2016 (4) TMI 917 - SC - Indian Laws

Court rules pre-deposit not secured asset, must be returned upon appeal withdrawal.

The Supreme Court dismissed the appeal, affirming the High Court's decision to allow the borrower to withdraw the deposit made under Section 18 of the ... Pre-deposit under Section 18 - entertainment of appeal - refund of pre-deposit on disposal or withdrawal of appeal - appropriation or attachment of pre-deposit only by consent or lawful process - no lien on pre-deposit by secured creditor under Section 171 Indian Contract Act - recovery of shortfall under Section 13(10) read with Rule 11Pre-deposit under Section 18 - entertainment of appeal - refund of pre-deposit on disposal or withdrawal of appeal - Whether a pre-deposit made under the proviso to Section 18 is to be returned on disposal, withdrawal or when the appeal becomes infructuous, in the absence of appropriation or lawful attachment. - HELD THAT: - The proviso to Section 18 requires a borrower to make a pre-deposit for the Appellate Tribunal to entertain an appeal. The word 'entertain' denotes admitting the appeal to consideration; the deposit is a pre-condition for entertaining the appeal and is made to the Tribunal, not to the secured creditor. Consequently, where an appeal is disposed of on merits, withdrawn, or rendered infructuous and there has been no appropriation by the Tribunal with the depositor's consent and no attachment by lawful process, the pre-deposit is not a secured asset or secured debt and must be refunded to the depositor on request. The Court accordingly held that, in the absence of appropriation or attachment, the deposit is liable to be returned to the appellant/depositor. [Paras 22, 25]Pre-deposit made under Section 18 must be refunded on disposal, withdrawal or when the appeal becomes infructuous, unless it has been appropriated with consent or lawfully attached.No lien on pre-deposit by secured creditor under Section 171 Indian Contract Act - Whether the secured creditor/bank has a lien on the pre-deposit under Section 171 of The Indian Contract Act, 1872. - HELD THAT: - Section 171 concerns the general lien of bankers over goods bailed to them as security for a general balance of account. A pre-deposit made under Section 18 is lodged with the Appellate Tribunal, not bailed to the bank; it is not a bailment in terms of Section 148 nor goods retained by the bank. Therefore the bank has no right of general lien over the Tribunal-held pre-deposit under Section 171, and the contention that the bank could appropriate the deposit on that basis was rejected. [Paras 23, 24]Bank does not have a lien over the pre-deposit under Section 171 of The Indian Contract Act; the pre-deposit is not bailed goods to the bank.Appropriation or attachment of pre-deposit only by consent or lawful process - recovery of shortfall under Section 13(10) read with Rule 11 - Under what circumstances may the pre-deposit be appropriated or utilised towards the borrower's liability, and whether the Bank's rights under Section 13(10) / Rule 11 are affected by the refund direction. - HELD THAT: - The Court clarified that appropriation of the pre-deposit by the secured creditor/Tribunal can occur only if the Appellate Tribunal, with the depositor's consent, has already appropriated or adjusted the amount towards the dues, or if there is a lawful attachment of the deposit in proceedings under Section 13(10) read with Rule 11 or any other proceedings recognised by law. The present dismissal is without prejudice to the Bank's liberty to initiate appropriate steps under Section 13(10) and Rule 11 to recover any shortfall; such remedies remain available and are not foreclosed by the decree to refund the pre-deposit where no appropriation or attachment exists. [Paras 22, 27]Pre-deposit may be appropriated only by depositor's consent or pursuant to lawful attachment; Bank remains free to pursue recovery under Section 13(10) read with Rule 11.Final Conclusion: Appeal dismissed. The pre-deposit made under Section 18 must be refunded to the depositor in the absence of appropriation with consent or lawful attachment; the Bank retains the remedy to recover any shortfall under Section 13(10) read with Rule 11. Issues Involved:1. Deposit requirement under Section 18 of the SARFAESI Act.2. Fate of the deposit on disposal of the appeal.3. Bank's right to lien on the deposit.4. Applicability of Section 171 of the Indian Contract Act, 1872.Issue-wise Detailed Analysis:1. Deposit Requirement under Section 18 of the SARFAESI Act:An appeal under Section 18 of the SARFAESI Act before the Debt Recovery Appellate Tribunal (DRAT) can only be entertained if the borrower deposits fifty percent of the amount as per the order passed by the Debt Recovery Tribunal (DRT) under Section 17 or fifty percent of the amount due from the borrower as claimed by the secured creditor, whichever is less. The Appellate Tribunal may reduce this amount to twenty-five percent.2. Fate of the Deposit on Disposal of the Appeal:The primary legal issue is the fate of such a deposit upon the disposal of the appeal. The borrower made a deposit of Rs. 50 lakhs before the DRAT. When the Securitisation Application was finally disposed of by the DRT, setting aside the sale, the borrower sought to withdraw the appeal and refund the deposit. The High Court of Gujarat permitted the borrower to withdraw the amount unconditionally, which was challenged by the appellant-Bank. The Supreme Court held that the deposit made under Section 18 is not a secured asset or secured debt since no security interest was created on such pre-deposit. If the appeal is withdrawn or disposed of, the pre-deposit must be returned to the appellant unless appropriated with the consent of the depositor or attached under Section 13(10) read with Rule 11 of the Security Interest (Enforcement) Rules, 2002.3. Bank's Right to Lien on the Deposit:The appellant-Bank argued that it had a right to set off the deposit against the borrower's dues, citing Section 13(10) of the SARFAESI Act and Rule 11 of the Security Interest (Enforcement) Rules, 2002. However, the Supreme Court found no merit in this argument, emphasizing that the pre-deposit is not a secured asset or debt, and the bank cannot appropriate it without the depositor's consent or a legal attachment.4. Applicability of Section 171 of the Indian Contract Act, 1872:The Bank also claimed a lien on the deposit under Section 171 of the Indian Contract Act, 1872, which allows bankers to retain goods bailed to them as security for a general balance of account. The Supreme Court rejected this argument, clarifying that the pre-deposit with the Tribunal is not a bailment with the bank and thus does not fall under Section 171.Conclusion:The Supreme Court dismissed the appeal, affirming the High Court's decision to allow the borrower to withdraw the deposit. The Court clarified that the dismissal of the appeal does not affect the Bank's right to take steps under Section 13(10) of the SARFAESI Act read with Rule 11 of the Security Interest (Enforcement) Rules, 2002. There was no order as to costs.