Pre-deposit under SARFAESI Act cannot be waived off

“Pre-deposit of 50% under Section 18 of the SARFAESI Act is a mandate and cannot be waived off in cases where the borrower challenges the action sale with respect to secured assets.”

Recently, the Supreme Court, in its judgement in M/s Sidha Neelkanth Paper Industries Private Limited & Another v. Prudent ARC Limited & Others1., held that in case where the borrower also challenges the auction sale and does not accept the same and also challenges the steps taken under Section 13(2)2 and 13(4)3 of the SARFAESI Act with respect to the secured assets, the borrower has to deposit 50% of the amount claimed by the secured creditor along with interests.

FACTUAL BACKGROUND OF THE DISPUTE
The Appellant (M/s Sidha Neelkanth Paper Industries Private Limited) approached the Andhra Bank for sanction of credit facility and in the year 2008, it had approached Standard Chartered Bank for taking over the debt taken by it. In the year 2010, the Andhra Bank sanctioned open cash credit limit for a sum of Rs. 15.5 Crores in favour of the principal borrower. Since, the Principal Borrower failed to make the repayment to the Andhra Bank, its account was declared as a Non-performing Asset (NPA) and notice was issued by the Andhra Bank under Section 13(2) of the SARFAESI Act calling the borrower to make the repayment. Objection thereto was raised by the Principal Borrower against the same. Since, the amount was not paid under Section 13(2), measures under Section 13(4) of the SARFAESI Act were initiated by the Bank and possession of one of the mortgaged properties was taken. Thereafter, an appeal was filed challenging the measures taken by the Andhra Bank under Section 13(4) of the SARFAESI Act by the Principal Borrower.

A conditional interim stay was granted by the Debt Recovery Tribunal and the parties filing the appeal were directed to deposit a sum of Rs. 2 Crores within a period of 30 days and to bring a better buyer in respect of the properties in question within a period of 60 days along with 10% of the proposed sale consideration. Since the Borrower failed to comply with this order of the Debt Recovery Tribunal, the mortgaged properties were put to auction and attempts made by the owners of the property to challenge the proposed auction failed inasmuch as the application moved before the Debt Recovery Tribunal and the appeal before the Debt Recovery Appallete Tribunal and the High Court were all dismissed. The property was put to auction after getting it valued. In the meantime, Andhra Bank assigned all its debts and underlying securities to the Respondent (Prudent ARC Limited).

All attempts by the Principal Borrower to prevent the auction failed and the auction was conducted and a sale certificate was issued in favour of the auction Purchaser. The Principal Borrower, then filed an appeal before the Debt Recovery Appellate Tribunal to restrain the Bank or the Assignee from proceeding with the auction. The Debt Recovery Appellate Tribunal directed the Principal Borrower to comply with the requirements of making a Pre-deposit under Section 18 of the SARFAESI Act. The said direction was challenged before the High Court. The High court, then directed the Debt Recovery Appellate to hear the appeal on merits by passing a waiver on the statutory requirement of Pre-deposit by observing that the realization of the amount deposited by the auction purchaser against the said debt is more than 50 percentage of the total debt, therefore, it can be inferred that 50% of the debt due is secured.

However, this decision of the High Court and subsequently of the Debt Recovery Appellate Tribunal was challenged in the High Court by the Respondent/ Assignee (Prudent ARC) in a writ petition before the High Court wherein the High Court directed the Principal Borrower to deposit the remaining amount of the 50% of the Pre-deposit as it is a statutory mandate under Section 184 of the SARFAESI Act and cannot be waived off by the Debt Recovery. This decision of the High Court was challenged before in the Supreme Court in the present appeal.

DECISION OF THE SUPREME COURT
The Supreme Court, while deciding on the issue, observed that according to the proviso to Section 18 of the SARFAESI Act, it is the “borrower” who has preferred an appeal before the Appellate Tribunal, hence, it the “borrower” who shall have to deposit 50% of the amount of “debt due” from him. The Supreme Court also observed that the borrower is not entitled to claim adjustment/appropriation of the amount realized by selling the secured properties and deposited by the auction purchaser in the event, when the auction sale is also under challenge.

Therefore, in conclusion, a borrower can take the benefit of the amount received by the creditor in an auction sale only if he unequivocally accepts the sale.

By - Prachi Pandey

  1. Civil Appeal no. 8969 of 2022.
  2. Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
  3. In case the borrower fails to discharge his liability in full within the period speci-fied in sub-section (2), the secured creditor may take recourse to one or more of the follow-ing measures to recover his secured debt, namely:-
    1.  take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
    2. take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt;
    3. appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
    4. require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
  4. Any person aggrieved, by any order made by the Debts Recovery Tribunal 1[under section 17, may prefer an appeal along with such fee, as may be prescribed] to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.
    (2)[Provided that different fees may be prescribed for filing an appeal by the borrower or by the person other than the borrower:]
    (3)[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.
Top