Section 11 of SARFAESI Is Not an Option—It Is a Compulsion: Supreme Court Declares Arbitration Between Banks as Mandatory

“Legal Fiction of Consent Under Section 11 Eliminates Need for Written Arbitration Agreement,” in a precedent-setting verdict, the Supreme Court of India in Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors., held that Section 11 of the SARFAESI Act mandates arbitration for inter-bank disputes over secured assets, including those involving competing security interests. The bench comprising Justices J.B. Pardiwala and Pankaj Mithal observed that:

“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.”

The judgment marks a definitive interpretation of Section 11 and resolves judicial uncertainty regarding its scope, application, and whether written consent is required for arbitration in such cases.

The legal dispute stemmed from overlapping claims between Bank of India and Punjab National Bank on a common stock of goods offered as security by M/s Sri Nangli Rice Mills Pvt. Ltd., a defaulting borrower. While Bank of India claimed a charge by way of hypothecation, PNB asserted a superior right through pledge.

The matter initially reached the High Court, which directed the parties to resolve the issue via arbitration under Section 11 of the SARFAESI Act. Challenging this, Bank of India argued that in the absence of an explicit arbitration agreement and given that pledge is excluded under Section 31(b), the dispute should lie within the jurisdiction of the DRT.

The Supreme Court framed four core questions:
What is the scope of Section 11 of SARFAESI? Does it apply to all disputes between financial institutions, even in the absence of a written arbitration agreement? Is it mandatory or directory? And does it apply where one institution acts in the capacity of a borrower?

Answering these, the Court firmly held that:

“The twin conditions required for attracting Section 11 are—first, that the dispute must be between entities mentioned therein such as banks or ARCs, and second, that the dispute must relate to securitisation, reconstruction or non-payment of any amount due including interest.”

In one of its most consequential pronouncements, the Supreme Court ruled that the requirement of a written arbitration agreement under the Arbitration Act is not necessary for invoking Section 11 of SARFAESI, due to the legal fiction embedded in the section:

“By using the phrase ‘as if the parties have consented in writing,’ the legislature has introduced a legal fiction—there is no need for an explicit written agreement.”

The Court rejected earlier DRAT rulings (notably in Federal Bank) that insisted on written consent, and endorsed the view taken in Oriental Bank of Commerce that deemed consent under Section 11 is sufficient.

“There is a ‘deemed agreement’ between the parties specified in Section 11... This provision negates the requirement for a formal written arbitration agreement.”

DRT Has No Jurisdiction in Inter-Bank Disputes over Priority

The Court held that inter-se disputes between financial institutions over the priority of charges, even if one claim arises from a pledge (ordinarily excluded under SARFAESI), must be resolved through arbitration, not litigation before the DRT.

“The real dispute is not whether the security was created by pledge or hypothecation, but who has the superior claim. That question falls squarely within the purview of Section 11.”

When a Lender Becomes a Borrower—Section 11 No Longer Applies

A major clarification came in the form of the Court’s ruling that if a bank or financial institution acts as a borrower, then Section 11 does not apply, even if both entities are financial institutions:

“A lender-turned-borrower shall be governed by the same statutory framework as any ordinary borrower... The classification depends on the transaction, not the inherent status of the party.”

Section 11 Is Not a Directory Provision—It Is the Only Permissible Remedy

In interpreting the use of “shall” in Section 11, the Court declared it mandatory, not merely directory. The judgment warns against forum shopping or bypassing the arbitral process:

“Disputes amongst the specified financial entities must be resolved by way of Section 11... Parties cannot bypass it by seeking recourse elsewhere.”

The Court applied the doctrine of election and clarified that arbitration is not an alternative under Section 11—it is the only prescribed remedy for such disputes.

“If arbitration or conciliation is the prescribed route, then that prescribed route shall be followed.”

AMRCD Guidelines Cannot Override Statutory Mandate of Section 11

The Court dismissed arguments that disputes between CPSEs (both banks were public sector entities) could be resolved under the AMRCD guidelines for inter-governmental disputes.

“The AMRCD memorandum cannot override a statutory scheme. Section 11 of SARFAESI prevails... The dispute arises not out of a commercial contract between the parties, but out of competing rights in a common security interest.”

Upholding the High Court’s decision, the Supreme Court dismissed the appeal and concluded:

“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.”

The Registry was directed to circulate the judgment to all High Courts and DRT/DRAT benches across the country for uniform application.

This ruling by the Supreme Court is likely to streamline the resolution of disputes between banks and financial institutions and reinforce the object of the SARFAESI Act—speedy, efficient recovery of dues and minimizing litigation.

By asserting the mandatory nature of arbitration under Section 11 and clarifying that a written agreement is not required, the Court has eliminated a long-standing ambiguity in the law and strengthened the autonomy of arbitral proceedings within the SARFAESI framework.

Date of Decision: May 23, 2025