel for PNB had
submitted that Section 17(1) of SARFAESI Act can be invoked
by a person including a borrower who is aggrieved by any of
the measures taken by a secured creditor under Section 13 of
SARFAESI Act which while in the present case the Bank of
India had not even claimed in its S.A. that PNB had initiated
Special Leave Petition (C) No. 16735 of 2022 Page 23 of 98

any measures under SARFAESI Act in order to recover its dues
from respondent no.2 herein and PNB was aggrieved with
those measures. The S.A. was filed by Bank of India simply on
the allegations that PNB was claiming itself to be having a
charge over stocks of rice/wheat etc. kept in the godowns of
respondent no.3 in respect of which Bank of India was also
claiming its charge as a hypothecated and to have a
declaration to that effect in its favour Bank of India had
already filed a civil court which was pending and which fact
had been concealed in the S.A. and for these reasons also the
S.A. was liable to be rejected. The DRT has, however, not even
examined these objections raised by PNBwhich ought to have
been done. Similarly the DRT as not considered the objection
that in the S.A. Bank of India had challenged the correctness
of the order of the District Magistrate passed on the
application moved by this Bank itself under Section 14 of
SARFEASI Act whereby a direction was given that PNB’s
stocks will not be touched meaning thereby it was accepted and
recognised that stocks pledged with PNB were also stored in
the godowns as had been claimed by PNB before the District
Magistrate. Against that direction of the District Magistrate,
counsel for PNB submitted, no S.A. could be filed but even that
aspect was not considered by the DRT.

xxx xxx xxx

9. This appeal, therefore, deserves to be allowed and matter
needs to be sent back to DRT for fresh disposal in accordance
with law and keeping in mind the observations made
hereinabove.

10. This appeal is accordingly allowed and impugned order is
set aside with a direction to the learned DRT-I, Chandigarh to
pass a fresh order of disposal of the S.A. No.285/2017 of Bank
of India keeping in mind the observations made in this order
by this and giving fresh hearing to the parties and at the same
time to pass fresh order uninfluenced by anything said in its
impugned order which now stands set aside. The S.A. shall
accordingly be now taken up for ‘directions’ by the DRT on
23.11.2019 at 2.p.m. and efforts should be made to pass the
fresh order as far as possible within two months from the date
of receipt of this order. While disposing of the S.A. afresh DRT
also be at liberty to pass appropriate order concerning the
Special Leave Petition (C) No. 16735 of 2022 Page 24 of 98

appropriation/disbursement/utilisation of the sale proceeds of
stocks of rice/paddy etc. which were sold during the pendency
of the present appeal.”
(Emphasis supplied)

ii. Second round of proceedings before the DRT.


27. On remand, the DRT-I, Chandigarh vide its order dated 12.02.2020, held that
it has no jurisdiction to adjudicate the dispute since the controversy pertained
to competing claims between two banks over the same secured asset. Placing
reliance on the decision of the DRAT in Oriental Bank of Commerce & Anr.
v. Canara Bank & Ors. reported in (2011) SCC OnLine DRAT 8 , it held that
where the dispute in respect of the secured asset is inter-se between two banks
or creditors, the same must be adjudicated by way of arbitration in terms of
Section 11 of the SARFAESI Act by approaching the competent authority for
seeking appointment of arbitrator by way of an application under Section 11
of the Arbitration and Conciliation Act, 1996 (for short, the (“ Act, 1996 ”). In
light of the foregoing, the DRT directed the parties to approach the High Court
for the same and further ordered that until final adjudication of the dispute the
sale proceeds from the sale and auction of the security shall remain in deposit
with the SBI. The relevant observations read as under: -
“I have heard the arguments on maintainability of this SA. And
as per Counsel for respondent this Tribunal has no jurisdiction
to resolve the disputes between the banks by way of filing SA
by one Bank against the other Bank.

Special Leave Petition (C) No. 16735 of 2022 Page 25 of 98

Along with this issue counsel for respondent has placed on
record the citation “OBC Vs. Canara Bank 2011 BC 14
(DRAT) Delhi” in which Hon’ble DRAT, Delhi has
propounded a principle that disputes between Banks cannot be
entertained by Tribunal by way of filing SA and Banks will
approach the High Court for resolution of their disputes.

xxx xxx xxx

I have perused the relevant provision under Section 144 CPC
in this Section if any decision is reversed in appeal against any
decree then the benefit taken by that party out of the decree will
have to be restored to the other party after the reversal of
appeal. Since in this case no such order has been set aside in
any appeal, therefore Principles of Restitution under Section
144 CPC do not apply here and the amount which is lying with
the SBI will remain with the SBI till the dispute between the
Banks is decided by the Competent Court of jurisdiction and
accordingly this SA is dismissed as being not maintainable.”

C. IMPUGNED ORDER

28. Aggrieved with the aforesaid, the appellant bank herein approached the High
Court by way of writ petition being CWP No. 13538 of 2020 (O&M), wherein
the High Court vide its final impugned judgment and order, finding no fault
in the decision of the DRT, dismissed the writ petition and affirmed the order
dated 12.02.2020 passed by the DRAT, in view of the mandate of Section 11
of the SARFAESI Act. The relevant observations read as under: -
“OBC Vs Canara Bank 2011 BC 14 (DRAT Delhi)” has been
relied upon in the said order. The petitioner is having a remedy
under Section 11 of the SARFEASI Act, 2002 (here-in-after
referred to as `the Act, 2002) as the dispute can be settled by
resorting the said remedy. Section 11 of the Act, 2002 [...]

xxx xxx xxx
Special Leave Petition (C) No. 16735 of 2022 Page 26 of 98

Accordingly, by considering the provisions of Section 11 of the
Act, 2002, we do not find any merit in the contention raised by
learned counsel for the petitioner. The remedy is available to
petitioner under Section 11 of the Act, 2002. The petitioner is
at liberty to avail that remedy before the appropriate Forum.

29. In view of the aforesaid, the appellant bank being aggrieved and dissatisfied
with the impugned order passed by the High Court is here before this Court
with the present appeal.

D. SUBMISSIONS OF THE PARTIES

i. Submissions on behalf of the Appellant Bank.

30. Mr. Dhruv Mehta, the learned senior counsel appearing for the appellant bank
submitted that Section 11 of the SARFAESI Act is inapplicable to the present
case, as there is no legitimate dispute between the appellant and the respondent
bank in view of Section 31(b) of the SARFAESI Act. It was submitted that
the appellant bank’s charge over the secured asset in question was created by
way of hypothecation, whereas the respondent bank’s charge was purportedly
created through pledge. Since, Section 31(b) of the SARFAESI Act explicitly
excludes ‘pledge’ from the scope and purview of the Act, the respondent bank
herein possesses no rights in terms of the SARFAESI Act that may be decided
under Section 11 thereof.

Special Leave Petition (C) No. 16735 of 2022 Page 27 of 98

31. It was submitted that the appellant bank holds a prior charge as, the said
security was created by way of credit facilities sanctioned to the borrower in
2003 and thereafter duly registered by way of the Credit Facility Agreement
dated 23.09.2006, executed between it and the borrower. Whereas the
respondent bank had purportedly created a charge over the said security
through pledge only in 2013 by way of the Agreement of Advance / Pledge
Agreement dated 06.12.2013.

32. It was further submitted that the stocks of rice and paddy that were pledged in
favour of the respondent bank is null and void, in view of the terms and
conditions of the Credit Facility Agreement dated 23.09.2006, more
particularly clauses 4.6, 4.15 to 41.7 and 4.23, whereby it was stipulated that
the borrower shall not create any rights, interests, charge or encumbrances
over the said security until the loan sanctioned by the appellant bank was
satisfied in full.

33. He would submit that, the High Court was not correct in holding that the DRT
will have no jurisdiction to adjudicate dispute between two banks under
Section 17 of the SARFAESI Act. It was contended that both the High Court
and the DRT fell in error by placing reliance on the decision of Oriental Bank
of Commerce (supra) as the said decision is contrary to a previous decision of
the DRAT in Federal Bank Ltd. v. LIC Housing Finance Ltd. & Ors.
reported in 2010 SCC OnLine DRAT 138 wherein it was held that Section
Special Leave Petition (C) No. 16735 of 2022 Page 28 of 98

11 of the SARFAESI Act would only apply when there is an arbitration
agreement subsisting between the parties to resolve any dispute. He submitted
that in the present case, no such arbitration agreement exists either between
the appellant and the respondent banks or between them and the borrower
individually to attract the provisions of Section 11 of the SARFAESI Act.

34. In the last, Mr. Dhruv Mehta submitted that Section 11 of the SARFAESI Act
is confined to Chapter II of the said Act which deals with the functioning and
powers of banks, financial institutions and asset reconstruction companies in
respect of securitization and reconstruction, and that the said provision has no
application to enforcement of security interest provided in Chapter III of the
SARFAESI Act. He further submitted that where the dispute pertains to
enforcement of borrower’s assets given as security, such dispute must be
addressed in terms of Section(s) 17 and 18 of the SARFAESI Act,
respectively, and Section 11 would be inapplicable in such disputes,
notwithstanding whether such dispute is between two or more secured
creditors such as two banks, financial institutions etc.

35. In such circumstances referred to above, the learned Senior Counsel prayed
that there being merit in his appeal, the same be allowed and the impugned
judgment and order of the High Court be set aside.

Special Leave Petition (C) No. 16735 of 2022 Page 29 of 98

ii. Submissions on behalf of the Respondent Bank.


36. Ms. Ekta Choudhary, the learned counsel appearing for the respondent bank
also placed reliance on Section 31(b) of the SARFAESI Act, however to
contend that since the said provision stipulates that the SARFAESI Act shall
not apply to the pledge of movable goods as defined under Section 172 of the
Indian Contract Act, 1872 (for short, the “ Contract Act ”), as a natural
consequence, Section 11 of the SARFAESI Act would be inapplicable to such
cases. She submitted that since in the present case, the charge in favour of the
respondent bank was created through pledging of the security in the form of
stocks of rice and paddy, the same falls beyond the scope and purview of the
SARFAESI Act, and such dispute can neither be adjudicated under Section 11
or 17 of the SARFAESI Act.

37. In the alternative she submitted that if Section 11 of the SARFAESI Act is
found to be applicable, then no error not to speak of any error of law could be
said to have been committed by the High Court whilst passing the impugned
order. She would submit that, although Chapter II of the SARFAESI Act
primarily deals with securitization and reconstruction, yet the provision of
Section 11, more particularly the expression “ any dispute relating to
securitisation or reconstruction or non-payment of any amount due including
interest ” is of wide import and would include disputes that pertain to recovery
Special Leave Petition (C) No. 16735 of 2022 Page 30 of 98

of outstanding loan dues and by extension, the enforcement of security interest
in lieu thereof.

38. To make good her submission, reliance was placed on the decisions of this
Court in CIT v. Hindustan Bulk Carriers , reported in (2003) 3 SCC 57 and
East India Hotels vs Union of India reported in (2001) 1 SCC 284 , to contend
that a statute must be read as a whole and one provision of the statute must be
construed harmoniously with reference to the other provisions so as to make
a consistent construction of the whole statute.

39. She further submitted that Section 11 of the SARFAESI Act would extend to
include within its ambit even those disputes regarding non-payment of
amounts due, including interest, that arise amongst banks, financial
institutions, Non-Banking Financial Companies (NBFCs) etc.

40. In the last, she invited the attention of this Court to Office Memorandum No.
05.0003/2019-FTS-10937 dated 14.12.2022 titled the ‘Settlement of
commercial disputes between Central Public Sector Enterprises (CPSEs) inter
se and CPSE(s) and Government Department(s)/Organization(s) -
Administrative Mechanism for Resolution of CPSEs Disputes (AMRCD)’ (for
short, the “ AMRCD Memorandum ”), issued by the Ministry of Finance,
Department of Public Enterprises, Government of India. She submitted that
the AMRCD Memorandum has been formulated with a view to provide a
Special Leave Petition (C) No. 16735 of 2022 Page 31 of 98

structured mechanism for resolution of disputes inter se CPSEs. through
arbitration, in accordance with the procedure outlined therein. Placing reliance
on the said guidelines, she contended that, since the dispute in the present
matter is between two public sector banks, it ought to be resolved under the
framework of the AMRCD Memorandum.


41. In such circumstances referred to above, it was prayed on behalf of the
respondent bank that there being no merit in the appeal, the same may be
dismissed.



E. ISSUES FOR DETERMINATION.

42. Having heard the learned counsel appearing for the parties and having gone
through the materials on record, the following questions fall for our
consideration: -
I. What is the scope of Section 11 of the SARFAESI Act? In other words,
what is the meaning of the expression “ any dispute relating to
securitisation or reconstruction or non-payment of any amount due
including interest ” occurring in Section 11 of the SARFAESI Act?

II. What is the significance of the expression “ arises amongst any of the
parties, namely, the bank or financial institution or asset reconstruction
Special Leave Petition (C) No. 16735 of 2022 Page 32 of 98

company or qualified buyer ” used in Section 11 read with Section 2 of
the SARFAESI Act? What is the underlying object behind prescribing
arbitration for the adjudication of disputes between a bank, financial
institution, asset reconstruction company or qualified buyer, in Section
11 of the SARFAESI Act?

