Supreme Court settles pre-deposit requirement for appeals under SARFAESI Act: Union Bank of India vs. Rajat Infrastructure Pvt. Ltd. (2 March 2020)

Introduction

Date of the Judgment: 2 March 2020
Citation: (2020) INSC 174
Judges: Deepak Gupta, J., Aniruddha Bose, J.

Can a borrower, or a guarantor, avoid pre-deposit requirements when appealing a decision under the SARFAESI Act? The Supreme Court addressed this critical question, clarifying the mandatory nature of pre-deposit for appeals before the Debt Recovery Appellate Tribunal (DRAT). This judgment clarifies the requirements for filing an appeal before the DRAT under the SARFAESI Act, specifically regarding the pre-deposit of a portion of the debt. The bench comprised Justices Deepak Gupta and Aniruddha Bose, with Justice Deepak Gupta authoring the judgment.

Case Background

Rajat Infrastructure Pvt. Ltd. (Respondent No. 1) had provided a guarantee and mortgaged its property to secure a loan taken by Respondents 4 and 5. The mortgaged property, which was in possession of Respondents 2 and 3 (alleged leaseholders), was put up for auction. Respondent No. 6 emerged as the highest bidder with a bid of Rs. 66.52 crores. Respondent No. 1 objected to the sale, claiming that the property was sold for a low amount and that there was collusion between the bank officers and the auction purchaser.

Respondent No. 1 challenged the order of the DRAT before the Bombay High Court. The High Court, on 25.11.2019, directed Respondent No. 1 to avail the statutory remedy of appeal before the DRAT, stating that no pre-deposit was required. The auction purchasers then filed a review petition, which was dismissed by the High Court on 16.12.2019, further clarifying that no pre-deposit was required if the challenge pertained to the valuation of the property.

Timeline

Course of Proceedings

The Bombay High Court initially directed the Respondent No. 1 to pursue an appeal before the DRAT, stating that no pre-deposit was required. The High Court’s reasoning was that since the challenge was regarding the valuation of the property and not a decree or fixed liability, no pre-deposit was necessary. The auction purchasers filed a review petition against this order, which was also dismissed by the High Court. The High Court clarified that pre-deposit would depend on the nature of the order being challenged, implying that if the challenge relates to valuation, no pre-deposit is needed.

Legal Framework

The core legal provision in question is Section 18 of the SARFAESI Act, which deals with appeals to the Appellate Tribunal. The relevant portion of Section 18 is as follows:

“18. Appeal to Appellate Tribunal.—(1) Any person aggrieved, by any order made by the Debts Recovery Tribunal under section 17, may prefer an appeal along with such fee, as may be prescribed to an Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.
Provided that different fees may be prescribed for filing an appeal by the borrower or by the person other than the borrower:
Provided further that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent. of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less:
Provided also that the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty­five per cent. of debt referred to in the second proviso.”

This section stipulates that an appeal to the DRAT will not be entertained unless the borrower deposits 50% of the debt claimed by the secured creditors or determined by the DRT, whichever is less. The DRAT may, for reasons recorded in writing, reduce this amount to not less than 25%.

Arguments

Appellant (Union Bank of India)

• The High Court’s order is against the provisions of the SARFAESI Act and the law laid down by the Supreme Court.
• Section 18 of the SARFAESI Act mandates a pre-deposit of 50% or at least 25% of the amount due for an appeal to be entertained by the DRAT.

Respondent No. 6 (Auction Purchasers)

• Supported the appellant’s case, arguing that no appeal can be entertained without complying with Section 18 of the SARFAESI Act.

Respondent No. 1 (Rajat Infrastructure Pvt. Ltd.)

• The High Court exercised its discretionary jurisdiction under Article 226 of the Constitution of India while holding that no pre-deposit was required.
• Respondent No. 1 is not a borrower, and therefore, the pre-deposit requirement should not apply.
• The main ground of challenge is that the property was sold for a low amount, and therefore, the DRAT should entertain the appeal without any deposit.
• The value of the property is much higher than the sale price, and there is collusion between the bank employees and the successful bidders.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the High Court was correct in directing that pre-deposit was not required for entertaining an appeal before the DRAT as mandated by Section 18 of the SARFAESI Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

Cases Relied Upon:

Legal Provisions Considered:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Narayan Chandra Ghosh vs. UCO Bank & Ors. [(2011) 4 SCC 548]* to emphasize that the pre-deposit requirement under Section 18 of the SARFAESI Act is mandatory. The Court reiterated that even if the debt amount is not determined by the DRT, the appeal cannot be entertained without pre-deposit. The DRAT can reduce the amount to 25% but cannot waive it entirely.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the clear and unambiguous language of Section 18 of the SARFAESI Act, which mandates a pre-deposit for entertaining appeals before the DRAT. The Court also emphasized the importance of adhering to established legal precedents, particularly the judgment in Narayan Chandra Ghosh vs. UCO Bank & Ors., which had already clarified the mandatory nature of pre-deposit.

