Partial amount deposited as precondition for entertaining appeal U/s 18 of SARFAESI Act neither secured asset nor a lien #indianlaws

The partial deposit before the DRAT as a pre-condition for considering the appeal on merits in terms of Section 18 of the Act, is not a secured asset. It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such pre-deposit in favour of the secured creditor. Therefore,on disposal of the appeal, either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of the pre-deposit, the same has to be allowed and the pre-deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor but with the consent of the depositors, had already appropriated the pre-deposit towards the liability of the borrower, or with the consent, had adjusted the amount towards the dues. It is also not a bailment with the bank as provided under Section 148 of The Indian Contract Act, 1872.

As Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) provides, an appeal before the Debt Recovery Appellate Tribunal (‘DRAT’) can be entertained only if the borrower deposits fifty per cent of the amount in terms of the order passed by the Debt Recovery Tribunal (‘DRT’) under Section 17 of the Act or fifty per cent of the amount due from the borrower as claimed by the secured creditor, whichever is less. The Appellate Tribunal may reduce the amount to twenty five per cent.

The question before the Court in the instant matter was as to what is the fate of such deposit on the disposal of appeal?

On the part of Bank it was contended that borrower has no right to get back the deposit made by it as a pre-condition for entertaining the appeal. The said amount has to be set off against the dues actually been quantified and for which, Section 13 recovery steps have been permitted. Further, it was submitted that the Bank has to secure the entire debt by proceeding against the secured assets, and therefore, the deposit is liable to be appropriated by the Bank. Bank, as further contended, has a lien on the amount under Section 171 of The Indian Contract Act, 1872.

The court observed that as per the scheme of the SARFAESI Act, it was intended to facilitate easy and faster recovery of loans advanced by banks and financial institutions. The ordinary recovery mechanism contemplated in the Code of Civil Procedure, 1908 was not considered sufficient and therefore the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was introduced for a special and speedier mechanism for the recovery. When even the later Act was not found to be good enough in achieving the intended objects, the SARFAESI Act was enacted.

The Act incorporates a system whereby direct action for recovery of secured debt may be initiated against the secured assets of a borrower after the debt is declared to be a non performing asset (NPA).

Under the scheme of the SARFAESI Act, a secured creditor is entitled to proceed against the borrower for the purpose of recovering his secured debt by taking action against the secured assets, in case the borrower fails to discharge his liability in full within the period specified in the notice issued under Section 13(2) of the Act. It is the mandate of Section 13(3) of the Act that the notice issued under Section 13(2) should contain details of the amount payable by the borrower and also the secured assets intended to be enforced by the secured creditor in the event of non-payment of the dues as per Section 13(2) notice. Thus, the secured creditor is entitled to proceed only against the secured assets mentioned in the notice under Section 13(2). However, in terms of Section 13(11) of the Act, the secured creditor is also free to proceed first against the guarantors or sell the pledged assets.

Any person aggrieved by the order of the DRT under Section 17 of the SARFAESI Act, is entitled to prefer an appeal along with the prescribed fee within the permitted period of 30 days. For ‘preferring’ an appeal, a fee is prescribed, whereas for the Tribunal to ‘entertain’ the appeal, the aggrieved person has to make a deposit of fifty per cent of the amount of debt due from him as claimed by the secured creditors or determined by the DRT, whichever is less. This amount can, at the discretion of the Tribunal, in appropriate cases, for recorded reasons, be reduced to twenty- five per cent of the debt.

It was observed that such preconditions of depositing fees is present in several statutes while providing for statutory appeals, like The Income-Tax Act, 1961, The Central Excise Act, 1944, The Consumer Protection Act, 1986, The Motor Vehicles Act, 1988, etc. However, unlike those statutes, the purpose of the SARFAESI Act is different, it is meant only for speedy recovery of the dues, and the scheme under Section 13(4) of the Act, permits the secured creditor to proceed only against the secured assets. Of course, the secured creditor is free to proceed against the guarantors and the pledged assets, notwithstanding the steps under Section 13(4) and without first exhausting the recovery as against secured assets referred to in the notice under Section 13(2). But such guarantor, if aggrieved, is not entitled to approach DRT under Section 17. That right is restricted only to persons aggrieved by steps under Section 13(4) proceeding for recovery against the secured assets.

The Appeal under Section 18 of the Act is permissible only against the order passed by the DRT under Section 17 of the Act. Under Section 17, the scope of enquiry is limited to the steps taken under Section 13(4) against the secured assets. The partial deposit before the DRAT as a pre-condition for considering the appeal on merits in terms of Section 18 of the Act, is not a secured asset. It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such pre-deposit in favour of the secured creditor. If that be so, on disposal of the appeal, either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of the pre-deposit, the same has to be allowed and the pre-deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor but with the consent of the depositors, had already appropriated the pre-deposit towards the liability of the borrower, or with the consent, had adjusted the amount towards the dues, or if there be any attachment on the pre-deposit in any proceedings under Section 13(10) of the Act read with Rule 11 of The Security Interest (Enforcement) Rules, 2002, or if there be any attachment in any other proceedings known to law.

The Court further expressed its disagreement with Banks’ contention that Bank has a lien on the pre-deposit made under Section 18 of the SARFAESI Act in terms of Section 171 of The Indian Contract Act, 1872.

The Court observed that Section 171 of The Indian Contract Act, 1872 provides for retention of the goods bailed to the bank by way of security for the general balance of account. The pre-deposit made by a borrower for the purpose of entertaining the appeal under Section 18 of the Act is not with the bank but with the Tribunal. It is not a bailment with the bank as provided under Section 148 of The Indian Contract Act, 1872.

[Axis Bank vs. SBS Organics Private Limited and Anr.]

(SC, 22.04.2016) – Civil Appeal No. 4379 of 2016