III. Whether the existence of a written arbitration agreement between the
parties is required for the purpose of resolution of disputes under
Section 11 of the SARFAESI Act, 2002? In other words, is there any
conflict between the decisions of Oriental Bank of Commerce (supra)
and Federal Bank (supra)?

IV. Whether Section 11 of the SARFAESI Act, 2002 should be construed
as mandatory or directory in its nature?

F. ANALYSIS

i. Legislative History and Scheme of the SARFAESI Act.

43. Till early 1990s, the civil suits were being filed for recovery of the dues of
banks and financial institutions under the Act 1882 and the Code of Civil
Procedure, 1908 (CPC). Due to various difficulties the banks and financial
institutions had to face in recovering loans and enforcement of securities, the
Special Leave Petition (C) No. 16735 of 2022 Page 33 of 98

Parliament enacted the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (for short, the “ RDBFI Act ”).

44. On account of lack of infrastructure and manpower, the regular civil courts
were not in a position to cope up with the speed in the adjudication of recovery
cases. In the light of recommendations of the Tiwari Committee the special
tribunals came to be set up under the provisions of the RDBFI Act referred to
above for the recovery of huge accumulated NPA of the Bank loans.

45. On the continuing rise in number of Non-Performing Assets (NPA) at banks
and other financial institutions in India; a poor rate of loan recovery and the
failure of the existing legislation in redressing the difficulties of recovery by
banks; the Narasimham Committee I & II and Andyarujina Committee were
constituted by the Government for examining and suggesting banking reforms
in India. These Committees in their reports observed that one out of every five
borrower was a defaulter, and that due to the long and tedious process of
existing frame work of law and the overburdening of existing forums
including the specialised tribunals under the 1993 Act, any attempt of recovery
with the assistance of court/tribunal often rendered the secured asset nearly
worthless due to the long delays. In this background the Committees thus,
proposed new laws for securitisation in order to permit banks and financial
Special Leave Petition (C) No. 16735 of 2022 Page 34 of 98

institutions to hold securities and sell them in a timely manner without the
involvement of the courts.


46. On the recommendations of the Narasimham Committee and Andyarujina
Committee, the SARFAESI Act was enacted to empower the banks and
financial institutions to take possession of the securities and to sell them
without intervention of the court.

47. The statement of objects and reasons for which the Act has been enacted reads
as under: -
“STATEMENT OF OBJECTS AND REASONS

The financial sector has been one of the key drivers in India's
efforts to achieve success in rapidly developing its economy.
While the banking industry in India is progressively complying
with the international prudential norms and accounting
practices there are certain areas in which the banking and
financial sector do not have a level playing field as compared
to other participants in the financial markets in the world.
There is no legal provision for facilitating securitisation of
financial assets of banks and financial institutions. Further,
unlike international banks, the banks and financial institutions
in India do not have power to take possession of securities and
sell them. Our existing legal framework relating to commercial
transactions has not kept pace with the changing commercial
practices and financial sector reforms. This has resulted in
slow pace of recovery of defaulting loans and mounting levels
of non-performing assets of banks and financial institutions.
Narasimham Committee I and II and Andhyarujina Committee
constituted by the Central Government for the purpose of
examining banking sector reforms have considered the need
for changes in the legal system in respect of these areas. These
Special Leave Petition (C) No. 16735 of 2022 Page 35 of 98

Committees, inter alia, have suggested enactment of a new
legislation for securitisation and empowering banks and
financial institutions to take possession of the securities and to
sell them without the intervention of the court. Acting on these
suggestions, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
Ordinance, 2002 was promulgated on the 21st June, 2002 to
regulate securitisation and reconstruction of financial assets
and enforcement of security interest and for matters connected
therewith or incidental thereto. The provisions of the
Ordinance would enable banks and financial institutions to
realise long-term assets, manage problem of liquidity, asset
liability mismatches and improve recovery by exercising
powers to take possession of securities, sell them and reduce
nonperforming assets by adopting measures for recovery or
reconstruction."

48. This Court in Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.
reported in (2004) 4 SCC 311 , examined the history and legislative backdrop
that ultimately led to the enactment of the SARFAESI Act as under: -
“34. Some facts which need to be taken note of are that the
banks and the financial institutions have heavily financed the
petitioners and other industries. It is also a fact that a large
sum of amount remains unrecovered. Normal process of
recovery of debts through courts is lengthy and time taken is
not suited for recovery of such dues. For financial assistance
rendered to the industries by the financial institutions,
financial liquidity is essential failing which there is a blockade
of large sums of amounts creating circumstances which retard
the economic progress followed by a large number of other
consequential ill effects. Considering all these circumstances,
the Recovery of Debts Due to Banks and Financial Institutions
Act was enacted in 1993 but as the figures show it also did not
bring the desired results. Though it is submitted on behalf of
the petitioners that it so happened due to inaction on the part
of the Governments in creating Debts Recovery Tribunals and
appointing presiding officers, for a long time. Even after
leaving that margin, it is to be noted that things in the spheres
concerned are desired to move faster. In the present-day global
Special Leave Petition (C) No. 16735 of 2022 Page 36 of 98

economy it may be difficult to stick to old and conventional
methods of financing and recovery of dues. Hence, in our view,
it cannot be said that a step taken towards securitisation of the
debts and to evolve means for faster recovery of NPAs was not
called for or that it was superimposition of undesired law since
one legislation was already operating in the field, namely, the
Recovery of Debts Due to Banks and Financial Institutions Act.
It is also to be noted that the idea has not erupted abruptly to
resort to such a legislation. It appears that a thought was given
to the problems and the Narasimham Committee was
constituted which recommended for such a legislation keeping
in view the changing times and economic situation whereafter
yet another Expert Committee was constituted, then alone the
impugned law was enacted. Liquidity of finances and flow of
money is essential for any healthy and growth-oriented
economy. But certainly, what must be kept in mind is that the
law should not be in derogation of the rights which are
guaranteed to the people under the Constitution. The
procedure should also be fair, reasonable and valid, though it
may vary looking to the different situations needed to be
tackled and object sought to be achieved.

xxx xxx xxx

36. In its Second Report, the Narasimham Committee observed
that NPAs in 1992 were uncomfortably high for most of the
public sector banks. In Chapter VIII of the Second Report the
Narasimham Committee deals about legal and legislative
framework and observed:

“8.1. A legal framework that clearly defines the rights
and liabilities of parties to contracts and provides for
speedy resolution of disputes is a sine qua non for
efficient trade and commerce, especially for financial
intermediation. In our system, the evolution of the
legal framework has not kept pace with changing
commercial practice and with the financial sector
reforms. As a result, the economy has not been able
to reap the full benefits of the reforms process. As an
illustration, we could look at the scheme of mortgage
in the Transfer of Property Act, which is critical to the
work of financial intermediaries….”

Special Leave Petition (C) No. 16735 of 2022 Page 37 of 98

One of the measures recommended in the circumstances was
to vest the financial institutions through special statutes, the
power of sale of the assets without intervention of the court and
for reconstruction of assets. It is thus to be seen that the
question of non-recoverable or delayed recovery of debts
advanced by the banks or financial institutions has been
attracting attention and the matter was considered in depth by
the Committees specially constituted consisting of the experts
in the field. In the prevalent situation where the amounts of
dues are huge and hope of early recovery is less, it cannot be
said that a more effective legislation for the purpose was
uncalled for or that it could not be resorted to. It is again to be
noted that after the Report of the Narasimham Committee, yet
another Committee was constituted headed by Mr
Andhyarujina for bringing about the needed steps within the
legal framework. We are therefore, unable to find much
substance in the submission made on behalf of the petitioners
that while the Recovery of Debts Due to Banks and Financial
Institutions Act was in operation it was uncalled for to have yet
another legislation for the recovery of the mounting dues.
Considering the totality of circumstances and the financial
climate world over, if it was thought as a matter of policy to
have yet speedier legal method to recover the dues, such a
policy decision cannot be faulted with nor is it a matter to be
gone into by the courts to test the legitimacy of such a measure
relating to financial policy.”


49. In this regard, reference may also be made to the following observations of
this Court in Union Bank of India v. Satyawati Tondon & Ors. reported in
(2010) 8 SCC 110 . The relevant observations read as under: -
“1. [...] With a view to give impetus to the industrial
development of the country, the Central and State
Governments encouraged the banks and other financial
institutions to formulate liberal policies for grant of loans and
other financial facilities to those who wanted to set up new
industrial units or expand the existing units. Many hundred
thousand took advantage of easy financing by the banks and
Special Leave Petition (C) No. 16735 of 2022 Page 38 of 98

other financial institutions but a large number of them did not
repay the amount of loan, etc. Not only this, they instituted
frivolous cases and succeeded in persuading the civil courts to
pass orders of injunction against the steps taken by banks and
financial institutions to recover their dues. Due to lack of
adequate infrastructure and non-availability of manpower, the
regular courts could not accomplish the task of expeditiously
adjudicating the cases instituted by banks and other financial
institutions for recovery of their dues. As a result, several
hundred crores of public money got blocked in unproductive
ventures.

2. In order to redeem the situation, the Government of India
constituted a committee under the Chairmanship of Shri T.
Tiwari to examine the legal and other difficulties faced by
banks and financial institutions in the recovery of their dues
and suggest remedial measures. The Tiwari Committee noted
that the existing procedure for recovery was very cumbersome
and suggested that special tribunals be set up for recovery of
the dues of banks and financial institutions by following a
summary procedure. The Tiwari Committee also prepared a
draft of the proposed legislation which contained a provision
for disposal of cases in three months and conferment of power
upon the Recovery Officer for expeditious execution of orders
made by adjudicating bodies.”



ii. Scope of Section 11 and expression “dispute” thereunder.

a. Various Decisions on the subject.

50. Before proceeding with the analysis of the scope and ambit of the provision
of Section 11 of the SARFAESI Act, it would be apposite to refer to the
decisions of various DRTs, DRATs and High Courts and the cleavage of
Special Leave Petition (C) No. 16735 of 2022 Page 39 of 98

opinion that have been expressed as regards the nature and kind of disputes
that would fall within the said provision.

51. In Anand Rathi Global Finance Limited v. Aavas Financiers Limited , (Arb.
P. No. 1308 of 2024), the dispute in the said case arose when the petitioner
therein, an NBFC, advanced a loan to the borrower, against a property
mortgaged as security. The borrower’s account was declared as NPA,
prompting the petitioner therein to initiate proceedings under Section 13(2) of
the SARFAESI Act. While attempting symbolic possession under Section
13(4), the petitioner therein discovered that the same property was also
mortgaged to the respondent, another NBFC. The Delhi High Court held that
since the dispute was between two NBFCs regarding priority of claims over a
mortgaged property under the SARFAESI Act, the same must be resolved
through arbitration as mandated by Section 11 thereof. The relevant
observations read as under: -
“6. In view of the fact that disputes have arisen between the
parties, this Court is inclined to appoint an Arbitrator to
adjudicate upon the disputes between the parties.”

52. In Bank of India v. Development Credit Bank Ltd. reported in 2012 SCC
OnLine AP 71 it was the case of the petitioner therein that a prior mortgage
over a house, had been created in its favor to secure loans. Although
possession proceedings were initiated under Section 13(4) of the SARFAESI
Special Leave Petition (C) No. 16735 of 2022 Page 40 of 98

Act, it was discovered that the respondent therein, had also taken possession
of the same property under Section 13(4), pursuant to a subsequent mortgage
suppressed by the borrowers. The Andhra Pradesh High Court held that the
dispute between the two banks admittedly concerning priority of claims fell
within the ambit of Section 11 of the SARFAESI Act, which mandates
resolution through arbitration or conciliation. The relevant observations read
as under: -
“Any dispute among the bank, or financial institution, or
securitization company or reconstruction company or
qualified institutional buyer, shall have to be settled by
conciliation or arbitration as provided in the Arbitration and
Conciliation Act, 1996. For doing so, the parties to the dispute
have to consent in writing for reference to the conciliation or
arbitration. Under Section 17(3) of the Act, if the DRT comes
to the conclusion that the action taken under Section 13(4) of
the Act by the secured creditor is not in accordance with the
provisions of the Act, DRT may require restoration of the
management of the business to the borrower or restoration of
possession of the secured asset to the borrower by declaring
the recourse to any of the measures under Section 13(4) of the
Act is invalid and “pass such other order as it may consider
appropriate and necessary in relation to any of the recourse
taken by the secured creditor”. Therefore, in our considered
opinion, it is always open to the petitioner or the first
respondent to submit consent in writing for resolution of
dispute by conciliation or arbitration. This can as well be done
before the DRT and a Writ Petition ordinarily may not be
proper remedy.”

