Borrower Has To Pre-Deposit 50% Of Amount As Debt Due In Appeal Before DRAT U/s. 18 Of SARFAESI Act- SC

The Supreme Court recently explained 50% of which amount the borrower was required to deposit as pre-deposit under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act').

The Bench of Justice MR Shah and Justice B.V. Nagarathna held 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 and the borrower is not entitled to claim adjustment/appropriation of the amount realised by selling the secured properties and deposited by the auction purchaser when the auction sale is also under challenge.”

The Bench also held that “Under Section 17, the scope of enquiry is limited to the steps taken under Section 13(4) against the secured assets. Therefore, whatever amount is mentioned in the notice under Section 13(2) of the SARFAESI Act, in case steps taken under Section 13(2)/13(4) against the secured assets are under challenge 18 before the DRT will be the ‘debt due’ within the meaning of proviso to Section 18 of the SARFAESI Act. In case of challenge to the sale of the secured assets, the amount mentioned in the sale certificate will have to be considered while determining the amount of pre-deposit under Section 18 of the SARFAESI Act. However, in a case where both are under challenge, namely, steps taken under Section 13(4) against the secured assets and also the auction sale of the secured assets, in that case, the “debt due” shall mean any liability (inclusive of interest) which is claimed as due from any person, whichever is higher.”

In this case, the appeal was preferred against the impugned judgments of a few High Courts wherein the High Courts had directed to adjust/appropriate the amount realized by auction sale of the secured properties/deposited by the auction purchasers while considering the 50% of the amount as pre-deposit to be deposited by the borrower while preferring an appeal before the DRAT.

Advocate Tuhin appeared for the appellant and Caveat Advocates Abhishek Agarwal, Rajat Bhardwaj appeared for the respondents.

Issues dealt with were:

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.

2. Whether while calculating the amount of “debt due”, the amount deposited by the auction purchaser on the 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.

3. Whether the “debt due” under Section 18 of the SARFAESI Act would include the liability + interest.

With regard to issue 1, the Apex Court observed that the borrower had to deposit fifty percent of the amount of “debt due” from him, as was claimed by the secured creditors or determined by the DRT, whichever was less and only and only then, an appeal under Section 18 of the SARFAESI Act would be permissible against the order passed by the DRT under Section 17 of the SARFAESI Act.

With regard to issue 2, the Apex Court observed that if the borrower wanted to appropriate and/or adjust the amount realized from sale of the secured assets deposited by the auction purchaser, the borrower had to accept the auction sale unequivocally.

With regard to issue 3, the Apex Court observed that the Delhi High Court had erred in excluding the amount payable towards interest while considering the “debt due” and said that “As per Section 2(g) of the Act 1993, “debt” means liability inclusive of interest as claimed by the bank/financial institution.”

The Apex Court upheld the view taken by the Bombay High Court in the case of Eskays Construction Pvt. Ltd. and observed that “in a case where the borrower challenges the auction sale, thereafter it will not be open for the borrower to pray to use the sale proceeds received from the sale of the secured properties to be adjusted/given credit in an application for waiver of pre-deposit.”

Accordingly, the appeal was allowed.

Cause Title- M/s Sidha Neelkanth Paper Industries Private Limited & Another v. Prudent ARC Limited & Others

Click here to read/download the Judgment