Factual Background and Procedural History
The dispute arose when M/s Sri Nangli Rice Mills Pvt. Ltd., a borrower, obtained a credit facility from the appellant Bank of India (BOI) in 2003 against hypothecation of stocks (rice, paddy). In violation of express clauses prohibiting dual charges, the borrower later availed a credit facility from Punjab National Bank (PNB) in 2013, pledging the same stock.
PNB affixed pledge tags to goods stored in a warehouse managed by National Bulk Handling Corporation (NBHC), acting as collateral manager.
In 2015, upon borrower default, BOI discovered PNB’s competing claim over the pledged goods. BOI sought recovery under the SARFAESI Act and initiated proceedings under Section 14, later challenged under Section 17 before DRT.
PNB objected, arguing that DRT lacked jurisdiction in disputes between banks and that BOI should resort to arbitration under Section 11 of SARFAESI.
Identification of Legal Issues
The Court framed the following core issues:
- What is the scope and applicability of Section 11 of the SARFAESI Act?
- Whether inter-bank disputes over secured assets fall within DRT’s jurisdiction under Section 17, or are exclusively referable to arbitration?
- Is a written arbitration agreement necessary for invoking Section 11?
- Should Section 11 be construed as mandatory or directory in nature?
Arguments of the Parties
Appellant: Bank of India
- Claimed prior hypothecation dating back to 2003 gave it superior rights over the goods.
- Argued that PNB’s pledge was contrary to clauses in BOI’s credit agreement prohibiting additional encumbrances.
- Asserted that Section 11 was not attracted because:
- There was no arbitration agreement between BOI and PNB.
- Section 11 was confined to securitisation/reconstruction, not enforcement.
- Challenged DRT’s reliance on Oriental Bank v. Canara Bank, citing Federal Bank v. LIC Housing which held arbitration requires agreement.
Respondent: Punjab National Bank
- Contended that Section 31(b) excludes pledge transactions from SARFAESI, making Section 17 inapplicable.
- Argued that even if Section 11 applied, it is the exclusive remedy for such inter-bank disputes.
- Invoked Administrative Mechanism for Resolution of CPSEs Disputes (AMRCD) for arbitration between public sector banks.
Court’s Analysis and Reasoning
A. Scope of Section 11 SARFAESI
Section 11 applies to “any dispute relating to securitisation, reconstruction, or non-payment of any amount due” among banks, financial institutions, ARCs or qualified buyers. The Court clarified that:
- It covers inter-creditor disputes, including enforcement actions.
- It is not confined to transactions with borrowers alone.
B. Arbitration Agreement Not Required
Citing Section 11’s structure and legislative purpose, the Court ruled that:
- Section 11 does not require a separate arbitration agreement.
- It creates a statutory obligation for arbitration between specified parties.
- Interpretation aligns with public policy of speedy resolution among financial institutions.
C. Mandatory Nature of Section 11
The Court held Section 11 is mandatory, not merely directory:
- It overrides the general jurisdiction of civil courts or tribunals in such disputes.
- This fosters a specialised, non-adversarial resolution system among lenders.
D. DTDR Jurisdiction Limited
The DRT’s decision (affirmed by the High Court) to decline jurisdiction under Section 17 was upheld. Since no enforcement measure under SARFAESI was taken by PNB, and the dispute was solely inter-creditor, DRT jurisdiction was correctly denied.
E. Rejecting Section 31(b) Objection
While Section 31(b) excludes pledge from SARFAESI’s application in borrower proceedings, it does not limit Section 11 applicability among banks.
Final Holding and Conclusion
The Court dismissed BOI’s appeal and upheld the High Court’s and DRT’s rulings. It declared:
- Inter-bank disputes over security enforcement fall within Section 11 of SARFAESI.
- Such disputes must be referred to arbitration, even without a prior agreement.
- DRT has no jurisdiction under Section 17 for inter-se disputes between banks.
- Section 11 is mandatory, serving the Act’s objective of reducing litigation delays in credit enforcement.
FAQs:
1. Can one bank sue another in DRT under the SARFAESI Act?
No. Inter-bank disputes are not maintainable before DRT under Section 17. Such matters must be referred to arbitration under Section 11 of the SARFAESI Act.
2. Is a written arbitration agreement required under Section 11 SARFAESI?
No. Section 11 mandates arbitration for disputes among banks or financial institutions even if there is no separate arbitration clause.
3. Does the SARFAESI Act apply to pledge of movable goods?
Not for borrower proceedings. However, it does not exclude application of Section 11 to inter-bank disputes over pledged assets.
4. What types of disputes fall under Section 11 of SARFAESI Act?
Any dispute involving securitisation, reconstruction, or non-payment among banks, financial institutions, ARCs, or qualified buyers.
5. Why is Section 11 considered mandatory in the SARFAESI Act?
It ensures a faster, alternative resolution process among financial institutions, avoiding delays associated with litigation.
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