53. In Central Bank of India v. UCO Bank (MA No. 26/2022 in SA No. 3/2013) ,
there was a dispute between two banks; Central Bank of India and UCO Bank
respectively, both of whom claimed security interest over the same mortgaged
Special Leave Petition (C) No. 16735 of 2022 Page 41 of 98

property. The borrowers therein had availed financial assistance from Central
Bank of India and created equitable mortgage over their immovable property.
On default in repayment, Central Bank of India issued a demand notice under
Section 13(2) of the SARFAESI Act and thereafter took symbolic possession
under Section 13(4) thereof. However, it was later discovered that UCO Bank,
which also claimed a mortgage over the same property, had issued a sale
notice and conducted auction sale of the mortgaged property, and adjusting
the sale proceeds against its own dues with the surplus being kept in a no lien
account. Central Bank of India filed a Miscellaneous Application seeking
release of excess auction proceeds in its favour. However, the DRT, Guwahati
whilst dismissing the same as not maintainable inter-alia on the ground of
jurisdiction, placed reliance on the decision of Oriental Bank of Commerce
(supra) and observed that since the dispute pertained to overlapping security
interests and competing claims between two banks over the same property,
such inter-se disputes between banks are to be resolved through arbitration
and not before the DRT as per Section 11 of the SARFAESI Act.

54. In CFM Asset Reconstruction (P) Ltd. v. Tamilnad Mercantile Bank Ltd .,
reported in 2022 SCC OnLine DRAT 305 , the dispute in the said was
between an asset reconstruction company and a bank over competing security
interests in the same property. The appellant held 96.25% of the total secured
interest, while the respondent bank claimed 3.75% and thus, filed a
Special Leave Petition (C) No. 16735 of 2022 Page 42 of 98

securitization application under Section 17 of the SARFAESI Act challenging
the private treaty sale conducted by the appellant therein. The appellant in turn
contended that such an inter-se dispute over apportionment of proceeds
between secured creditors is governed by Section 11 of the SARFAESI Act
and ought to be referred to arbitration. The DRAT held that since both the
parties were secured creditors under the SARFAESI Act, the dispute squarely
fell within the scope of Section 11, which provides for resolution of such
disputes through conciliation or arbitration in terms of the Act, 1996, even in
the absence of a specific arbitration agreement. It was further held that the
SARFAESI Act contemplates statutory arbitration and that in such cases and
the DRT would have no jurisdiction to entertain the dispute under Section 17.
The relevant observations read as under: -
“16. Unfortunately, the Learned PO has not discussed the
scope of section 11 or its purport… The said section which is
extracted above provides for a statutory arbitration. It raises a
presumption of the existence of an arbitration agreement in
respect of a dispute relating to securitisation or reconstruction
on non-payment of any amount including interest between bank
or financial institution or asset reconstruction company…
When both parties to the dispute are secured creditors, there is
no option for them but to resolve the dispute except by
resorting to arbitration under the provisions of section 11 of
the SARFAESI Act. It is not an arbitration by choice. It is a
statutory arbitration contemplated under the provisions of the
Act which binds the parties to a dispute referred to therein.”

“17. In view of the above, I am of the opinion that the Learned
Presiding Officer has gone wrong in finding that the DRT has
jurisdiction to entertain an application filed by the 1
Respondent under section 17 of the SARFAESI Act. The
securitization application is also bad for the reason stated in
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sub-section (9) of section 13 of the SARFAESI Act since the
decision to proceed with the sale under a private treaty was
exercised by the Appellant financial institution which has more
than 60% of the amount provided as loan to the borrower.
However, in case there is a dispute between the Appellant and
the 1 Respondent, it needs to be resolved by an arbitrator
agreed upon by the parties or by resorting to the provisions of
the Arbitration and Conciliation Act, 1996.”

55. In D. Dhanamjaya Rao v. Bank of India, Kothapeta Branch, Guntur ,
reported in 2004 SCC OnLine AP 962 , the applicant therein was a borrower
who had availed a cash credit loan from the respondent bank. He alleged that
the bank had made illegal mis-adjustments and wrongful debits from his loan
account to discharge the liability of another borrower introduced by him, and
thereafter issued a notice under Section 13(2) of the SARFAESI Act for
recovery of dues. The applicant approached the Andhra Pradesh High Court
under Section 11(6) of the Arbitration and Conciliation Act, 1996, for initation
of arbitration in terms of Section 11 of the SARFAESI Act. The Andhra
Pradesh High Court dismissed the application holding that the applicant being
a borrower did not fall within the class of parties covered under Section 11 of
the SARFAESI Act, which permits arbitration only among specified financial
entities such as banks, financial institutions, ARCs, or qualified institutional
buyers. It was further held that Section 11 of the SARFAESI Act envisages a
statutory arbitration only among those enumerated parties and not between a
bank and a borrower. The relevant observations read as under: -
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“13. Therefore, such of those parties, who fall within the
definition of parties mentioned in Section 2(c), (m), (za), (v)
and (u) of the Securitization Act, namely the “bank” or
“financial institution” or “securitization company” or
“reconstruction company” or “qualified institutional buyer”,
as appearing in Section 11 of the Securitization Act, are
entitled to invoke the provisions of Section 11 of the Arbitration
Act, for resolution of disputes by an Arbitrator… The
applicant, according to his own admission, is a borrower and
a loanee of the Bank, and he, not being a “bank” nor
“financial institution” nor “securitization company” nor
“reconstruction company” nor “qualified institutional buyer”,
is not entitled to invoke the provisions of Section 11 of the
Securitization Act and consequently the provisions under
Section 11 of the Arbitration.”






56. In Bell Finvest India Ltd. v. AU Small Finance Bank Ltd ., reported in 2002
DHC 004654 , the petitioner therein, an NBFC, sought appointment of an
arbitrator under Section 11 of Act, 1996, in terms of Section 11 of the
SARFAESI Act to argue that the said provision stipulated a statutorily
mandate arbitration between financial institutions. The Delhi High Court,
while dismissing the petition, held as under: -
(i) First, that Section 11 of the SARFAESI Act is intended to provide a
statutory arbitration mechanism only in cases where disputes arise inter
se between financial institutions, securitisation or reconstruction
companies or qualified institutional buyers, and not between a lender
and a borrower. The relevant observations read as under: -
“7.10 … the SARFAESI Act does not deal with disputes
between a secured creditor and a borrower; but deals
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with the rights of the secured creditors inter-se … claims
covered by the RDB Act are non-arbitrable, with a
prohibition against waiver of jurisdiction under those
statutes by necessary implication. Accordingly, disputes
that would be covered by section 11 of the SARFAESI
Act are those which deal with the rights of secured
creditors inter-se, since the SARFAESI Act proceeds on
the basis that the liability of the borrower has been
crystallized and the borrower’s account has been
classified as a non-performing asset in the hands of the
financial institution.”

(ii) Secondly, that even if the borrower happens to be a financial institution,
once it has availed a credit facility from another bank or financial
institution, it dons the character of a borrower under Section 2(1)(f) of
the SARFAESI Act and cannot claim the benefit of Section 11. The
relevant observations read as under: -
“7.11 Though petitioner No. 1 is a financial institution,
for the purposes of the present lis between the parties,
petitioner No. 1 dons the hat of a borrower within the
meaning of section 2(1)(f) of the SARFAESI Act …
section 11 conspicuously omits the word borrower from
its text, which is a clear indication … that a financial
institution which happens to be a borrower vis-a-vis the
institution with which a dispute arises, cannot resort to
arbitration as a remedy.”

(iii) Lastly, that disputes concerning enforcement of security interests,
which are governed by special legislations such as the SARFAESI Act
and the RDB Act, are non-arbitrable, and the special remedy provided
therein cannot be overridden by any statutory or consensual arbitration.
The relevant observations read as under: -
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“7.13 … matters covered by special laws, which create
special rights, to be adjudicated and enforced by special
forums, under special procedures, in this case the DRT,
are non-arbitrable; and therefore, the remedies
available to a lender for enforcing a security interest
cannot be encroached upon by any arbitral
mechanism.”

57. In Diamond Entertainment Technologies (P) Ltd. v. Religare Finvest Ltd.
reported in 2023 SCC OnLine Del 95 , the dispute in the said case arose
between two financial entities pursuant to the restructuring of a loan under a
facility agreement. The petitioner borrower had defaulted on repayments,
leading to measures being initiated by the respondent lender under the
SARFAESI Act, 2002 including issuance of demand and possession notices.
While the lender sought to proceed under SARFAESI, the borrower invoked
arbitration under the same facility agreement. In this backdrop, a review
petition was filed by the lender seeking recall of the order passed under
Section 11 of the Act, 1996, on the ground that the disputes were non-
arbitrable being governed exclusively by the framework of the SARFAESI
Act. The Delhi High Court whilst dismissing the review petition, held as
under: -
(i) First, that Section 11 of the SARFAESI Act, which provides a statutory
recognition of arbitration as a mode of dispute resolution under
SARFAESI where any dispute relating to securitization, reconstruction
or non-payment of any amount due arises amongst any of the parties;
Special Leave Petition (C) No. 16735 of 2022 Page 47 of 98

namely the bank, financial institution, asset reconstruction company or
qualified buyer. Thus, the same indicates that not all disputes under the
SARFAESI Act are necessarily barred from arbitration, especially when
initiated by the borrower.
(ii) Secondly, that while actions taken by financial institutions under
Section(s) 13 and 14 of the SARFAESI Act, respectively are actions in
rem and thus, may not be arbitrable, disputes arising inter se between
two financial creditors of non-payment, reconciliation of accounts, or
challenge to recovery measures, can still nevertheless be referred to
arbitration if the statutory framework permits and especially where the
dispute is initiated by the borrower and not the lender.
(iii) Thirdly, that once a borrower raises a bona fide dispute on the amounts
claimed and invokes arbitration under a prior agreement, the mere fact
that proceedings have been initiated under SARFAESI by the lender
would not ipso facto bar arbitration. It was held that the statutory bar on
arbitration applies where special rights and remedies under the
SARFAESI framework are being exercised by banks, and not where a
borrower seeks resolution of disputes regarding the lender’s claim or
conduct.

58. In Encore Asset Reconstruction Company Pvt. Ltd. v. Universal Journeys
India Pvt. Ltd ., (Arb. P. No. 1226 of 2024), the Delhi High Court was
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considering a petition under Section 11 of the Act, 1996 for seeking
appointment of an Arbitrator for disputes arising out of a loan transaction. The
dispute pertained to non-payment of dues under a loan agreement entered into
between the respondent and one Riviera Investors Private Limited, which was
later assigned to the petitioner therein who was an Asset Reconstruction
Company. The respondent objected to the arbitration, contending that it had
not consented to the assignment and that the arbitration clause was not
effectively transferred. The High Court held that Section 11 of the SARFAESI
Act expressly provides for arbitration of disputes “ relating to securitisation or
reconstruction or non-payment of any amount due including interest ” amongst
a bank, financial institution, asset reconstruction company or qualified buyer,
once the parties have consented in writing. As the dispute arose on account of
non-payment by the borrower post-assignment, and the assignment deed
carried over the arbitration clause in the original loan agreement, the High
Court held that such assignment binds the borrower to the same arbitration
mechanism.

59. In Federal Bank (supra) the DRAT held that in the absence of a written
consent for arbitration, Section 11 of the SARFAESI Act will not apply even
if a dispute is between two financial institutions concerning competing
security interests in the same immovable property. The relevant observations
read as under: -
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“7. I am unable to subscribe to the view propounded by the
Counsel for the respondents. There is no agreement between
the parties. The appellant does not want that this matter to be
decided by arbitration. The provisions of Section 11 of the
SRFAESI Act have a crystalline clarity. It clearly, specifically,
unequivocally mentions that parties to dispute must have
consented in writing for determination of such dispute by
conciliation or arbitration and the provisions of that Act shall
apply accordingly. There is no such written consent.

60. In Oriental Bank of Commerce (supra) the dispute therein was between three
banking institutions, in respect of competing claims over the same mortgaged
property. The controversy stemmed from non-payment of loans and priority
of charges created over the said property. While Canara Bank had taken
possession under the SARFAESI Act, both Oriental Bank and Andhra Bank
filed securitisation applications claiming prior mortgage interests. The DRAT,
held that inter-se disputes between secured creditors under the SARFAESI
Act cannot be adjudicated by the DRT and ought to be resolved by way of
arbitration as mandated by Section 11 of the SARFAESI Act. The relevant
observations read as under: -
“6. Since there is a dispute between the Banks inter se,
therefore, I am of the considered view that the learned DRT did
not have the jurisdiction to try the Securitisation Application
under the SRFAESI Act. Recently, the attention of the Court
was invited towards Section 11 of the SRFAESI-Act which runs
as follows:

‘11. Resolution of disputes.—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
Special Leave Petition (C) No. 16735 of 2022 Page 50 of 98

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 for
determination of such dispute by conciliation or
arbitration and the provisions of that Act shall
apply accordingly.’”

“7. Consequently, it is clear that the previous view taken in this
regard that DRT has the jurisdiction to try such disputes
appears to be incorrect. The order passed by the learned DRT
under the SRFAESI Act in this case is without jurisdiction.”

