Supreme Court clarifies pre-deposit under SARFAESI Act: Sidha Neelkanth Paper Industries vs. Prudent ARC Limited (2023)

Introduction

Date of the Judgment: January 5, 2023

Citation: (2023) INSC 15

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a borrower, who is appealing against an order under the SARFAESI Act, use the proceeds from the auction sale of their secured assets to meet the mandatory pre-deposit requirement? The Supreme Court of India recently addressed this critical question, clarifying the interpretation of Section 18 of the SARFAESI Act. This judgment clarifies whether the amount deposited by an auction purchaser can be adjusted against the pre-deposit required from the borrower for filing an appeal.

The Supreme Court bench comprised Justices M.R. Shah and B.V. Nagarathna, with the judgment authored by Justice M.R. Shah.

Case Background

The case involves multiple appeals concerning the interpretation of Section 18 of the SARFAESI Act. The core issue revolves around whether the amount deposited by an auction purchaser of a secured asset can be adjusted against the mandatory pre-deposit that a borrower must make to file an appeal against an order of the Debt Recovery Tribunal (DRT).

In Civil Appeal Nos. 8969 and 8970 of 2022, M/s Sidha Neelkanth Paper Industries Private Limited (the principal borrower) had taken a loan from Andhra Bank, which was later assigned to Prudent ARC Limited. Due to non-payment, the bank initiated proceedings under the SARFAESI Act, and one of the mortgaged properties was auctioned. The borrower challenged the auction and the pre-deposit requirement.

In Civil Appeal Nos. 8972, 8973, and 8974 of 2022, the borrowers had taken a home loan from Bank of Baroda. After defaulting, the bank initiated proceedings under the SARFAESI Act, and the mortgaged property was auctioned. The auction purchasers then challenged the DRAT order which waived the pre-deposit for the borrower.

Timeline

Course of Proceedings

The Debt Recovery Tribunal (DRT) initially directed the borrower to deposit a sum of Rs. 2 crores as a condition for interim stay. After the borrower failed to comply, the mortgaged properties were put to auction. The DRT dismissed the borrower’s application to prevent the auction, and the Debt Recovery Appellate Tribunal (DRAT) directed the borrower to comply with the pre-deposit requirements under Section 18 of the SARFAESI Act.

The High Court of Delhi directed the DRAT to hear the appeal on merits, observing that more than 50% of the debt was recovered through the auction. Subsequently, the DRAT waived the statutory pre-deposit, considering the amount realized from the sale of the mortgaged property.

The High Court of Madhya Pradesh dismissed the writ petitions filed by the auction purchasers, confirming the DRAT order that the pre-deposit requirement was met by the amount realized from the auction sale.

Legal Framework

The core legal issue revolves around the interpretation of Section 18 of the SARFAESI Act, which deals with appeals to the Appellate Tribunal. The second proviso to Section 18 states that no appeal shall be entertained unless the borrower has deposited 50% of the amount of debt due from him.

Section 2(ha) of the SARFAESI Act defines “debt” as having the same meaning as in Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993.

Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993 defines “debt” as “any liability (inclusive of interest) which is claimed as due from any person… by a bank or a financial institution… in cash or otherwise, whether secured or unsecured…”

The interplay of these provisions determines whether the amount realized from the sale of secured assets can be adjusted against the pre-deposit required for filing an appeal.

Arguments

Arguments on behalf of the Borrower

• The borrower argued that the amount realized from the sale of the secured property (Rs. 12.5 crores) was more than 50% of the original debt (Rs. 16.61 crores), thus satisfying the pre-deposit requirement under Section 18 of the SARFAESI Act.
• The borrower contended that the “debt due” should be calculated by deducting the money received by the bank during the pendency of proceedings before the DRT.
• The borrower argued that the High Court erred in not applying the literal rule of interpretation for construing the second proviso to Section 18 of the SARFAESI Act.

Arguments on behalf of the Financial Institution and Auction Purchaser

• The financial institution argued that the High Court erred in directing that the amount realized from the auction sale should be appropriated for the pre-deposit amount.
• The financial institution contended that the “debt due” under Section 18 should include both the principal amount and the interest, as per Section 2(g) of the Act of 1993.
• It was argued that the amount recovered from the sale of the secured assets cannot be adjusted against the pre-deposit under Section 18 of the SARFAESI Act, as the pre-deposit is to be made by the borrower.
• The auction purchaser argued that the pre-deposit is meant to ensure the borrower’s bona fides and discourage frivolous litigation, and the amount must be deposited by the borrower, not adjusted from auction proceeds.
• The auction purchaser contended that the borrower cannot claim the benefit of the amount received by the creditor in an auction sale if they are challenging the sale.

The innovativeness of the argument by the borrower was that the amount realized by the financial institution by selling the secured property is required to be adjusted/appropriated while considering the “debt due”.

