SUPREME COURT CLARIFIES WHICH AMOUNT IS TO BE DEPOSITED BY BORROWER AS PRE-DEPOSIT U/S 18 SARFAESI ACT

Recently, a Two Judge Bench of the Hon’ble Supreme Court comprising of Justices M R Shah and B V Nagarathna passed a judgment dated 05.01.2023 in Sidha Neelkanth Paper Industries Private Limited vs Prudent ARC Limited, in CIVIL APPEAL NO. 8969 OF 2022, and held that 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.

FACTS

The Appellant, approached the Andhra Bank for sanction of credit facility in the year 2008. 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. Immovable properties were mortgaged by the guarantors and by the borrower to secure the said cash credit facility. After taking over the existing cash credit facility, a further ad-hoc open cash credit to the tune of Rs. 3 crores, due to the Standard Chartered Bank, was cleared by the Andhra Bank. Since, the principal borrower failed to make the repayment to the Andhra Bank, its account was declared as a Non Performing Asset (NPA). A notice dated 10.05.2013 was issued by the Andhra Bank under Section 13(2) of the SARFAESI Act, calling upon the borrower to pay the outstanding amount. Since the amount demanded was not paid under Section 13(2) of the SARFAESI Act, measures under Section 13(4) of the SARFAESI Act were initiated by the Bank and possession of one of the mortgaged properties was taken.

An appeal was filed by Respondent herein challenging the measures taken by the Andhra Bank under Section 13(4) of the SARFAESI Act in which conditional interim stay was granted by the Debt Recovery Tribunal and the applicants were directed to deposit a sum of Rs. 2 crores within a period of 30 days. Since the borrower failed to comply with the order of the DRT, the mortgaged properties were put to auction. The borrower filed a Writ Petition before the Delhi High Court challenging the assignment of debts by Andhra Bank, which came to be dismissed by the High Court. The borrower filed an interlocutory application before the DRT to prevent the auction. However, the DRT allowed the creditor/assignee to proceed with the auction.

The borrower filed an appeal before the DRAT challenging the order passed by the DRT dismissing the application filed by the borrower praying that the Bank/assignee be restrained from proceeding with the auction. The DRAT directed the borrower to comply with the requirements of making a pre-deposit under Section 18 of the SARFAESI Act. The said order was in the nature of an interim order and was challenged before the Delhi High Court. The High Court directed the DRAT to hear the appeal on merits by observing that on realizing the amount of Rs. 12.5 crores against the debt of Rs. 16.61 crores, it can be said that more than 50% of the debt due is secured/recovered and therefore the requirement of making a pre deposit under the second proviso to Section 18 of the SARFAESI Act can be said to have been met. The borrower also sought waiver of the statutory pre-deposit under Section 18 of the SARFAESI Act. The DRAT allowed the waiver of the statutory pre-deposit by observing that the amount already realized by selling the mortgaged property/secured property is required to be adjusted towards the pre-deposit and/or the same can be said to be a deposit of 50% of the amount as pre-deposit, as envisaged under Section 18 of the SARFAESI Act.

Feeling aggrieved and dissatisfied with the order passed by the DRAT allowing waiver of the statutory pre-deposit, the secured Creditor/Assignee filed the subject Writ Petition before the Delhi High Court. The High Court partly allowed the said writ petition preferred by the secured creditor/assignee by directing that the borrower is required to deposit 50% of the remaining 4.1 crores being debt due (after deducting/adjusting Rs. 12.5 crores realized/recovered by selling the mortgaged property). The High Court has also observed that it shall be open to DRAT to reduce the said pre-deposit amount to 25%, after recording reasons in writing for the said reduction.

ISSUE

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

REASONING AND ANALYSIS OF THE SUPREME COURT

Aggrieved by the aforementioned Order of the Delhi High Court, the Appellant moved the Supreme Court under Article 133 of the Constitution of India (Appeals to the Supreme Court in Civil Matters).

The Apex Court, in present case, w.r.t. above issue held as follows:

1. “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 before the DRT will be the ‘debt due’ within the meaning of proviso to Section 18 of the SARFAESI Act.
2. 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.
3. 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.”

CONCLUSION

Based on the aforesaid observations, the Apex Court allowed the appeal and held that the Delhi High Court erred in directing to adjust/appropriate the amount realized by auction sale of the 23 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.

Devashish Kakkar

Legal Associate

The Indian Lawyer