Pre-deposit under SARFAESI is mandatory

pre-deposit SARFAESI

Pre-deposit of 50% under section 18 of the Enforcement of Security Interest Act,2 (SARFAESI) is mandatory and cannot be waived in cases where the borrower challenges the action sale with respect to secured assets.

In the recent case of M/s Sidha Neelkanth Paper Industries Private Ltd and Anor v Prudent ARC Ltd and Ors, the Supreme Court held that where a borrower does not accept the holding of an auction, and challenges it, and steps are taken under sections 13(2) and 13(4) of the SARFAESI in connection with secured assets, the borrower must deposit 50% of the amount claimed by the secured creditor with interest.

The appellants and principal borrower, M/s Sidha Neelkanth Paper Industries, asked the Andhra Bank for a credit facility. In 2008, they had asked Standard Chartered Bank to take over their debt. In 2010, the Andhra Bank agreed to an open cash credit limit of INR1.55 billion (USD18.9 million) in favour of the principal borrower.

When the principal borrower failed to make a repayment to the Andhra Bank, its account was declared a non-performing asset (NPA). The Andhra Bank issued a demand under section 13(2) of the SARFAESI for repayment and the principal borrower raised an objection to the demand.

The amount remained unpaid and, under section 13(4) of the SARFAESI, the Andhra Bank took further measures including possession of a mortgaged property to secure part of the debt. Other parties then appealed against the measures taken by the bank.

The Debt Recovery Tribunal (DRT) granted a condition interim stay, with the appealing parties directed to deposit INR20 million within 30 days and to present a better buyer for the property within 60 days, together with 10% of the proposed sale consideration.

As the borrower did not comply with this order, the mortgaged property was put up for auction. Challenges by the owners of the property to the auction were dismissed by the DRT, the Debt Recovery Appellate Tribunal (DRAT) and the High Court. The property was put up for auction after valuation. In the meantime, Andhra Bank assigned all its debts and underlying securities to the respondent, Prudent ARC.

The auction was conducted and a sale certificate issued in favour of the purchaser at auction. The principal borrower then filed an appeal before the DRAT to restrain the bank or the assignee from proceeding further.

The DRAT directed the principal borrower to comply with the requirement to make a pre-deposit under section 18 of the SARFAESI. On appeal, the High Court ordered the DRAT to hear the appeal on its merits, issuing a waiver of the statutory requirement of pre-deposit.

The court held that the amount deposited by the auction purchaser was greater than 50% of the total debt. It could be inferred, therefore, that 50% of the debt due was already secured.

Further hearings before the high court and the DRAT led to the principal borrower being directed to deposit the remaining amount of the 50% of the pre-deposit, as it is a statutory requirement under section 18 of the SARFAESI and cannot be waived by the DRT or DRAT. The matter was appealed to the Supreme Court.

The Supreme Court held that the proviso to section 18 of the SARFAESI envisaged that it was the borrower who appealed to the DRAT, and therefore it was the borrower who had to deposit 50% of the amount of the debt due from them.

The court also held that the borrower was not entitled to claim an adjustment in the amount of the deposit because the secured property had been sold. The borrower was neither entitled to claim any sale proceeds deposited by the purchaser at auction when they were challenging the very sale at auction. A borrower could only take the benefit of the amount received by the creditor at auction if they unequivocally accepted the sale.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.