61. In Reliance Commercial Finance Limited v. Axis Bank Limited , (AP No.
361 of 2019) the petitioner, a financial institution under the SARFAESI Act,
2002, sought arbitration under Section 11 of the Act, 1996, relying on the
statutory arbitration provision enshrined in Section 11 of the SARFAESI Act.
The dispute arose from the petitioner’s takeover of a loan from the respondent
bank, and subsequent claims regarding mortgage documents and related
transactions. The respondent argued there was no privity of contract or written
arbitration agreement thus, there could be no reference to arbitration as the
statutory conditions of existence an arbitration agreement under Section 7 of
the Act, 1996 was not fulfilled. However, the Calcutta High Court held that
Section 11 of the SARFAESI Act creates a statutory fiction of an arbitration
agreement, negating the need for a written agreement under Section 7. It
further observed that since prima facie , the jural relationship between the
parties based on the payment and correspondence was one as contemplated
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under Section 11 of the SARFAESI Act, the High Court proceeded to refer
the dispute to arbitration and appoint an arbitrator. The relevant observations
read as follows: -
“Section 11 of the Act of 2002 raises a deemed statutory fiction
of the existence of an arbitration agreement, provided the other
parameters are fulfilled, and does not require an agreement in
writing to be entered into between the parties in terms of
Section 7 of the Act of 1996. The deeming provision for
existence of an arbitration agreement will appear from the user
of the words ‘as if the parties to the dispute have consented in
writing for determination of such dispute by conciliation or
arbitration and the provisions of that Act shall apply
accordingly’ in Section 11 of the Act of 1996.”

b. Scope and ambit of Section 11 of the SARFAESI Act.

62. Section 11 of the SARFAESI Act deals with resolution of disputes relating to
securitisation or reconstruction or non-payment of any amount due including
where such dispute is between the bank or financial institution or asset
reconstruction company or qualified buyer and stipulates that such disputes
i.e., those pertaining to the subject-matter provided therein and involves the
parties stipulated thereto, shall be resolved by arbitration, as if such parties to
the dispute had consented to resolve it by arbitration in terms of the Act, 1996.
The said provision reads as under: -
“ 11. Resolution of disputes.—
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 asset reconstruction company or qualified buyer,
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such dispute shall be settled by conciliation or arbitration as
provided in the Arbitration and Conciliation Act, 1996 (26 of
1996), as if the parties to the dispute have consented in writing
for determination of such dispute by conciliation or arbitration
and the provisions of that Act shall apply accordingly.”

63. From the plain language of Section 11 of the SARFAESI Act, it is manifest
that the scope and ambit of the said provision have been limited or confined
by the twin conditions laid therein, that have to be satisfied in order to attract
the said provision being as under: -
(i) Where the dispute arises between: -
a. any bank;
b. any financial institution;
c. any asset reconstruction company;
d. any qualified buyer; and
(ii) Where the dispute relates to: -
a. securitization of financial assets;
b. reconstruction of assets;
c. non-payment of any amount due and / or interest

64. The object underlying Section 11 of the SARFAESI Act insofar as it mandates
arbitration or conciliation as the only mechanism for resolution of disputes
between a bank, financial institution, ARC etc., and ousts the jurisdiction of
the DRTs under Section 17 for adjudicating such disputes is to ensure that
ancillary or collateral disputes that may arise between competing secured
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creditors do not hinder the larger purpose of the SARFAESI Act of facilitating
recoveries of dues from the borrowers expeditiously by enforcement of
secured assets or other means provided thereunder. It is to ensure that discord
among secured creditors should not impede, derail, or stall the recovery
proceedings under the SARFAESI Act, which are designed with the idea of
time-bound adjudication with minimal interference.

65. In the absence of any such mandate as enshrined in Section 11 of the
SARFAESI Act, every conflict between secured creditors over a security
interest would ultimately just prolong the recovery proceedings against the
borrower and thwart any possibility of a meaningful recovery of bad debts. By
requiring such disputes to be referred to arbitration, the legislature has
effectively sought to avoid a situation where squabbles between secured
creditors obstruct or delay the realization of the value of the secured assets.
Both the RDBFI Act and the SARFAESI Act envision the DRTs and DRAT
as specialized forum for or facilitating and effectuating recovery against
defaulting borrowers, and not for resolving disputes inter se secured creditors.
Their jurisdiction is primarily directed toward the adjudication of recovery
certificates, enforcement of security interest, and addressing borrower
objections under Section 17. The nature of proceedings before the DRT is
largely summary, intended to enthuse efficiency in recovery of dues save such
proceedings from the perils of pendency. This is the very reason why the
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legislature consciously omitted the term “borrower” in Section 11 of the
SARFAESI Act.

66. The category of disputes contemplated under Section 11 of the SARFAESI
Act are those which pertain to the rights and entitlements of secured creditors
inter se , in relation to the enforcement of security interest independent of the
borrower’s liability. The entire scheme of the SARFAESI Act is premised on
the liability of the borrower being crystallized by virtue of its classification as
a non-performing asset by the secured creditor. The kind of disputes that may
arise from the scheme SARFAESI Act, broadly fall into two categories being;
(i) disputes in relation to the recovery proceedings or measures taken under
the said Act and (ii) disputes pertaining to any rights or claims in respect of
the secured asset. The former disputes concern only the secured creditor and
the borrower, although such disputes have a bearing on the security interest or
secured asset, yet such proceedings are more concerned with the manner of
recovery and the measures thereto and thus, encompass disputes between the
borrower and secured creditor(s) alone. However, the latter disputes are
specifically in respect of the secured asset or security interest, the nature of
dispute is not in relation to the manner of recovery but rather the manner of
apportionment of the recovery proceeds either directly or indirectly, and thus,
such disputes arise and concern the secured creditors that are covered under
the SARFAESI Act, namely banks, financial institutions, asset reconstruction
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companies and qualified buyers. The legislature keeping the aforesaid
distinction in mind, incorporated the provisions of Section(s) 11 and 17 of the
SARFAESI Act, for resolution of disputes pertaining to any rights or claims
in respect of the secured asset and disputes in relation to the recovery
proceedings or measures taken thereunder, respectively.

67. The Black Law Dictionary (5th ed. 1979) defines “dispute” as “ A conflict or
controversy; a conflict of claims or rights; an assertion of a right, claim, or
demand on one side, met by contrary claims or allegations on the other. The
subject of litigation; the matter for which a suit is brought and upon which
issue is joined, and in relation to which jurors are called and witnesses
examined .”

68. The High Court of Madhya Pradesh in its decision in Dilip Construction
Company v. Hindustan Steel Ltd ., reported in 1973 SCC OnLine MP 22 was
called upon to examine the question of existence of a dispute in order to raise
the jurisdiction of arbitration. In the case, a contractual dispute arose between
appellant and respondent therein under a contract which included an
arbitration clause. The appellant therein completed part of the contracted work
but raised a claim for additional payment, which the respondent contested. The
respondent argued that no dispute existed as the claims were still under
examination, and certain claims fell outside the contract's purview. Despite
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this, both parties nominated arbitrators, and the matter proceeded to an umpire,
who made an award in favour of the appellant therein. The core issue was
whether a genuine ‘dispute’ existed at the time of invoking the arbitration
clause, as its pre-existence was a condition precedent for invoking arbitration
in terms of the contract. The High Court held that: -
“10. There was no jurisdiction either in the arbitrators or the
umpire to make an award in this case. The pre-existence of a
difference or dispute is a condition precedent to the invoking
of the arbitration clause. On a plain construction of its terms,
the right to arbitration under Clause 61 of the agreement only
arises, if a difference or dispute exists, at the tine when a notice
of submission is served by a party seeking to enforce the
arbitration clause. In the present case, there was, in fact, no
such difference or dispute. If there is no dispute, there can
consequently be no right to demand arbitration. The Court
must, therefore, be satisfied that there was some real point of
difference which had to be submitted to arbitration.

11. The law on the subject is lucidly stated in Russel on
Arbitration, Seventeenth Edn. p. 28:

“To constitute a submission proper, there must be a difference.
If there is no difference there is nothing for an arbitrator to
arbitrate about, and in the case of an agreement to refer future
disputes to arbitration, the arbitrator's jurisdiction does not
arise until a dispute has arisen. It might seem, therefore, that
if the agreement between the parties is in effect an agreement
to prevent disputes from arising and not an agreement as to
how they are to be settled, then it is neither an agreement to
refer to arbitration nor a submission to arbitration, and it is
not within the Act.”

12. The existence of a dispute is an essential condition for the
jurisdiction of an arbitrator. If there is no dispute, there can be
no right to demand arbitration at all. This was clearly laid
down by Rankin, J., as he then was, in Uttam Chand Saligram
v. Jewa Mamooji, ILR 46 Cal 534 : (AIR 1920 Cal 143). A point
as to which there is no dispute cannot be referred to
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arbitration. Failure to pay does not necessarily constitute a
difference or dispute. A dispute implies an assertion of right by
one party and repudiation thereof by another. In tide instant
case, there was; merely an assertion of a claim made by the
appellant for payment of Rupees 16,77,197.28 P., but there was
no repudiation of that claim by the respondent and, therefore
there could be no dispute which could be referred to
arbitration. The jurisdiction of an arbitrator depends not upon
the existence of a claim or the accrual of a cause of action, but
upon the existence of a dispute. (See Balmukund Ruia v.
Gopiram Bhotica, 24 Cal WN 775 : (AIR 1920 Cal 808 (2)).

18. In Dawoodbhai Abdulkader v. Abdulkader Ismailji, AIR
1931 Bom 164 the plaintiff was the sub-partner of the
defendant in a certain business. The deed of sub-partnership
incorported all the articles, covenants, conditions and
obligations contained in the principal partnership agreement
between the defendant and his partner which were not
inconsistent with the terms of the agreement. There was a
clause in the deed of principal partnership which provided,
inter alia, that any dispute or difference arising between
partners with regard to the construction of any of the articles
contained in the agreement or to any divisions of goods or
things, related to the said Partnership or the affairs thereof,
shall be referred to arbitration in the manner therein
mentioned. The plaintiff called upon the defendant to make up
the accounts and to pay him the amount found due at the foot
thereof. The defendant did not pay and the plaintiff filed a suit
praying that the defendant may be ordered to render a true and
complete account of the profits earned by the partnership
business and of the amount due to the plaintiff, and to pay the
same to him. The defendant thereupon took out a summons for
an order to stay further proceedings to enable the parties to
refer to arbitration. It was held by Wadia, J., that as there was
no dispute between the parties but mere failure to pay, the suit
was maintainable and could not be stayed. The principles
deducible from these authorities are—

(i) The existence of a difference or dispute is an essential
condition for the arbitrator's jurisdiction to act under an
arbitration clause in an agreement;
(ii) The jurisdiction of an arbitrator depends not upon the
existence of a claim or the accrual of a cause of action,
Special Leave Petition (C) No. 16735 of 2022 Page 58 of 98

but upon the existence of a dispute. A dispute implies an
assertion of a right by one party and repudiation thereof
by another;
(iii) A failure to pay is not a difference, and the mere fact that
a party could not or would not pay does not in itself
amount to a dispute unless the party who chooses not to
pay raises a point of controversy regarding, for
instance, the basis of payment or the time or manner of
payment.”
(Emphasis supplied)

69. This Court in Major (Retd.) Inder Singh Rekhi v. Delhi Development
Authority , reported in (1988) 2 SCC 338 again explained the meaning of the
term “dispute”. In the said case, the appellant therein had contracted with the
respondent therein for constructing of 240 flats. The appellant therein
repeatedly requested the respondent authority to finalize the pending bills.
However, due to the inaction of the respondent, the appellant therein issued a
notice for seeking the release of the sum offered as security and for invoking
arbitration. When the respondent authority failed to respond, the appellant
therein filed an application for initiation of arbitration, alleging the existence
of a ‘dispute’ regarding the unsettled bills and withheld security. This Court
held as under: -
“4. There should be dispute and there can only be a dispute
when a claim is asserted by one party and denied by the other
on whatever grounds. Mere failure or inaction to pay does not
lead to the inference of the existence of dispute. Dispute entails
a positive element and assertion of denying, not merely
inaction to accede to a claim or a request. Whether in a
particular case a dispute has arisen or not has to be found out
from the facts and circumstances of the case.”

(Emphasis supplied)
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70. The ratio of the decision of Inder Singh Rekhi (supra) was examined in
McDermott International Inc. v. Burn Standard Co. Ltd. , reported in (2006)
11 SCC 181 , wherein this Court clarified and held that the term “dispute” does
not necessarily imply that a claim asserted by one of the party must be
followed by a denial from the other party. A “dispute” would said to exist
where the other party has denied or disputed his claim or in instances where it
has feigned ignorance or is not otherwise interested in resolving it. The
relevant observations read as under: -
“117. In Major (Retd.) Inder Singh Rekhi v. Delhi
Development Authority [(1988) 2 SCC 338] , whereupon Mr
Mitra placed strong reliance, an award made under the old Act
was in issue. A dispute had arisen whether there was a claim
and denial or repudiation thereof. In that context, it was held:
(SCC p. 340, para 4)

“There should be dispute and there can only be a
dispute when a claim is asserted by one party and
denied by the other on whatever grounds. Mere
failure or inaction to pay does not lead to the
inference of the existence of dispute. Dispute entails
a positive element and assertion of denying, not
merely inaction to accede to a claim or a request.
Whether in a particular case a dispute has arisen or
not has to be found out from the facts and
circumstances of the case.”

118. There is no dispute about the aforementioned principle
but the same would not mean that in every case the claim must
be followed by a denial. If a matter is referred to any arbitrator
within a reasonable time, the party invoking the arbitration
clause may proceed on the basis that the other party to the
contract has denied or disputed his claim or is not otherwise
interested in referring the dispute to the arbitrator.”

