LEGAL LEARNING – SHRI GANPATI JURISTS
Statutory Arbitration Under Section 11 of the SARFAESI Act
The Supreme Court has ruled that Section 11 of the SARFAESI Act, 2002, mandates statutory arbitration for certain disputes among secured creditors, eliminating the need for a written arbitration agreement.
Key Legal Takeaways:
1. Statutory Mandate of Arbitration
Section 11 creates a legal fiction—no written agreement is needed to initiate arbitration among banks, financial institutions, ARCs, or qualified buyers regarding disputes related to securitisation, reconstruction, or non-payment of dues.
2. Twin Conditions for Section 11 Arbitration
Arbitration becomes mandatory if:
a) The dispute is between banks, FIs, ARCs, or qualified buyers.
b) The dispute pertains to securitisation, reconstruction, or non-payment (including interest).
3. No Jurisdiction of DRT
If the above two conditions are satisfied, the Debt Recovery Tribunal (DRT) cannot adjudicate. Arbitration under Section 11 read with the Arbitration Act, 1996, is the only remedy.
4. Borrower Definition Includes Institutions
A bank, FI, or ARC can also be a borrower under Section 2(f) SARFAESI if it receives financial assistance and creates a security interest. Hence, a lender-turned-borrower is treated as any other borrower.
5. Mandatory Nature
The use of “shall” in Section 11 makes arbitration compulsory. Parties cannot avoid it by choosing alternative forums.
6. Wide Scope of "Non-payment"
Includes indirect defaults such as third-party failures impacting payment obligations.
Conclusion:
Any eligible dispute under Section 11 must be compulsorily resolved by arbitration, not DRT or other civil forums, even in the absence of an arbitration agreement.
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