IS THE PRE-DEPOSIT OF 50 % OF DEBT DUE UNDER SECTION 18 OF THE SARFESI ACT MANDATORY?


Section 18 of the SARFESI Act, 2002 stipulates that right of the party aggrieved by the order u/s 17 to appeal before the appellate tribunal within 30 days. It mandates a prescribed fee of 50 % of the debt due and strictly mentions 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.
The debt due is to be deposited before the DRAT as a mandatory requirement, but the Supreme Court in various cases have opined that in appropriate cases for reasons to be recorded the deposit of at least 25% per cent of the debt due would be permissible, but not entire waiver.

In Sidha Neelkanth Paper Industries (P) Ltd. v. Prudent ARC Ltd., 2023 SCC OnLine SC 12, The Supreme Court posed a few questions 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?”

The Court Opined that:

A. In case steps taken under section 13(2)/13(4) against secured assets are under challenge, the amount due will be: 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.

B. In case challenge is to the sale of the secured assets, the amount due would be : 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.

C. In case, both steps yaken under section 13(4) and the auction sale of the secured asset are challenged the amount due would be:

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.

D. Whether the amount received in auction sale can be adjusted while determining payment of 50% under section 18 if sale of secured assest is under challenge: NO . The SC has held that the second proviso to Section 18 of the SARFAESI Act, it is the “borrower” who has preferred an appeal before the Appellate Tribunal and the “borrower” who shall have to deposit 50% of the amount of “debt due” from him. If the words used in the second proviso to Section 18 of the SARFAESI Act are “borrower has to deposit”, it is not appreciable how the amount deposited by the auction purchaser on purchase of secured assets can be adjusted and/or appropriated towards the amount of pre-deposit, to be deposited by the borrower.

i. It is the “borrower” who has to deposit the 50% of the amount of “debt due” from him.

ii. At the same time, if the borrower wants to appropriate and/or adjust the amount realised from sale of the secured assets deposited by the auction purchaser, the borrower has to accept the auction sale.

In other words, the borrower can take the benefit of the amount received by the creditor in an auction sale only if he unequivocally accepts the sale.

iii. In a 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)/13(4) of the SARFAESI Act with respect to secured assets, the borrower has to deposit 50% of the amount claimed by the secured creditor along with interest as per section 2(g) of the Act 1993 and as per section 2(g), “debt” means any liability inclusive of interest which is claimed as due from any person.

E. Can the Borrower pray to adjust/give credit of the sale proceeds, in an application of pre-deposit: NO.

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.

F. How Much amount does the borrower has to pay?

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.

G. If the borrower intends to make a request to reduce the deposit to 25% it has to make out a special case for reduction (from 50% to 25%). Can the entire amount, as required under section 18 to deposit be waived off? -  No.

The supreme court in Kotak mahindra bank vs. Ambuj A. Kasliwal (2021)3SCC549 also held that

  • When further amount is due and payable in discharge of the decree/recovery certificate issued by the DRT in favor of the appellant/Bank, the High Court does not have the power to waive the pre-deposit in its entirety, nor can it exercise discretion which is against the mandatory requirement of the statutory provision as contained in Section 21.
  • In all cases 50% of the decretal amount i.e. the debt due is to be deposited before the DRAT as a mandatoryrequirement,butinappropriatecasesforreasonstobrrecorded the deposit of at least twenty-five per cent of the debt due would be permissible, but not entire waiver.
  • Any waiver of pre-deposit to the entire extent would be against the statutory provisions and, therefore, not sustainable in law.  The order of the High Court is, therefore, liable to be set aside.

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Greetings, I am a young legal professional and a proud Gorkha who’s eager as a morning bird, loves poetry and drama, listens to the Floyd and the Beatles, admires the court craft and is passionate about the little things that adds immense value.

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