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(Emphasis supplied)

71. The word “dispute” used in Section 11 of the SARFAESI Act does not take
into account “any dispute” that arises out of “any reason whatsoever”. The
scope and meaning of the said term has been qualified and limited by the
provision itself, more particularly, the expression “ relating to securitisation
or reconstruction or non-payment of any amount due including interest ”.
Hence, Section 11 would be attracted only where the dispute arises in relation
to (i) securitisation, or (ii) reconstruction, or (iii) non-payment of any amount
due (including interest).

72. Section 2(z) of the SARFAESI Act defines ‘securitisation’ as “ acquisition of
financial assets by any asset reconstruction company from any originator,
whether by raising of funds by such asset reconstruction company from
qualified buyers by issue of security receipts representing undivided interest
in such financial assets or otherwise ”.

73. Section 2(b) of the Act defines ‘asset reconstruction’ as “ acquisition by any
asset reconstruction company of any right or interest of any bank or financial
institution in any financial assistance for the purpose of realisation of such
financial assistance ”.

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74. It is manifest from the foregoing discussion that the present case at hand, more
particularly dispute between the appellant and respondent banks does not
pertain to either securitisation or reconstruction. It does not involve any
acquisition of financial assets or rights by an asset reconstruction company
(ARC). Rather, the crux of the issue is whether the controversy involving the
competing claims of rights over the stocks of goods by hypothecation or
pledge and the dispute therein falls within the scope of Section 11 of the
SARFAESI Act, more particularly the third category of disputes delineated
thereunder pertaining to “ non-payment of any amount due including interest ”.

c. Meaning of the expression “ non-payment of any amount due including
interest ”.


75. The scope and meaning of the phrase “ non-payment of any amount due
including interest ,” used in Section 11 of the SARFAESI Act warrants careful
examination. It is pertinent to note that the statute employs the term “any”
amount, thereby refraining from limiting its application to a specific category
of amounts that may be owed to a party mentioned in the provision. The
expression “ any amount due, including interest ,” must be construed in light of
the purpose of the Act and the provisions contained therein. The plain meaning
of the term “ any amount due ” encompasses amounts that remain unpaid
beyond the due date. However, the aforesaid is only one element of the
meaning of the said expression.
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76. In Nanalal M. Varma and Co. Ltd. v. Alexandra Jute Mills Limited , reported
in 1987 SCC OnLine Cal 100 , the Calcutta High Court whilst discussing the
scope and meaning of the expression “ non-payment of price ” held that non-
payment may arise from a myriad of reasons. It may be due to one’s inability
to pay while not disputing liability thereof or it may be due to repudiation or
denial of its liability to pay. It may so happen, that even a failure to fulfil ones
obligation to pay within the time stipulated may amount to non-payment.
However, it held that when there is no repudiation or denial of liability a
simpliciter non-payment or default in payment may not give rise to a dispute.
It is only when there is non-payment as explained aforesaid, accompanied by
a denial of liability and by reason thereof payment is not made, would the
same tantamount to a dispute. The relevant observations read as under: -
“7. [...] A non-payment may arise by reason of one's inability
to pay while not disputing liability thereof. A non-payment, on
the other hand, may be the result of repudiation or denial of its
liability to pay. Thirdly, a non-payment of price may mean
failure to fulfil ones obligation under the contract to pay within
the time stipulated. When there is no repudiation or denial of
liability a simpliciter non-payment or default in payment may
not give rise to a dispute which can be referred to arbitration.
On the other hand, when there is denial of liability and by
reason thereof payment is not made by a party from whom
demand is made by the other party, the same would be a case
of repudiation. In our view the third kind of case mentioned by
us, that is, failure to pay within the time provided in the
contract resulting in breach of terms of the contract depending
upon the terms of the particular arbitration clause could be
validly the subject-matter of a reference to arbitration. In this
connection we may refer to the observation of Rankin J. as his
Lordship then was, in the case of Uttam Chand Saligram v.
Special Leave Petition (C) No. 16735 of 2022 Page 63 of 98

Jewa Mamooji, ILR 46 Cal 534 : AIR 1920 Cal 143 to the effect
that the existence of a dispute was an essential condition for
the Arbitrator's jurisdiction, the dispute may be either in the
acknowledgment of debts or as regards the mode and time of
satisfying it [...]”
(Emphasis supplied)

77. A situation of “non-payment of any amount” or an overdue arises when one
party fails to fulfil their obligation to pay the party they are indebted to. For
the purposes of the present case at hand, we will be focusing on the scope of
Section 11 of the SARFAESI Act specifically in the context of disputes
between two banks, excluding financial institutions, asset reconstruction
companies (ARCs), or qualified buyers, as otherwise contemplated under the
provision. In cases, involving two banks acting as creditors, a dispute may not
arise directly between the banks due to the “ non-payment of any amount ” they
owe to each other. Instead, disputes typically emerge because of the
borrower’s failure to discharge their debt obligations. For instance, if a
borrower defaults on repayment after availing of credit facilities extended by
two banks, issues of non-payment of loan amounts (including interest) owed
by the borrower, the same may lead to a dispute. Such a dispute is likely to
concern the priority of charges over the borrower’s assets, especially in
situations where the borrower has secured loans from both banks by
mortgaging the same property. In the present case, the question of priority
arises due to the simultaneous loans extended by the appellant and respondent
banks and the creation of charges over the same security.
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78. In cases such as the present one, the authority to determine which bank holds
the prior charge over the borrower’s assets becomes a significant issue for
consideration. There have been instances where such disputes have been
referred to the DRT or civil courts for adjudication. The question of
determining the priority of charge typically arises after the borrower defaults
on their obligations and their assets are classified as NPAs. In such scenarios,
two or more banks may assert competing claims over the same secured asset.

79. The dispute stems from the borrower’s failure to discharge their debt
obligations, including the amounts they were bound to pay to the banks. This
non-payment gives rise to a conflict between the creditors regarding the
hierarchy of their respective charges over the borrower’s assets.
Consequently, the issue of priority of charge is inherently and intrinsically
linked to the borrower’s “ non-payment of any amount due ” as contemplated
under Section 11 of the SARFAESI Act. This provision, therefore, would
undoubtedly bring such disputes within its ambit, and thereby mandate
resolution of such disputes through conciliation or arbitration as prescribed
under the Act, 1996.

80. It is imperative to carefully examine the bare text of Section 11 of the
SARFAESI Act. The said provision does not stipulate that the “ amount due ”
must be owed directly between the two banks, financial institutions, ARCs
etc.. The language of the provision is clear and discernible: “ Where any
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dispute relating to [...] non-payment of any amount due, including interest,
arises amongst any [...]”. The broad phrasing of the aforesaid expression
signifies a wide import of its meaning which would include a various range of
scenarios where disputes are connected to unpaid amounts, including those
arising due to third-party defaults, such as indirect defaults of the borrowers.

81. For illustration, a borrower may owe a certain amount to Bank A and another
amount to Bank B, after both of these banks have hypothecated the borrower’s
property. If the borrower defaults and fails to repay these loans, a dispute may
arise between Bank A and Bank B regarding their respective claims over the
borrower’s mortgaged assets. This dispute is inherently and intrinsically
linked to the borrower’s “ non-payment of any amount due including interest ”,
which the borrower was obligated to pay under the terms of their respective
loan agreements with the banks.

82. Thus, it follows that where the dispute between the banks is fundamentally
related to the “ non-payment of any amount due including interest ”, which may
be triggered by the actions of a borrower, Section 11 of the SARFAESI Act
would apply. Consequently such, disputes being those which fall squarely
within the ambit of the said provision, would mandate the resolution of such
disputes through the mechanisms of conciliation or arbitration as provided
under the Act, 1996. This interpretation aligns with both the language, the
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legislative intent behind Section 11 and the avowed object and spirit of the
SARFAESI Act.

83. In the present case, a dispute has arisen between the appellant and the
respondent banks regarding their respective claims over the stocks of the
borrower company. The controversy primarily on the surface entails the
method of creation of charge on the stocks. The appellant bank asserts its
claim based on a hypothecation agreement, whereby the stocks of the
borrower company were hypothecated in its favour. On the other hand, the
respondent bank claims a superior right by virtue of a pledge created over the
same security, in terms of Section 172 of the Contract Act. It is pertinent to
note that, Section 31(b) of the SARFAESI Act, stipulates that the provisions
of the SARFAESI Act will not apply to movables that have pledged.

84. However, a closer look would reveal, that the dispute in substance, is not
merely concerned with whether the rights of either the appellant or the
respondent banks are enforceable by virtue of the manner in which they have
been created. Rather, the dispute pertains to the priority of charge between two
banks than the mode of its creation. The contention that the charge, being
created by way of pledge, falls outside the ambit of the Act under Section
31(b) is misplaced. This is because the exclusion under Section 31(b) applies
to disputes between the borrower and the lender concerning the pledge of
movables, where such dispute is purely in regard to enforcement of such right
Special Leave Petition (C) No. 16735 of 2022 Page 67 of 98

qua the borrower. However, the present dispute between the appellant and the
respondent banks is regarding their respective rights over the stocks. The
manner in which the charge was created, be it by pledge or hypothecation, is
irrelevant to the determination of priority between the two banks. The said
issue will only assume importance, once the rights of each of the banks are
crystalized, and thereafter enforcement of security on the strength of such
rights is sought. Hence, the present case falls under the ambit of Section 11 of
the SARFAESI Act.

d. Section 11 will not apply to disputes between Bank(s), Financial
Institution(s), ARC(s) or Qualified Buyer(s), who are otherwise a
Borrower.

85. At this stage we may clarify one another pertinent aspect regarding Section 11
of the SARFAESI Act, and whether the said provision could said to be
applicable where one of the parties although is a bank, financial institution or
ARC etc., yet its jural relation to another such entity is that of a borrower and
lender? In this regard, we must look into the decisions of this Court in M/s.
Transcore v. Union of India & Anr. reported in (2008) 1 SCC 125 and the
Delhi High Court in Bell Finvest India (supra).

Special Leave Petition (C) No. 16735 of 2022 Page 68 of 98

86. In Transcore (supra) this Court held that that Section 11 of the SARFAESI
Act is applicable to financial institutions for their inter-se disputes but not to
a dispute with a borrower. The relevant observation reads as under: -
“21 [...] Section 11 deals with resolution of disputes relating
to securitisation, reconstruction or non-payment of any
amount due between the bank or FI or securitisation company
or reconstruction company. It further states that such disputes
shall be resolved by conciliation or arbitration. It is important
to note that the dispute contemplated under Section 11 of the
NPA Act is not with the borrower [...]

30. The point to be noted is that the scheme of the NPA Act
does not deal with disputes between the secured creditors and
the borrower. On the contrary, the NPA Act deals with the
rights of the secured creditors inter se. The reason is that the
NPA Act proceeds on the basis that the liability of the borrower
has crystallised and that his account is classified as non-
performing asset in the hands of the bank/FI.”


87. In Bell Finvest India (supra), the petitioner therein an NBFC and a financial
institution had entered a rupee facility agreement with the respondent therein
who was a bank for taking a loan, against which a security interest was created
in favour of the respondent bank therein. Under the said agreement, the
petitioner therein was defined as that of a ‘borrower’ and the respondent as the
‘lender’. The petitioner therein had defaulted in repayment of loan to the
respondent therein under the said agreement and the account of the petitioner
was classified as NPA. The petitioner therein moved an application for seeking
appointment of arbitrator under the Act, 1996 before the High Court,
contending that since dispute is between a NBFC and a bank, Section 11 of
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the SARFAESI Act would be applicable, and the dispute would be amenable
to arbitration. Per contra, the respondent therein argued that the dispute is a
straightforward debtor-creditor matter, and that although the petitioner therein
is a financial institution under Section 2(1)(m)(iv) of the SARFAESI Act, yet
because it is also a borrower in terms of Section 2(1)(f) of the SARFAESI Act,
he falls outside the scope of Section 11 of the SARFAESI Act, which excludes
borrowers and intends arbitration only for disputes between lenders. The Delhi
High Court placing reliance on Transcore (supra) held that Section 11 of the
SARFAESI Act is intended to provide a statutory arbitration mechanism only
in cases where disputes arise inter se between financial institutions,
securitisation or reconstruction companies or qualified institutional buyers,
and not between a lender and a borrower. A borrower that happens to be a
financial institution, would still for the purposes of the SARFAESI Act be
considered a borrower and thus would be disentitled to claim the benefit of
Section 11 of the SARFAESI Act. The relevant observations read as under: -
“7.10 [...] the SARFAESI Act does not deal with disputes
between a secured creditor and a borrower; but deals with the
rights of the secured creditors inter-se … claims covered by the
RDB Act are non-arbitrable, with a prohibition against waiver
of jurisdiction under those statutes by necessary implication.
Accordingly, disputes that would be covered by section 11 of
the SARFAESI Act are those which deal with the rights of
secured creditors inter-se, since the SARFAESI Act proceeds
on the basis that the liability of the borrower has been
crystallized and the borrower’s account has been classified as
a non-performing asset in the hands of the financial institution.

