The Bombay High Court has clarified that statutory arbitration under Section 11 of the SARFAESI Act is available even when one party is not yet a secured creditor, provided the dispute arises from non-payment of amounts due by a common borrower. This ruling resolves a critical ambiguity in financial sector dispute resolution and expands access to arbitration for financial institutions caught in transitional security creation cycles.
Background & Facts
The Dispute
The dispute arises from a loan takeover transaction in which Aditya Birla Housing Finance Limited (Applicant), a financial institution, agreed to take over outstanding credit facilities extended by Axis Bank Limited (Respondent No.1) to a group of borrowers (Respondents Nos.2 to 5). The transaction was structured so that Aditya Birla would repay Axis Bank’s outstanding dues, enabling Axis Bank to release its mortgage on a property in Delhi, which would then be mortgaged in favour of Aditya Birla as security for its new loan. However, due to a timing gap between the issuance of Axis Bank’s foreclosure statement and the actual disbursement of funds, a residual amount of Rs. 2,36,936.29 remained outstanding in the overdraft account. Axis Bank refused to release the title deeds, citing this unpaid balance, thereby preventing Aditya Birla from perfecting its security interest.
Key Facts
- On 17 July 2023, the borrowers approached Aditya Birla seeking a loan of Rs. 4,70,05,000 to repay Axis Bank’s facilities.
- On 4 September 2023, Aditya Birla and the borrowers executed a loan agreement containing an arbitration clause (Clause 10).
- On 12 September 2023, the borrowers executed an irrevocable Power of Attorney empowering Aditya Birla to obtain title deeds from Axis Bank.
- On 13 September 2023, Aditya Birla disbursed Rs. 17,05,144 to the cash credit account and Rs. 96,25,003 to the overdraft account of Axis Bank.
- On 13 September 2023, Axis Bank implemented a debit freeze on the overdraft account at the borrowers’ request.
- On 26 February 2024, the borrowers requested Axis Bank to lift the debit freeze.
- On 7 March 2024, Axis Bank lifted the freeze, allowing the borrowers to withdraw additional funds.
- On 8 February 2024, the borrowers’ account with Aditya Birla was classified as a Non-Performing Asset (NPA).
- On 19 June 2024, Aditya Birla issued a legal notice to Axis Bank demanding release of title deeds.
- On 15 July 2024, Axis Bank replied, asserting an outstanding balance of Rs. 88,90,126 in the overdraft account.
- On 27 August 2024, Aditya Birla issued a second request for title deeds.
- On 4 December 2025, Aditya Birla invoked arbitration under Section 21 of the Arbitration Act against the borrowers.
- On 19 January 2026, Axis Bank denied any arbitration agreement with Aditya Birla.
Procedural History
- 4 September 2023: Loan agreement executed between Aditya Birla and borrowers.
- 13 September 2023: Disbursement to Axis Bank’s accounts completed.
- 7 March 2024: Debit freeze lifted by Axis Bank; borrowers drew additional funds.
- 19 June 2024: First legal notice issued by Aditya Birla to Axis Bank.
- 15 July 2024: Axis Bank’s refusal letter received.
- 4 December 2025: Arbitration notice issued to borrowers under Section 21 of the Arbitration Act.
- 19 January 2026: Axis Bank denied existence of arbitration agreement.
- 19 January 2026: Commercial Arbitration Petition No. 104 of 2025 decided by this Court, directing deposit of title deeds with the Registry.
- 23 April 2026: Judgment reserved in the present application.
- 6 May 2026: Judgment pronounced.
The Parties' Positions
Applicant (Aditya Birla): Argues that the dispute with Axis Bank arises from non-payment of amounts due by the borrowers, triggering Section 11 of the SARFAESI Act. It contends that the statutory arbitration mechanism applies irrespective of whether it has yet perfected its mortgage, as the dispute is intrinsically linked to the borrower’s default and competing claims over the same security.
Respondent No.1 (Axis Bank): Contends that Section 11 of the SARFAESI Act is available only to secured creditors and that Aditya Birla, having no registered mortgage, cannot invoke it. It argues that the absence of privity of contract and the lack of a written arbitration agreement preclude statutory arbitration.
Respondents Nos.2 to 5 (Borrowers): Oppose the application, challenging the validity of the mortgage claim and asserting no enforceable rights in favour of Aditya Birla.
Relief Sought
Aditya Birla seeks:
- Appointment of an arbitrator under Section 11 of the SARFAESI Act to resolve disputes with Axis Bank.
- Appointment of an arbitrator under the loan agreement’s arbitration clause to resolve disputes with the borrowers.
- Consolidation of both arbitrations before a single tribunal.
The Legal Issue
Can a financial institution that has not yet created a security interest over a property invoke statutory arbitration under Section 11 of the SARFAESI Act against a bank when the dispute arises from non-payment of amounts due by a common borrower, despite the absence of a written arbitration agreement?
