2025 (5) TMI 1744 - SC - Indian Laws

Scope and ambit of Section 11 of the SARFAESI Act - securitisation or reconstruction or non-payment of any amount due including interest - expression dispute - Meaning of the expression non-payment of any amount due including interest - Aailed credit facility from the appellant bank herein by hypothecating stocks of paddy and other assets - Non-Performing Assets (NPA) at banks and other financial institutions in India - HELD THAT - 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 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. 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. First a bare perusal of the Administrative Mechanism for Resolution of CPSEs Disputes (AMRCD) Memorandum 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. 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 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. 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 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. 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 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. (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. 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. In the result the present appeal fails and is hereby dismissed. Pending application(s) if any shall also stand disposed of.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(i) What is the scope and meaning of Section 11 of the SARFAESI Act, specifically the phrase "any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest"?

(ii) What is the significance of the expression "arises amongst any of the parties, namely, the bank or financial institution or asset reconstruction company or qualified buyer" in Section 11, and what is the legislative object behind mandating arbitration for disputes between such parties?

(iii) Whether the existence of a written arbitration agreement between the parties is a prerequisite for invoking Section 11 arbitration under the SARFAESI Act, and if there is any conflict in precedents on this point.

(iv) Whether Section 11 of the SARFAESI Act is mandatory or directory in nature.

(v) Whether Section 11 applies to disputes between two banks, including when one bank is a borrower vis-`a-vis the other.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Scope and Meaning of Section 11 of the SARFAESI Act

Legal Framework and Precedents: Section 11 mandates that disputes relating to securitisation, reconstruction, or non-payment of any amount due including interest, arising among banks, financial institutions, asset reconstruction companies (ARCs), or qualified buyers, shall be resolved by arbitration or conciliation under the Arbitration and Conciliation Act, 1996. The provision creates a statutory arbitration mechanism for such disputes.

Various decisions, including those of DRTs, DRATs, and High Courts, have held that disputes inter se secured creditors over priority of claims or charges on secured assets fall within Section 11. For example, the DRAT in Oriental Bank of Commerce held that disputes between banks over competing charges must be resolved by arbitration under Section 11. Similarly, the Delhi High Court in Anand Rathi Global Finance Ltd. held that disputes between NBFCs regarding priority of claims fall within Section 11 arbitration.

Court's Interpretation and Reasoning: The Court emphasized that Section 11 applies only if two conditions are met: (1) the dispute is between specified parties (banks, financial institutions, ARCs, qualified buyers); and (2) the dispute relates to securitisation, reconstruction, or non-payment of any amount due including interest. The term "dispute" is not any disagreement but one involving an assertion and denial of rights, as clarified by precedents interpreting "dispute" in arbitration law.

The Court clarified that disputes between secured creditors over priority of charges arising from a borrower's default qualify as disputes relating to "non-payment of any amount due including interest." The dispute between banks over priority of charges on the same security is inherently linked to the borrower's non-payment and thus falls within Section 11.

Key Evidence and Findings: The factual matrix involved two banks extending loans to the same borrower secured by the same stocks of paddy and rice, with competing claims-one by hypothecation and the other by pledge. The dispute arose after the borrower defaulted, triggering a conflict over priority of charges.

Application of Law to Facts: The Court held that the dispute between the two banks regarding priority over the same security is a dispute relating to "non-payment of any amount due including interest" within the meaning of Section 11. The manner of creation of charge (pledge or hypothecation) is irrelevant to the applicability of Section 11, which governs inter-se disputes between secured creditors.

Treatment of Competing Arguments: The appellant bank argued that since pledge is excluded from the SARFAESI Act under Section 31(b), Section 11 does not apply. The Court rejected this, clarifying that Section 31(b) excludes the Act's application to pledges only vis-`a-vis the borrower, not disputes between secured creditors over priority. The respondent bank contended that Section 11 applies broadly to such disputes and that the dispute must be resolved by arbitration. The Court agreed with the respondent's position.

Conclusion: Section 11 applies to disputes between banks relating to securitisation, reconstruction, or non-payment of any amount due including interest, including disputes over priority of charges arising from borrower default.

Issue (ii): Significance of the Expression "Arises Amongst Any of the Parties" and Object of Arbitration in Section 11

Legal Framework and Precedents: Section 11 restricts arbitration to disputes arising among banks, financial institutions, ARCs, or qualified buyers. The legislative history shows that the SARFAESI Act was enacted to expedite recovery of NPAs by banks and financial institutions, avoiding delays caused by litigation among secured creditors.

Court's Interpretation and Reasoning: The Court explained that Section 11's object is to prevent disputes between secured creditors from delaying recovery proceedings against borrowers. It ensures that disputes between banks or financial institutions over securitisation, reconstruction, or non-payment are resolved expeditiously by arbitration, thereby not stalling enforcement of security interests. The DRTs and DRATs have jurisdiction primarily over borrower-lender disputes, not inter-se disputes between secured creditors.

Application of Law to Facts: The dispute between the appellant and respondent banks falls squarely within the ambit of Section 11, as it involves competing claims between secured creditors over the same security following borrower default.

Treatment of Competing Arguments: The appellant bank argued that Section 11 should not apply to enforcement disputes under Chapter III of the SARFAESI Act. The Court rejected this, holding that Section 11 applies to inter-se disputes between secured creditors, regardless of the chapter under which enforcement is sought.