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7.11 Though petitioner No. 1 is a financial institution, for the
purposes of the present lis between the parties, petitioner No.
1 dons the hat of a borrower within the meaning of section
2(1)(f) of the SARFAESI Act … section 11 conspicuously omits
the word borrower from its text, which is a clear indication …
that a financial institution which happens to be a borrower vis-
a-vis the institution with which a dispute arises, cannot resort
to arbitration as a remedy.”

88. In appeal, this Court in M/s Bell Finvest India Ltd. v. A.U. Small Finance
Bank Ltd., [ Special Leave Petition (C) No. 24101 of 202 ] observed that the
interpretation of the Delhi High Court in Bell Finvest India (supra) that the
disputes between two financial institutions relating to “payment of any amount
due including interest”, would not include borrowed and loan amount may not
be correct. However, this Court in view of the peculiar facts and circumstances
of the case therein deemed it unnecessary to decide the aforesaid issue.

89. We have already clarified that a dispute relating to the “ non-payment of any
amount due, including interest ” may arise following a default in loan
repayment by a common borrower. Such default can indirectly lead to a
conflict between two banks that have extended loans to the same borrower.
This type of dispute falls within the ambit of Section 11 of the SARFAESI
Act, as it involves competing claims over the recovery of dues. Hence, Section
11 of the SARFAESI Act does include borrowed loan amount under the “non-
payment of any amount due including interest”. However, when a lender
assumes the role of a borrower, the legal relationship between the parties
Special Leave Petition (C) No. 16735 of 2022 Page 71 of 98

undergoes a shift. In such circumstances, the entity that typically extends
credit now becomes obligated to fulfil the borrowed amount as per the
contractual arrangements between the bank and the lender-turned-borrower.
This changes the traditional lender-borrower relationship, requiring the
lender-turned-borrower to adhere to the same obligations that may in the usual
circumstances apply to any other borrower.

90. ‘Borrower’ has been defined in Section 2(f) of the SARFAESI Act as follows:
(f) “borrower” means any person who, or a pooled investment
vehicle as defined in clause (da) of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) which, has been
granted financial assistance by any bank or financial
institution or who has given any guarantee or created any
mortgage or pledge as security for the financial assistance
granted by any bank or financial institution and includes a
person who, or a pooled investment vehicle which, becomes
borrower of a asset reconstruction company consequent upon
acquisition by it of any rights or interest of any bank or
financial institution in relation to such financial assistance or
who has raised funds through issue of debt securities;

91. It is clear from the above definition that the Act defines ‘borrower’ in broad
terms, meaning “any person” or pooled investment vehicle that has received
financial assistance from a bank or financial institution. The definition
explicitly includes those who have provided guarantees or created security
interests, as well as those whose debt has been acquired by the ARC. It also
extends to entities that have raised any funds through the issuance of debt
securities. lender-turned-borrower will also fall within the scope of a
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borrower. The use of the phrase “any person” in this provision makes it clear
that it does not leave out such entities who are banks but taking the loans in
the capacity of a borrower. When a lender avails a loan from another bank or
institution in its capacity of being a borrower, then it steps into the position of
a borrower and shall be governed by the same statutory framework as a
borrower is. The classification of a borrower shall be determined by the nature
of the transaction rather than the inherent status of such party.

92. We do not find any reasoning as to why a lender-turned-borrower should not
be kept under the same scrutiny as that of a traditional borrower, including the
potential classification of its account as NPA. A bank taking a loan from
another bank is taking the loan in the capacity of a borrower rather than acting
in its usual capacity as a lender, unless expressly modified and specified by
the terms of the facility agreement between parties governing such transaction
where they take into account the position of the lender-turned-borrower
leading to any consequential advantages or disadvantages to such lender-
turned-borrower. In such regard, it is important to see the purpose for which
the loan and the functioning capacity of both the parties in which the loan is
extended. The roles in financial transactions are thus defined by the terms of
the agreement and the capacity in which a parties act, rather than their inherent
nature as a lender. If every dispute between a lender and a lender-turned-
Special Leave Petition (C) No. 16735 of 2022 Page 73 of 98

borrower becomes arbitrable under Section 11 of the SARFAESI Act, then it
would render the entire mechanism of the SARFAESI Act otiose.

iii. There is no requirement of existence of a written arbitration
agreement under Section 11 of the SARFAESI Act.

93. As discussed in the foregoing paragraphs, Section 11 stipulates that any
dispute between a bank or financial institution or asset reconstruction
company or qualified buyer shall be resolved by way of arbitration.

94. The Act, 1996, more particularly Section 7 stipulates that a dispute shall be
resolved by way of arbitration, where there exists an arbitration agreement
between the parties. The said provision reads as under: -
7. Arbitration agreement.—
(1) In this Part, “arbitration agreement” means an agreement
by the parties to submit to arbitration all or certain disputes
which have arisen or which may arise between them in respect
of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate
agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other
means of telecommunication including
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communication through electronic means which
provide a record of the agreement; or

(c) an exchange of statements of claim and defence in
which the existence of the agreement is alleged by one
party and not denied by the other.

(5) The reference in a contract to a document containing an
arbitration clause constitutes an arbitration agreement if the
contract is in writing and the reference is such as to make that
arbitration clause part of the contract.

95. Similarly, Section 8 of the Act, 1996 which empowers a judicial authority to
refer the parties to arbitration also stipulates that such reference shall be made
if the judicial authority finds that prima-facie a valid arbitration agreement
exists. The said provision reads as under: -
“8. Power to refer parties to arbitration where there is an
arbitration agreement.—
(1) A judicial authority, before which an action is brought in a
matter which is the subject of an arbitration agreement shall,
if a party to the arbitration agreement or any person claiming
through or under him, so applies not later than the date of
submitting his first statement on the substance of the dispute,
then, notwithstanding any judgment, decree or order of the
Supreme Court or any Court, refer the parties to arbitration
unless it finds that prima facie no valid arbitration agreement
exists.

(2) The application referred to in sub-section (1) shall not be
entertained unless it is accompanied by the original arbitration
agreement or a duly certified copy thereof: Provided that
where the original arbitration agreement or a certified copy
thereof is not available with the party applying for reference to
arbitration under sub-section (1), and the said agreement or
certified copy is retained by the other party to that agreement,
then, the party so applying shall file such application along
with a copy of the arbitration agreement and a petition praying
the Court to call upon the other party to produce the original
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arbitration agreement or its duly certified copy before that
Court.

(3) Notwithstanding that an application has been made under
sub-section (1) and that the issue is pending before the judicial
authority, an arbitration may be commenced or continued and
an arbitral award made.”

96. However, Section 11 of the SARFAESI Act, apart from stipulating that any
dispute between a bank or financial institution or asset reconstruction
company or qualified buyer shall be resolved by way of arbitration further
uses the expression “ as if the parties to the dispute have consented in writing
for determination of such dispute by conciliation or arbitration ”, which is of
vital significance. The legislature in its wisdom has not only prescribed and
mandated the resolution of disputes covered under the said provision by way
of arbitration, but by consciously using the aforesaid expression, has gone one
step ahead by providing a deeming fiction whereby, an arbitration agreement
is presumed to exists between the parties falling under the said provision for
the resolution of any ‘dispute’ between them that is specified thereunder.
Thus, Section 11 of the SARFAESI Act, creates a legal fiction as regards the
existence of an arbitration agreement notwithstanding whether such
agreement exists or not in actuality.

97. This Court in Rajasthan State Industrial Development & Investment Corpn.
v. Diamond & Gem Development Corpn. Ltd. , reported in (2013) 5 SCC 470
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extensively dealt with the interpretation of the expression “as if” in any given
provision. The relevant observations read as under: -
“26. The expression “as if” is used to make one applicable in
respect of the other. The words “as if” create a legal fiction.
By it, when a person is “deemed to be” something, the only
meaning possible is that, while in reality he is not that
something, but for the purposes of the Act of legislature he is
required to be treated that something, and not otherwise. It is
a well-settled rule of interpretation that, in construing the
scope of a legal fiction, it would be proper and even necessary
to assume all those facts on the basis of which alone such
fiction can operate. The words “as if” in fact show the
distinction between two things and, such words must be used
only for a limited purpose. They further show that a legal
fiction must be limited to the purpose for which it was created.
[Vide Radhakissen Chamria v. Durga Prosad Chamria
[(1939-40) 67 IA 360 : (1940) 52 LW 647 : AIR 1940 PC 167]
, CIT v. S. Teja Singh [AIR 1959 SC 352] , Ram Kishore Sen v.
Union of India [AIR 1966 SC 644] , Sher Singh v. Union of
India [(1984) 1 SCC 107 : AIR 1984 SC 200] , State of
Maharashtra v. Laljit Rajshi Shah [(2000) 2 SCC 699 : 2000
SCC (Cri) 533 : AIR 2000 SC 937] , Paramjeet Singh Patheja
v. ICDS Ltd. [(2006) 13 SCC 322 : AIR 2007 SC 168] (SCC p.
341, para 28) and CIT v. Willamson Financial Services
[(2008) 2 SCC 202] .]

xxx xxx xxx

28. In Industrial Supplies (P) Ltd. v. Union of India [(1980) 4
SCC 341 : AIR 1980 SC 1858] this Court observed as follows
: (SCC p. 351, para 25)

“25. It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain
for what purpose the fiction is created. After
ascertaining the purpose, full effect must be given to
the statutory fiction and it should be carried to its
logical conclusion. The court has to assume all the
facts and consequences which are incidental or
inevitable corollaries to giving effect to the f iction.
The legal effect of the words ‘as if he were’ in the
Special Leave Petition (C) No. 16735 of 2022 Page 77 of 98

definition of ‘owner’ in Section 3(n) of the
Nationalisation Act read with Section 2(1) of the
Mines Act is that although the petitioners were not the
owners, they being the contractors for the working of
the mine in question, were to be treated as such
though, in fact, they were not so.”

(Emphasis supplied)

98. Hence, it is crystal clear, that the use of the words “as if” in conjunction with
the expression “ parties to the dispute have consented in writing for
determination of such dispute by conciliation or arbitration ” stipulates a legal
deeming fiction whereby it shall be ‘presumed’ that there existed an arbitration
agreement and a written arbitration agreement between the bank or financial
institution or asset reconstruction company or qualified buyer is not required.
By eliminating the necessity of an actual agreement between the concerned
parties, effectively binds them to arbitration or conciliation and the provisions
of the Act, 1996 apply accordingly.

99. At this stage we may address ourselves on one of the contentions vehemently
canvassed on behalf of the appellant bank herein. It was submitted that there
exists a conflict between the decisions of the DRAT in Oriental Bank of
Commerce (supra) and Federal Bank (supra), insofar as the requirement of
existence of an arbitration agreement is concerned for attracting the provision
of Section 11 of the SARFAESI Act.

Special Leave Petition (C) No. 16735 of 2022 Page 78 of 98

100. In Federal Bank (supra), the DRAT while interpreting Section 11 of the
SARFAESI Act, held that unless there is a written consent by the parties for
determination of a dispute as mentioned in the said provision by way of
arbitration, the said provision will not apply. In other words, Section 11 of the
SARFAESI Act would only apply when there is an arbitration agreement
subsisting between the parties to resolve a dispute as stipulated in the said
provision. The relevant observations read as under: -

101. On the contrary, the DRAT in Oriental Bank of Commerce (supra) while
deciding a similar question, simpliciter held that where there is a dispute inter-
se two banks, or financial institutions or securitisation/reconstruction
companies or qualified institutional buyers, the same shall be resolved by way
of arbitration in terms of Section 11 of the SARFAESI Act. The relevant
observations read as under: -
"6. Since there is a dispute between the Banks inter se,
therefore, I am of the considered view that the learned DRT did
not have the jurisdiction to try the Securitisation Application
under the SARFAESI Act

Recently, the attention of the Court was invited
towards Section 11 of the SRFAESI-Act which runs
as follows: ‘11. Resolution of disputes.—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
Special Leave Petition (C) No. 16735 of 2022 Page 79 of 98

parties to the dispute have consented in writing for
determination of such dispute by conciliation or
arbitration and the provisions of that Act shall apply
accordingly.’”

7. Consequently, it is clear that the previous view taken in this
regard that DRT has the jurisdiction to try such disputes
appears to be incorrect. The order passed by the learned DRT
under the SARFAESI Act in this case is without jurisdiction. I,
therefore, set aside the order to that extent. It is made clear
that the Banks will approach the Hon'ble High Court and make
a request to the Hon'ble High Court to appoint an arbitrator
for the adjudication of this case.”


102. It was submitted by the appellant bank that, the aforesaid decision of Oriental
Bank of Commerce (supra) neither referred to the earlier decision of Federal
Bank (supra) nor adverted to the issue of whether there must exists a written
arbitration agreement between the parties in order to attract Section 11 of the
SARFAESI Act. In such circumstances, it was contended that, the impugned
order passed by the High Court directing the parties to undergo arbitration in
terms of Section 11 by relying upon Oriental Bank of Commerce (supra) was
erroneous as there was no arbitration agreement subsisting between the
appellant and respondent banks, and that the decision of Federal Bank (supra)
still holds field insofar as the requirement of existence of an arbitration
agreement for the purpose of Section 11 of the SARFAESI Act is concerned
and that the ratio of Oriental Bank of Commerce (supra) is subject to the ratio
of Federal Bank (supra).