Arguments Presented
For the Appellant/Petitioner
Ms. Megha Gupta, counsel for Aditya Birla, relied on the plain language of Section 11 of the SARFAESI Act, which requires only that the dispute arise between a bank and financial institution and relate to non-payment of any amount due including interest. She argued that the Supreme Court in Bank of India v. Sri Nangli Rice Mills held that such disputes need not be between two secured creditors, and that the exclusion under Section 31(b) (pledge of movables) does not bar arbitration under Section 11. She cited the Calcutta High Court’s decision in Reliance Commercial Finance Ltd. v. Axis Bank Ltd., which held that Section 11 creates a statutory fiction of an arbitration agreement, negating the need for a written contract under Section 7 of the Arbitration Act. She emphasized that the legislative intent behind Section 11 is to prevent inter-creditor disputes from obstructing recovery proceedings.
For the Respondent/State
Mr. Cyrus Ardeshir, Senior Advocate for Axis Bank, contended that Section 11 is available only to secured creditors, as the SARFAESI Act’s entire framework is predicated on the existence of a security interest. He relied on North Eastern Development Finance Corporation Ltd. v. L. Doulo Builders, where the Supreme Court held that without a mortgage, the SARFAESI Act cannot be invoked. He argued that the observations in Bank of India v. Sri Nangli Rice Mills were limited to disputes between two secured creditors and that the Applicant’s failure to perfect its mortgage disqualifies it from invoking Section 11. He further contended that the Applicant’s prior characterization of Axis Bank as a third party in the Section 9 petition estops it from now claiming a direct dispute.
The Court's Analysis
The Court undertook a detailed textual and purposive analysis of Section 11 of the SARFAESI Act. It rejected the narrow interpretation advanced by Axis Bank, holding that the provision does not require the parties to be secured creditors. The Court emphasized that Section 11 applies when two conditions are met: (i) the dispute arises between a bank, financial institution, ARC, or qualified buyer; and (ii) the dispute relates to securitisation, reconstruction, or non-payment of any amount due including interest.
"The language of the provision is clear and discernible: 'Where any 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 various range of scenarios where disputes are connected to unpaid amounts, including those arising due to third-party defaults, such as indirect default of the borrowers."
The Court distinguished North Eastern Development Finance Corporation Ltd. as a case concerning enforcement under Sections 13 and 14, not arbitration under Section 11. It held that the Supreme Court’s decision in Bank of India v. Sri Nangli Rice Mills was not confined to priority disputes between secured creditors but extended to any dispute intrinsically linked to the borrower’s non-payment. The Court noted that the exclusion under Section 31(b) (pledge of movables) did not bar arbitration, as the dispute in that case was between two banks over competing claims, not between borrower and lender.
The Court further held that Section 11 creates a statutory fiction of an arbitration agreement, as confirmed by the Calcutta High Court and acknowledged by the Supreme Court. It rejected the estoppel argument, noting that interim relief under Section 9 against third parties does not preclude subsequent invocation of statutory arbitration. The Court concluded that the Applicant’s inability to perfect its mortgage was caused by Axis Bank’s refusal to release title deeds, making the dispute directly connected to the borrower’s default and the competing claims over the same asset.
The Verdict
The Applicant succeeded. The Court appointed Hon’ble Smt. Justice Anuja Prabhudessai, Former Judge of this Court, as sole arbitrator to adjudicate disputes between Aditya Birla, Axis Bank, and the borrowers. The arbitration shall proceed under both the contractual clause in the loan agreement and Section 11 of the SARFAESI Act. The arbitrator shall determine the scope of the dispute, including whether Aditya Birla is entitled to a security interest. The parties shall bear the arbitrator’s fees equally. The order is stayed for six weeks only as against Axis Bank; the reference against the borrowers is not stayed.
What This Means For Similar Cases
Statutory Arbitration Is Not Limited to Secured Creditors
- Financial institutions seeking to take over loans may invoke Section 11 of the SARFAESI Act even if their security interest is not yet perfected, provided the dispute arises from the borrower’s default.
- The absence of a written arbitration agreement is not fatal - Section 11 creates a deemed consent under the Arbitration Act.
- Practitioners must now treat disputes between banks and financial institutions over common borrowers as arbitrable under SARFAESI Act, regardless of the status of the security interest.
Inter-Creditor Disputes Must Be Separated from Borrower Enforcement
- A secured creditor may proceed under Sections 13 and 14 of the SARFAESI Act even while a Section 11 arbitration is pending.
- A non-secured financial institution cannot challenge enforcement actions before the DRT but must resolve its competing claims via Section 11 arbitration.
- Arbitration under Section 11 is not a substitute for enforcement but a mechanism to resolve inter-creditor conflicts without delaying recovery.
Consolidation of Arbitrations Is Permissible
- Where a dispute involves both contractual and statutory elements, a single arbitral tribunal may be appointed to hear both.
- This avoids multiplicity of proceedings and ensures consistent findings on overlapping facts.
- Practitioners should seek consolidation at the referral stage to streamline resolution.