The innovativeness of the argument by the financial institution and auction purchaser was that the amount of pre-deposit is to be calculated in respect of the amount of “debt due” and the “debt” in SARFAESI Act is defined in Section 2(ha) which includes interest.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether, while calculating the amount to be deposited as pre-deposit under Section 18 of the SARFAESI Act, 50% of which amount the borrower is required to deposit as pre-deposit and whether while calculating the amount of “debt due”, the amount deposited by the auction purchaser on purchase of the secured assets is required to be adjusted and/or appropriated towards the amount of pre-deposit to be deposited by the borrower under Section 18 of the SARFAESI Act?
2. Whether the “debt due” under Section 18 of the SARFAESI Act would include the liability + interest?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the borrower must deposit 50% of the “debt due” as claimed by the bank, including interest, and cannot adjust the amount deposited by the auction purchaser. The court emphasized that the pre-deposit under Section 18 of the SARFAESI Act is a mandatory requirement for the borrower to pursue an appeal.

The Court relied on the definition of “debt” under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, which includes interest. It also affirmed that the pre-deposit is meant to ensure the borrower’s bona fides and discourage frivolous litigation.

The court approved the view taken by the Bombay High Court in Eskays Construction Pvt. Ltd. v. Soma Papers & Industries Limited & Others, 2016 SCC OnLine Bom. 9827, stating that it would be ludicrous to suggest that the money realised by the bank from the sale of secured assets could be used by the borrower to fulfil the condition of pre-deposit under Section 18.

The Court also referred to Narayan Chandra Ghosh v. UCO Bank, (2011) 4 SCC 548, which held that the pre-deposit provisions of Section 18 are mandatory in nature.

The Court also referred to Axis Bank v. SBS Organics Private Limited, (2016) 12 SCC 18, which held that the amount of pre-deposit is refundable to the borrower after disposal of appeal.

The Court also referred to M/s Shilpa Shares and Securities v. National Cooperative Bank Ltd., (S.L.P (Civil) No. 14717/2022, decided on 21.11.2022), which held that the amount deposited pursuant to the order of this Court cannot be adjusted in pre-deposit.

The Court stated that if the borrower wants to take the benefit of the amount received by the creditor in an auction sale, they must unequivocally accept the sale. If the borrower challenges the sale, they cannot claim the benefit of the sale proceeds for the pre-deposit.

What weighed in the mind of the Court?

The Court’s reasoning was primarily influenced by the literal interpretation of Section 18 of the SARFAESI Act and Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993. The Court emphasized that the language of the statute clearly mandates that the borrower must deposit 50% of the debt due and that the definition of “debt” includes interest. The Court also aimed to prevent borrowers from using the proceeds of the auction sale to meet the pre-deposit requirement while simultaneously challenging the sale, which it viewed as an attempt to “blow hot and cold.”

The court also focused on the purpose of the SARFAESI Act, which is to facilitate the recovery of debts by banks and financial institutions. Allowing borrowers to adjust auction proceeds against pre-deposit would undermine this purpose by delaying the recovery process and encouraging frivolous litigation.

Key Takeaways

• Mandatory Pre-Deposit: Borrowers appealing orders under the SARFAESI Act must deposit 50% of the debt due, as claimed by the secured creditor, including interest.
• No Adjustment of Auction Proceeds: The amount deposited by the auction purchaser cannot be adjusted against the borrower’s pre-deposit requirement.
• Acceptance of Sale: If a borrower wants to benefit from the auction proceeds, they must unequivocally accept the sale.
• Discouragement of Frivolous Appeals: The judgment aims to discourage frivolous appeals by ensuring that borrowers demonstrate their bona fides by making the required deposit.

Directions

The Supreme Court directed that the borrower has to deposit 50% of the amount of “debt due” as claimed by the bank/financial institution/assignee along with interest as claimed in the notice under Section 13(2) of the SARFAESI Act. The borrower is not entitled to claim adjustment/appropriation of the amount realized by selling the secured properties and deposited by the auction purchaser when the auction sale is also under challenge.

Development of Law

The ratio decidendi of the case is that the borrower must deposit 50% of the “debt due” as claimed by the bank, including interest, and cannot adjust the amount deposited by the auction purchaser. This judgment clarifies the interpretation of Section 18 of the SARFAESI Act and reinforces the mandatory nature of the pre-deposit requirement for appeals. This judgment solidifies the position that the pre-deposit cannot be waived or adjusted against sale proceeds.

Conclusion

The Supreme Court’s judgment in M/s Sidha Neelkanth Paper Industries Private Limited & Another vs. Prudent ARC Limited & Others clarifies that borrowers cannot use auction sale proceeds to meet the pre-deposit requirements under Section 18 of the SARFAESI Act. The court emphasized the mandatory nature of the pre-deposit and the inclusion of interest in the calculation of “debt due,” ensuring that the statutory requirements are strictly followed.