Special Leave Petition (C) No. 16735 of 2022 Page 80 of 98

103. In Standard Chartered Bank v. LIC Housing Finance Ltd. , reported in 2011
SCC OnLine DRAT 112 , it was reiterated that Section 11 of the SARFAESI
Act, postulates the requirement of both parties having consented in writing for
determination of such dispute by conciliation or arbitration. The relevant
observations read as under: -
“4. [...] Section 11 of the Act. 2002 clearly reveals that both
the parties must have consented in writing for determination of
such dispute by conciliation or arbitration [...]”


104. On the other hand, the High Court of Andhra Pradesh in D. Dhanamjaya Rao
(supra) held that there is no need for any agreement in writing between the
parties for determination of a dispute contemplated in Section 11 of the
SARFAESI Act, and that by virtue of the said provision, it is deemed that the
parties to the dispute have consented in writing for determination of such
dispute by conciliation or arbitration in terms of the said provision. The
relevant observations read as under: -
“12. From a reading of the above provision, it becomes clear
that if any dispute amongst the bank or financial institution or
a securitization company or reconstruction company or
qualified institutional buyer, as regards Securitization or
reconstruction or non-payment of any amount due including
interest arises, then such dispute shall be settled by
conciliation or arbitration as provided under the Arbitration
Act, as if the parties to the dispute had consented in writing for
determination of such dispute by conciliation or arbitration
and the provisions of that Act shall apply accordingly. In that,
the invocation of the provisions of Section 11 of the
Securitization Act, for arbitration is limited only to those
parties, namely the “bank” or “financial institution” or
“securitization company” or “reconstruction company” or
Special Leave Petition (C) No. 16735 of 2022 Page 81 of 98

“qualified institutional buyer”, and that too if any dispute
arises with regard to securitization or reconstruction or non-
payment of any amount due including interest amongst them,
and there need not be any agreement in writing, for it is deemed
that the parties to the dispute have consented in writing for
determination of such dispute by conciliation or arbitration as
per the provisions of the Arbitration Act.”

(Emphasis supplied)

105. Thus, it appears from the aforesaid that there are divergent views expressed
by various decisions as regards the necessity of an arbitration agreement under
the Section 11 of the SARFAESI Act.

106. We are of the considered view that there is a “deemed agreement” between
the parties specified in Section 11 of the SARFAESI Act, insofar as the dispute
relates to the matters so mentioned and is between the parties so specified
thereunder. Thus, there is no need for an explicit written agreement between
the parties. Section 11 of the SARFAESI Act creates a legal fiction by using
the word "as if," which presumes the existence of an arbitration agreement
among the designated parties, namely a bank or financial institution or asset
reconstruction company or qualified buyer. This provision negates the
requirement for a formal written arbitration agreement, as it assumes consent
for arbitration or conciliation concerning disputes related to securitization,
reconstruction, or non-payment of amount due, including interest. The term
"as if" must be given a meaningful effect, whereby the parties are to be treated
Special Leave Petition (C) No. 16735 of 2022 Page 82 of 98

as if they had willingly provided written consent. Consequently, the legal
presumption under Section 11 of the SARFAESI Act exists independently of
a formal arbitration agreement.

107. The view expressed in Oriental Bank of Commerce (supra) and D.

Dhanamjaya Rao (supra) insofar as it holds that there is no requirement of a
formal written arbitration agreement for the purpose of Section 11 of the
SARFAESI Act, lays down the correct position of law. The view taken in
Federal Bank (supra) and Standard Chartered Bank (supra) does not lay
down the correct position of law insofar as the aforesaid proposition is
concerned.

iv. Section 11 of the SARFAESI Act is mandatory in nature.

108. The next issue which falls for our consideration is, what is the meaning and
significance of the term “shall” used in Section 11 of the SARFAESI Act?
Whether, the legal import of the term “shall” used in Section 11 denotes that
the provision is mandatory in nature thereby compelling recourse to arbitration
in all disputes of the nature specified in the said provision if it is between the
parties enumerated therein, or could the said provision be said to be
“directory” particularly in light of the fact that arbitration is generally
understood to be an alternative dispute resolution mechanism.
Special Leave Petition (C) No. 16735 of 2022 Page 83 of 98

109. This Court in Delhi Airtech Services (P) Ltd. v. State of U.P. reported in
(2011) 9 SCC 354 held that the general rule of interpretation requires that the
word “shall” be read as “must”. It observed that the term “shall” only be read
as “may” where doing so would achieve the ends of legislative intent behind
the substantive provision and the scheme of the entire statute in question. The
relevant observations read as under: -
“122. The distinction between mandatory and directory
provisions is a well-accepted norm of interpretation. The
general rule of interpretation would require the word to be
given its own meaning and the word “shall” would be read as
“must” unless it was essential to read it as “may” to achieve
the ends of legislative intent and understand the language of
the provisions. It is difficult to lay down any universal rule, but
wherever the word “shall” is used in a substantive statute, it
normally would indicate mandatory intent of the legislature.

123.Crawford on Statutory Construction has specifically
stated that language of the provision is not the sole criterion;
but the courts should consider its nature, design and the
consequences which could flow from construing it one way or
the other.

124. Thus, the word “shall” would normally be mandatory
while the word “may” would be directory. Consequences of
non-compliance would also be a relevant consideration. The
word “shall” raises a presumption that the particular
provision is imperative but this prima facie inference may be
rebutted by other considerations such as object and scope of
the enactment and the consequences flowing from such
construction.”
(Emphasis supplied)

110. Similarly in State of Haryana v. Raghubir Dayal , reported in (1995) 1 SCC
133 , this Court held that the use of the word ‘shall’ ordinarily be construed as
mandatory except where such an interpretation would be anathema to either
Special Leave Petition (C) No. 16735 of 2022 Page 84 of 98

the scope of the enactment, or where the consequences that would flow from
such construction would not demand such interpretation. The relevant
observations read as under: -
“5. The use of the word ‘shall’ is ordinarily mandatory but it
is sometimes not so interpreted if the scope of the enactment,
on consequences to flow from such construction would not so
demand. Normally, the word ‘shall’ prima facie ought to be
considered mandatory but it is the function of the court to
ascertain the real intention of the legislature by a careful
examination of the whole scope of the statute, the purpose it
seeks to serve and the consequences that would flow from the
construction to be placed thereon. The word ‘shall’, therefore,
ought to be construed not according to the language with
which it is clothed but in the context in which it is used and the
purpose it seeks to serve. The meaning has to be ascribed to
the word ‘shall’ as mandatory or as directory, accordingly.
Equally, it is settled law that when a statute is passed for the
purpose of enabling the doing of something and prescribes the
formalities which are to be attended for the purpose, those
prescribed formalities which are essential to the validity of
such thing, would be mandatory. However, if by holding them
to be mandatory, serious general inconvenience is caused to
innocent persons or general public, without very much
furthering the object of the Act, the same would be construed
as directory.”
(Emphasis supplied)

111. In Mardia Chemicals (supra) this Court underscored that although the effect
of some of the provisions may be a bit harsh, yet the same had been
incorporated with a view to achieve speedier recovery of the dues declared as
NPAs. It further observed that the purpose of DRTs were two folds; first, to
facilitate the aforesaid object of speedier recovery and secondly, to ensure that
the borrowers also get a fair opportunity to get their matters adjudicated before
Special Leave Petition (C) No. 16735 of 2022 Page 85 of 98

the DRT within the time-bound framework of the SARFAESI Act. The
relevant observations read as under: -
“81. In view of the discussion held in the judgment and the
findings and directions contained in the preceding paragraphs,
we hold that the borrowers would get a reasonably fair deal
and opportunity to get the matter adjudicated upon before the
Debts Recovery Tribunal. The effect of some of the provisions
may be a bit harsh for some of the borrowers but on that
ground the impugned provisions of the Act cannot be said to be
unconstitutional in view of the fact that the object of the Act is
to achieve speedier recovery of the dues declared as NPAs and
better availability of capital liquidity and resources to help in
growth of the economy of the country and welfare of the people
in general which would subserve the public interest.”

112. Similarly, in Satyawati Tondon (supra) this Court observed that the primary
object of that Act was to facilitate creation of special machinery for speedy
recovery of the dues of banks and financial institutions. It further observed
that the entire purpose of establishment of DRTs and DRATs was to ensure
that defaulting borrowers are not able to invoke the jurisdiction of the civil
courts for frustrating the proceedings initiated by the banks and other financial
institutions, by providing a one-stop forum to make summary adjudication and
facilitate recovery of NPAs of the borrowers. The relevant observations read
as under: -
“5. An analysis of the provisions of the DRT Act shows that
primary object of that Act was to facilitate creation of special
machinery for speedy recovery of the dues of banks and
financial institutions. This is the reason why the DRT Act not
only provides for establishment of the Tribunals and the
Appellate Tribunals with the jurisdiction, powers and authority
to make summary adjudication of applications made by banks
Special Leave Petition (C) No. 16735 of 2022 Page 86 of 98

or f inancial institutions and specifies the modes of recovery of
the amount determined by the Tribunal or the Appellate
Tribunal but also bars the jurisdiction of all courts except the
Supreme Court and the High Courts in relation to the matters
specified in Section 17. The Tribunals and the Appellate
Tribunals have also been freed from the shackles of procedure
contained in the Code of Civil Procedure.

6. To put it differently, the DRT Act has not only brought into
existence special procedural mechanism for speedy recovery
of the dues of banks and financial institutions, but also made
provision for ensuring that defaulting borrowers are not able
to invoke the jurisdiction of the civil courts for frustrating the
proceedings initiated by the banks and other financial
institutions.”
(Emphasis supplied)

113. From the above, it is clearly that the DRTs were established for the recovery
of debts due to banks and financial institutions from the defaulting borrowers.
Neither the statute nor any interpretation thereof suggests that DRTs were
established even for the purpose of any dispute that arises amongst the banks,
financial institutions, ARCs or qualified buyers etc., relating to securitization,
reconstruction or non-payment of any amount due including interest. For the
same, a remedy has been provided under Section 11 of the SARFAESI Act,
when such dispute would arise inter se the mentioned parties relating to
securitization, reconstruction or non-payment of any amount due including
interest. For the remedy of recovering the dues from the borrowers, the banks
and the financial institutions are provided for a remedy under the SARFAESI
Act. It was in this context, that Mardia Chemicals (supra) held that the
borrower can challenge the action taken under Section 13(4) of the
Special Leave Petition (C) No. 16735 of 2022 Page 87 of 98

SARFAESI Act by filing an application under Section 17 thereof. Hence
forums like DRT and DRAT are available for the resolution of disputes
between the lender and the borrower with the remedies provided under
Sections 13, 17 and 18 of the SARFAESI Act, respectively. The conscious
omission of the word ‘borrower’ from the ambit of Section 11 of the Act is
another indication of its mandatory nature. The remedy under Section 11 is
only available to the banks, financial institutions, ARCs and the qualified
buyers, and not to a borrower.

114. The decision of Satyawati Tandon (supra) is particularly significant in this
regard. While interpreting the provision of the SARFAESI Act, this Court
observed that the primary object of the Act was to bring about “ special
machinery for speedy recovery of the dues of banks and financial institutions .”
If disputes that fall specifically under the ambit of Section 11 of the
SARFAESI Act are permitted to get their disputes through DRT proceedings,
it would go against the express language of the statute thereby diluting the
special procedural mechanisms designed for the borrower-lender disputes
under the scheme of the SARFAESI Act. Such an approach would create
unnecessary litigation, frustrate the avowed object of the SARFAESI Act and
undermine the efficiency of the prescribed process of resolution by arbitration
or conciliation. Disputes amongst the specified financial entities related to
securitization, reconstruction or non-payment of any amount due including
Special Leave Petition (C) No. 16735 of 2022 Page 88 of 98

interest must be resolved by the way of Section 11 of the SARFAESI Act in
order to maintain the financial stability in the economy in furtherance of the
larger public interest.