The Court’s reasoning was heavily influenced by the legal framework and precedents, with a lesser emphasis on the factual aspects of the case. The legal considerations outweighed the factual arguments presented by the respondents.

The Court considered the statutory language of Section 18 of the SARFAESI Act and the precedent set by Narayan Chandra Ghosh vs. UCO Bank & Ors. to conclude that pre-deposit is mandatory for appeals before the DRAT. The Court rejected the High Court’s interpretation that pre-deposit could be waived based on the nature of the challenge.

Judgment

The Supreme Court held that the High Court’s orders dated 25.11.2019 and 16.12.2019 were incorrect in so far as they held that pre-deposit was not required for an appeal before the DRAT. The Court emphasized that the pre-deposit requirement under Section 18 of the SARFAESI Act is mandatory and cannot be waived. The Court stated that a guarantor or mortgagor stands on the same footing as a borrower and must comply with the pre-deposit requirements.

The Court set aside the High Court’s orders and allowed the appeals filed by the Union Bank of India. The Court clarified that it had not gone into the merits of the case, which would be decided by the DRAT when the appeal is entertained. The Court extended the time for the auction purchasers to deposit the balance of the sale amount till 20.03.2020 and directed that if Respondent No. 1 files an appeal within 30 days of the judgment, it should not be rejected on the ground of limitation.

The Court explicitly stated: “…there is an absolute bar to the entertainment of an appeal under Section 18 of the Act unless the condition precedent, as stipulated, is fulfilled.”

The Court also noted: “The High Court cannot give directions which are contrary to law.”

Furthermore, the Court clarified: “A guarantor or a mortgagor, who has mortgaged its property to secure the repayment of the loan, stands on the same footing as a borrower and if he wants to file an appeal, he must comply with the terms of Section 18 of the SARFAESI Act.”

There were no dissenting opinions. The judgment was delivered by a bench of two judges, with Justice Deepak Gupta authoring the opinion.

Key Takeaways

• Mandatory Pre-Deposit: Pre-deposit is mandatory for filing an appeal before the DRAT under Section 18 of the SARFAESI Act.
• Guarantors and Mortgagors: Guarantors and mortgagors are treated the same as borrowers for the purpose of pre-deposit requirements.
• No Waiver by High Court: The High Court cannot waive the pre-deposit requirement, as it is a statutory mandate.
• DRAT’s Power: The DRAT can reduce the pre-deposit amount to 25% for reasons recorded in writing but cannot waive it entirely.
• Adherence to Law: The Supreme Court emphasized the importance of adhering to the statutory provisions and the law laid down by the Supreme Court.

Directions

The Supreme Court extended the time given to the auction purchasers, Respondent No. 6, to deposit the balance of the sale amount till 20.03.2020. The Court also directed that if Respondent No. 1 files an appeal within 30 days of the pronouncement of this order, it shall not be rejected on the ground of limitation.

Development of Law

The ratio decidendi of this case is that the pre-deposit requirement under Section 18 of the SARFAESI Act is mandatory for all appeals before the DRAT, and this requirement applies equally to borrowers, guarantors, and mortgagors. This judgment reinforces the established legal position and clarifies that the High Court cannot waive the pre-deposit requirement. There is no change in the previous position of the law, but the Supreme Court has reiterated the mandatory nature of the pre-deposit, thereby preventing any misinterpretation of the law.

Conclusion

The Supreme Court’s judgment in Union Bank of India vs. Rajat Infrastructure Pvt. Ltd. clarifies that pre-deposit is mandatory for appeals before the DRAT under Section 18 of the SARFAESI Act. The Court set aside the Bombay High Court’s order, which had incorrectly held that no pre-deposit was required. This decision reinforces the statutory requirement and ensures that appeals are not entertained without the mandatory deposit. The judgment also clarifies that guarantors and mortgagors are treated on par with borrowers for pre-deposit requirements, and the High Courts cannot waive this statutory mandate.