Conclusion: The expression signifies that Section 11 arbitration is a mandatory mechanism for resolving disputes inter se secured creditors, ensuring smooth and speedy recovery processes.

Issue (iii): Requirement of a Written Arbitration Agreement under Section 11

Legal Framework and Precedents: Section 11 of the SARFAESI Act states that disputes shall be settled "as if the parties to the dispute have consented in writing" to arbitration. The Arbitration and Conciliation Act, 1996 requires a written arbitration agreement for referral to arbitration.

There is a conflict in precedents: Federal Bank held that a written arbitration agreement is necessary, while Oriental Bank of Commerce and D. Dhanamjaya Rao held that Section 11 creates a statutory fiction deeming consent to arbitration, obviating the need for a written agreement.

Court's Interpretation and Reasoning: The Court held that Section 11 creates a legal fiction that the parties have consented in writing to arbitration, regardless of whether an actual written arbitration agreement exists. The use of the phrase "as if" establishes this deeming fiction, binding the parties to arbitration for disputes covered under Section 11.

The Court relied on authoritative interpretation of "as if" as creating legal fiction and held that the view in Oriental Bank of Commerce and D. Dhanamjaya Rao is the correct position of law, overruling the contrary view in Federal Bank and Standard Chartered Bank.

Application of Law to Facts: The appellant and respondent banks had no written arbitration agreement, but Section 11's statutory arbitration applies nonetheless to their dispute.

Treatment of Competing Arguments: The appellant argued that no arbitration agreement existed and thus Section 11 arbitration does not apply. The Court rejected this, emphasizing the statutory fiction created by Section 11.

Conclusion: No written arbitration agreement is required between the parties enumerated in Section 11 for disputes covered thereunder; the provision mandates arbitration by deeming consent.

Issue (iv): Mandatory or Directory Nature of Section 11

Legal Framework and Precedents: The word "shall" in Section 11 indicates mandatory intent. The Court referred to principles of statutory interpretation that "shall" is generally mandatory unless context demands otherwise. Precedents such as Delhi Airtech Services and State of Haryana v. Raghubir Dayal were cited.

Court's Interpretation and Reasoning: The Court held that Section 11 is mandatory, requiring parties to resolve disputes covered under it by arbitration or conciliation, and ousting jurisdiction of other forums such as DRTs for such disputes. This is to prevent delay and ensure speedy recovery of dues by banks and financial institutions. The special machinery created by the SARFAESI Act for recovery is to be respected and not circumvented.

Application of Law to Facts: The DRT's dismissal of the appellant bank's application on jurisdictional grounds and direction to resort to Section 11 arbitration was correct and mandatory.

Treatment of Competing Arguments: The appellant bank contended that Section 11 is directory and does not oust DRT jurisdiction. The Court rejected this, emphasizing the legislative intent and the special nature of the SARFAESI Act.

Conclusion: Section 11 is mandatory and exclusive for disputes covered thereunder between specified parties.

Issue (v): Applicability of Section 11 to Banks Who Are Borrowers

Legal Framework and Precedents: Section 2(f) of the SARFAESI Act defines "borrower" broadly to include any person or entity that has been granted financial assistance by a bank or financial institution. Precedents such as Transcore and Bell Finvest India held that where one party is a borrower, Section 11 arbitration does not apply.

Court's Interpretation and Reasoning: The Court clarified that Section 11 applies only to disputes inter se banks, financial institutions, ARCs, or qualified buyers acting as creditors. If one party is a borrower, even if it is a bank or financial institution in other contexts, Section 11 does not apply. The borrower-lender disputes are governed by Sections 13, 17, and 18, and are adjudicated by DRTs.

Application of Law to Facts: The dispute in the present case is between two banks acting as creditors, not in a lender-borrower relationship. Therefore, Section 11 applies.

Treatment of Competing Arguments: The respondent bank argued that since both are banks, Section 11 applies. The Court agreed, but clarified that if one bank is a borrower vis-`a-vis another, Section 11 would not apply.

Conclusion: Section 11 does not apply to disputes where one party is a borrower, even if that party is a bank or financial institution.

3. SIGNIFICANT HOLDINGS

"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."

"The expression 'non-payment of any amount due including interest' used in Section 11 of the SARFAESI Act is of wide import and would 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."

"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."

"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."

"Where the dispute is between a bank or financial institution or asset reconstruction company or qualified buyer and relates to securitisation or reconstruction or non-payment of any amount due including interest, the proper recourse is by arbitration under Section 11 of the SARFAESI Act and not by filing applications before the DRT."

"Section 31(b) of the SARFAESI Act excluding pledge from the Act's purview applies only to disputes between borrower and lender, but not to disputes inter se secured creditors over priority of charges."

"A lender-turned-borrower falls within the definition of 'borrower' under Section 2(f) of the SARFAESI Act and disputes involving such a party as borrower do not attract Section 11 arbitration."

"The AMRCD Memorandum, being an administrative guideline for resolution of disputes between CPSEs, cannot supplant the statutory arbitration mechanism under Section 11 of the SARFAESI Act."

"The DRT and DRAT are specialized forums for recovery of dues from borrowers and do not have jurisdiction to adjudicate disputes inter se secured creditors covered under Section 11 of the SARFAESI Act."

"The dispute between the appellant bank and respondent bank over priority of charge on the same security falls within the ambit of Section 11 of the SARFAESI Act and must be resolved by arbitration."