115. The aforesaid may be looked at from one another angle, through the doctrine
of election. This Court in Vidya Drolia v. Durga Trading Corpn., reported in
(2021) 2 SCC 1 , explained the interplay between the doctrine of election and
arbitration as a dispute resolution mechanism. It held that the choice to select
arbitration as a dispute resolution mechanism by virtue of doctrine of election
exists only if the law accepts existence of arbitration as an alternative remedy
and freedom to choose such alternative mechanism. Where there is any when
there is repugnancy and inconsistency, the right of choice and election to
arbitrate would be denied. The relevant observations read as under: -
“54. Implicit non-arbitrability is established when by
mandatory law the parties are quintessentially barred from
contracting out and waiving the adjudication by the designated
court or the specified public forum. There is no choice. The
person who insists on the remedy must seek his remedy before
the forum stated in the statute and before no other forum. In
Transcore v. Union of India [Transcore v. Union of India,
(2008) 1 SCC 125 : (2008) 1 SCC (Civ) 116] , this Court had
examined the doctrine of election in the context whether an
order under proviso to Section 19(1) of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 (“the DRT
Act”) is a condition precedent to taking recourse to the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (“the NPA Act”).
For analysing the scope and remedies under the two Acts, it
was held that the NPA Act is an additional remedy which is not
inconsistent with the DRT Act, and reference was made to the
Special Leave Petition (C) No. 16735 of 2022 Page 89 of 98

doctrine of election in the following terms : (Transcore case
[Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC
(Civ) 116] , SCC p. 162, para 64)

55. Doctrine of election to select arbitration as a dispute
resolution mechanism by mutual agreement is available only if
the law accepts existence of arbitration as an alternative
remedy and freedom to choose is available. There should not
be any inconsistency or repugnancy between the provisions of
the mandatory law and arbitration as an alternative.
Conversely, and in a given case when there is repugnancy and
inconsistency, the right of choice and election to arbitrate is
denied. This requires examining the “text of the statute, the
legislative history, and “inherent conflict” between arbitration
and the statute's underlying purpose” [ Jennifer L. Peresie,
“Reducing the Presumption of Arbitrability” 22 Yale Law &
Policy Review, Vol. 22, Issue 2 (Spring 2004), pp. 453-462.]
with reference to the nature and type of special rights
conferred and power and authority given to the courts or
public forum to effectuate and enforce these rights and the
orders passed. When arbitration cannot enforce and apply
such rights or the award cannot be implemented and enforced
in the manner as provided and mandated by law, the right of
election to choose arbitration in preference to the courts or
public forum is either completely denied or could be curtailed.
In essence, it is necessary to examine if the statute creates a
special right or liability and provides for the determination of
each right or liability by the specified court or the public forum
so constituted, and whether the remedies beyond the ordinary
domain of the civil courts are prescribed. When the answer is
affirmative, arbitration in the absence of special reason is
contraindicated. The dispute is non-arbitrable.

56. In M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp
Ltd. [M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp
Ltd., (2017) 16 SCC 741 : (2018) 2 SCC (Civ) 805] , and
following this judgment in Indiabulls Housing Finance Ltd. v.
Deccan Chronicle Holdings Ltd. [Indiabulls Housing Finance
Ltd. v. Deccan Chronicle Holdings Ltd., (2018) 14 SCC 783 :
(2018) 4 SCC (Civ) 703] , it has been held that even prior
arbitration proceedings are not a bar to proceedings under the
NPA Act. The NPA Act sets out an expeditious, procedural
methodology enabling the financial institutions to take
Special Leave Petition (C) No. 16735 of 2022 Page 90 of 98

possession and sell secured properties for non-payment of the
dues. Such powers, it is obvious, cannot be exercised through
the arbitral proceedings.

116. Vidya Drolia (supra) further placing reliance on Transcore (supra) observed
that insofar claims of banks and financial institutions as regards debt due is
concerned that fall under the RDBFI Act, the same would non-arbitrable, as
there is a prohibition against waiver of jurisdiction of the DRT. The relevant
observations read as under: -
“57. In Transcore [Transcore v. Union of India, (2008) 1 SCC
125 : (2008) 1 SCC (Civ) 116] , on the powers of the Debt
Recovery Tribunal (“DRT”) under the DRT Act, it was
observed : (SCC p. 141, para 18)

“18. On analysing the above provisions of the DRT
Act, we find that the said Act is a complete code by
itself as far as recovery of debt is concerned. It
provides for various modes of recovery. It
incorporates even the provisions of the Second and
Third Schedules to the Income Tax Act, 1961.
Therefore, the debt due under the recovery certificate
can be recovered in various ways. The remedies
mentioned therein are complementary to each other.
The DRT Act provides for adjudication. It provides
for adjudication of disputes as far as the debt due is
concerned. It covers secured as well as unsecured
debts. However, it does not rule out the applicability
of the provisions of the TP Act, in particular, Sections
69 and 69-A of that Act. Further, in cases where the
debt is secured by a pledge of shares or immovable
properties, with the passage of time and delay in the
DRT proceedings, the value of the pledged assets or
mortgaged properties invariably falls. On account of
inflation, the value of the assets in the hands of the
bank/FI invariably depletes which, in turn, leads to
asset-liability mismatch. These contingencies are not
Special Leave Petition (C) No. 16735 of 2022 Page 91 of 98

taken care of by the DRT Act and, therefore,
Parliament had to enact the NPA Act, 2002.”

58. Consistent with the above, observations in Transcore
[Transcore v. Union of India, (2008) 1 SCC 125 : (2008) 1 SCC
(Civ) 116] on the power of the DRT conferred by the DRT Act
and the principle enunciated in the present judgment, we must
overrule the judgment of the Full Bench of the Delhi High
Court in HDFC Bank Ltd. v. Satpal Singh Bakshi [HDFC Bank
Ltd. v. Satpal Singh Bakshi, 2012 SCC OnLine Del 4815 :
(2013) 134 DRJ 566] , which holds that matters covered under
the DRT Act are arbitrable. It is necessary to overrule this
decision and clarify the legal position as the decision in HDFC
Bank Ltd. [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC
OnLine Del 4815 : (2013) 134 DRJ 566] has been referred to
in M.D. Frozen Foods Exports (P) Ltd. [M.D. Frozen Foods
Exports (P) Ltd. v. Hero Fincorp Ltd., (2017) 16 SCC 741 :
(2018) 2 SCC (Civ) 805] , but not examined in light of the legal
principles relating to non-arbitrability. The decision in HDFC
Bank Ltd. [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC
OnLine Del 4815 : (2013) 134 DRJ 566] holds that only
actions in rem are non-arbitrable, which as elucidated above
is the correct legal position. However, non-arbitrability may
arise in case of the implicit prohibition in the statute,
conferring and creating special rights to be adjudicated by the
courts/public fora, which right including enforcement of
order/provisions cannot be enforced and applied in case of
arbitration. To hold that the claims of banks and financial
institutions covered under the DRT Act are arbitrable would
deprive and deny these institutions of the specific rights
including the modes of recovery specified in the DRT Act.
Therefore, the claims covered by the DRT Act are non-
arbitrable as there is a prohibition against waiver of
jurisdiction of the DRT by necessary implication. The
legislation has overwritten the contractual right to
arbitration.”
(Emphasis supplied)

117. The above exposition of law make it clear that election applies in the case
where the statute provides a specific remedy that overrides general remedies.
Special Leave Petition (C) No. 16735 of 2022 Page 92 of 98

The ratio of Vidya Drolia (supra) insofar as it hold that a choice to elect
arbitration as a dispute resolution mechanism would exists only if the law
accepts existence of arbitration as an alternative remedy with the freedom to
choose it, as naturally corollary implies that, where the law accepts existence
of arbitration as the only mechanism of resolution, there arbitration will not
be construed as an alternative remedy but as the only remedy available.
118. The aforesaid is particularly relevant in the interpretation of Section 11 of the
SARFAESI Act as the said provision by outlining a special provision for
banks, financial institutions, ARCs etc., to invoke the remedy in case of
dispute related to securitization, reconstruction or non-payment of any dues
indicates the intention of the legislature to create a special mechanism for
resolving such disputes. We are of the considered view that the usage of
“shall” in the provision mandates the parties to adhere to the mentioned
mechanism and restricts them from approaching any other forums. The parties
cannot bypass or subvert it by seeking recourse elsewhere. If arbitration or
conciliation is the prescribed route, then that prescribed route shall be
followed.

119. At this juncture, we may address ourselves on another submission vehemently
canvassed on behalf of the respondent bank, as regards the applicability of the
AMRCD Memorandum. Ms. Ekta Choudhary, the learned counsel for the
respondent bank submitted that since the dispute in the present matter is
Special Leave Petition (C) No. 16735 of 2022 Page 93 of 98

between two public sector banks, it ought to be resolved under the framework
of the AMRCD Memorandum, which provides a structured mechanism for
resolution of disputes inter-se CPSEs. Although, this contention was not once
raised by the respondent bank either before the DRT or the High Court, yet
we deem it necessary to answer the same.

120. We are of the considered opinion that the contention put forth by the learned
counsel on behalf of the respondent bank is completely misconceived,
meritless and deserves to be rejected for two good reasons.

121. First, a bare perusal of the aforesaid guidelines, more particularly, clause 3.3
would show that the said guidelines only apply in respect of dispute or
difference relating to the interpretation and application of provisions of
commercial contracts between two CPSEs etc. (emphasis). The said clause
reads as under: -
“3.3 Any dispute or difference relating to the interpretation
and application of the provisions of commercial contract(s)
between Central Public Sector Enterprises (CPSEs)/ Port
Trusts inter se and also between CPSEs and Government
Departments/Organizations (excluding disputes relating to
Railways, Income Tax, Customs & Excise Departments), shall
be taken up by either party for its resolution through AMRCD
only.”
(Emphasis suppled)

122. While there is no doubt that the present case involves two banks, and that both
banks may be said to be CPSEs, however the nature of the dispute between
Special Leave Petition (C) No. 16735 of 2022 Page 94 of 98

them by no stretch of imagination could be said to one pertaining to a
commercial contract entered into between them. Rather, the dispute between
them arises out of two separate agreements, that were executed by them with
the borrower company herein, independent of each other. We are at a loss to
understand, how the respondent bank could have ignored the aforesaid clause
3.3 of the AMRCD Memorandum and asserted that the dispute between it and
the appellant bank ought to be resolved under the framework of the said
memorandum.
123. Secondly, the dispute resolution mechanism envisaged under Section 11 of the
SARFAESI Act has been statutorily provided and mandated. The dispute also
pertains one between two banks in connection with the right of one of the
banks for enforcement of a common security interest given to them by the
borrower. Where such enforcement of security interest, by either bank is
sought to be undertaken in terms of the SARFAESI Act, the statutory
arbitration provided under Section 11 of the SARFAESI Act would
immediately be attracted, as soon as there is a dispute in respect to the same
with another bank, financial institution, ARC etc, as enumerated in the said
provision. Section 11 of the SARFAESI Act, statutorily empowers such
parties mentioned therein, to seek resolution of their dispute by way of
arbitration, and their right cannot be curtailed or confined to any executive
guideline or memorandum, particularly when such memorandum makes no
mention of the SARFAESI Act or disputes generally covered thereunder. In
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such circumstances, the aforesaid AMRCD Memorandum, can by no extent
supplant the statutorily prescribed provision of Section 11 of the SARFAESI
Act, which empowers the parties enumerated thereunder to opt for ad hoc
arbitration for resolution of disputes specified therein.


G. FINAL CONCLUSION
124. We summarize our final conclusion as under: -
(I) Section 11 of the SARFAESI Act deals with resolution of disputes
relating to securitisation, reconstruction or non-payment of any amount
due between the bank or financial institution or asset reconstruction
company or qualified buyer.
(II) In order to attract the provision of Section 11 of the SARFAESI Act,
twin conditions have to be fulfilled being; first, the dispute must be
between any bank or financial institution or asset reconstruction
company or qualified buyer and secondly, the dispute must relate to
securitisation or reconstruction or non-payment of any amount due
including interest. Where the aforesaid two conditions are found to be
prima-facie satisfied, there the DRT will have no jurisdiction and the
proper recourse would only be through Section 11 of the SARFAESI
Act read with the Act, 1996.
(III) The expression “ non-payment of any amount due, including interest ”
used in Section 11 of the SARFAESI Act is of wide import and would
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include a various range of scenarios of ‘disputes’ connected to unpaid
amounts including those arising due to third-party defaults, such as
indirect defaults of the borrowers.
(IV) Any dispute between two banks, financial institutions, asset
reconstruction companies or qualified buyers etc., where the jural
relation between the two is of a lender and borrower, then Section 11 of
the SARFAESI Act will have no application whatsoever. The use of the
phrase “any person” in the definition of ‘borrower’ in Section 2(f) of
the SARFAESI Act, makes it abundantly clear that even a bank,
financial institution or asset reconstruction company or qualified buyer
can be considered a borrower, if they receive financial assistance from
a bank or financial institution etc by providing or creating a security
interest. Thus, a lender-turned-borrower would also fall within the
scope of a “borrower” under the SARFAESI Act and shall be governed
by the same statutory framework as any ordinary borrower.
(V) Section 11 of the SARFAESI Act, provides for a statutory arbitration
for any dispute mentioned therein between any of the parties
enumerated thereunder. There is no need for an explicit written
agreement to arbitrate between such parties in order to attract Section
11 of the SARFAESI Act. The said provision creates a legal fiction as
regards the existence of an arbitration agreement notwithstanding
whether such agreement exists or not in actuality.
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(VI) Section 11 of the SARFAESI Act is mandatory in nature. The use of the
word “shall” therein, the mandate of the said provision cannot be
bypassed or subverted by the parties by seeking recourse elsewhere.


125. Thus, for all the foregoing reasons, we have reached the conclusion that there
is no infirmity in the impugned order passed by the High Court, directing the
appellant and the respondent banks to resolve their dispute by way of
arbitration in terms of Section 11 of the SARFAESI Act.

126. In the result, the present appeal fails and is hereby dismissed.
127. The parties shall bear their own costs.

128. Pending application(s), if any, shall also stand disposed of.
129. The Registry is directed to circulate one copy each of this judgment to all the
High Courts and all the benches of the DRTs and DRATs respectively.

.......................................................... J.
(J.B. Pardiwala)



.......................................................... J.
(Pankaj Mithal)

rd
23 May, 2025.
New Delhi.
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