Borrowers must deposit 50% of total debt including future interest for DRAT appeals under Section 18(1) SARFAESI Act

The Bombay HC dismissed a petition seeking waiver of deposit under Section 18(1) of the SARFAESI Act, 2002. The court held that "debt" under Section 2(g) of the RDB Act includes any liability with interest claimed by banks/financial institutions. For DRAT appeals, borrowers must deposit 50% of debt due as claimed by secured creditors or determined by DRT, whichever is less. The deposit amount must include future interest accrued on the debt till the appeal filing date, not just the amount mentioned in Section 13(2) notice. The court found no statutory justification to exclude future interest from deposit calculations.

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The core legal questions considered by the Court in this matter include:

1. What is the correct amount of "debt due" for the purpose of pre-deposit under the 2nd proviso to Section 18(1) of the SARFAESI Act, 2002 - whether it is limited to the amount mentioned in the Section 13(2) notice or includes accrued future interest as wellRs.

2. Whether the direction of the Debts Recovery Appellate Tribunal (DRAT) to deposit Rs.35 Crores as a condition precedent to entertain the appeal was justified, especially in light of the Petitioners' contention that the amount payable was approximately Rs.49 Crores and thus the deposit should be proportionately lower.

3. Whether the time granted by the DRAT to deposit the amount (two days) was unreasonably short given the large sum involved.

4. The interpretation and applicability of the Hon'ble Supreme Court decision in Sidha Neelkanth Paper Industries Private Limited regarding the calculation of "debt due" for pre-deposit under Section 18 of the SARFAESI Act.

Issue-wise Detailed Analysis

Issue 1: Definition and Quantum of "Debt Due" for Pre-deposit under Section 18(1) provisos of the SARFAESI Act

The legal framework centers on the 2nd proviso to Section 18(1) of the SARFAESI Act, which mandates that no appeal shall be entertained by the Debts Recovery Appellate Tribunal (DRAT) unless the borrower deposits 50% of the amount of "debt due" as claimed by the secured creditor or as determined by the Debt Recovery Tribunal (DRT), whichever is less. The 3rd proviso permits the DRAT to reduce this deposit to a minimum of 25%, provided reasons are recorded in writing.

The term "debt" is defined under Section 2(h)(a) of the SARFAESI Act, which adopts the meaning assigned in Section 2(g) of the Recovery of Debts and Bankruptcy Act (RDB Act). Section 2(g) of the RDB Act defines "debt" broadly as any liability, inclusive of interest, claimed as due from a person by a bank or financial institution, whether secured or unsecured, assigned, payable under decree or otherwise.

The Court emphasized that this definition is expansive and includes accrued future interest. Therefore, the "debt due" for the purpose of pre-deposit is not confined to the principal sum mentioned in the Section 13(2) notice but extends to interest accrued up to the date of filing the appeal before the DRAT.

The Court relied on a prior Division Bench decision of the Bombay High Court, which held that the deposit amount must be calculated on the debt due at the time of filing the appeal, inclusive of accrued interest, and not merely the amount stated in the Section 13(2) notice. The Court quoted extensively from this precedent, underscoring that limiting the deposit to the Section 13(2) notice amount alone would contravene the plain language of the statute.

The Court also clarified that if any part payment has been made by the borrower after the Section 13(2) notice but before filing the appeal, such payment must be credited and the deposit amount correspondingly reduced.

Issue 2: Justification of the DRAT's Direction to Deposit Rs.35 Crores

The Petitioners contended that the amount payable to the secured creditor was approximately Rs.49 Crores, based on the Section 13(2) notice dated 24th April 2019, and thus the deposit should have been about Rs.12.5 Crores (25% of Rs.49 Crores). They argued the DRAT erred in directing a deposit of Rs.35 Crores, which was more than 50% of the amount mentioned in the securitization notice.

The Court rejected this contention, noting that the first Respondent-ARC had filed a reply in the DRAT asserting that the amount due as on 16th January 2024 was Rs.84.81 Crores, a figure which was not disputed by the Petitioners at that stage. The Court observed that the Petitioners themselves undertook to deposit Rs.10.25 Crores by 19th January 2024 to avoid dispossession, thereby accepting the higher amount as the basis for the deposit calculation.

Legally, the Court held that the amount of "debt due" includes accrued interest, and the figure of Rs.84 Crores claimed by the secured creditor was valid for determining the deposit amount. The Court found no statutory or judicial basis to restrict the deposit calculation to the amount mentioned in the Section 13(2) notice alone.

The Court further noted that the Petitioners had challenged not only the Section 13(2) and 13(4) measures but also the sale notice published by the secured creditor, which under the Supreme Court's decision in Sidha Neelkanth Paper Industries Private Limited, requires considering the higher amount of debt due inclusive of interest for pre-deposit calculation.

Issue 3: Interpretation of the Supreme Court Judgment in Sidha Neelkanth Paper Industries Private Limited

The Petitioners relied heavily on paragraph 34 of the Supreme Court's decision in Sidha Neelkanth Paper Industries Private Limited to argue that only the amount mentioned in the Section 13(2) notice should be considered for pre-deposit calculation.

The Court analyzed the judgment in its entirety and found that the Petitioners' narrow reading of paragraph 34 was misplaced. The Supreme Court clarified that when steps under Section 13(2)/13(4) alone are challenged, the amount mentioned in the Section 13(2) notice is the "debt due." However, when both the challenge to Section 13(4) measures and the auction sale of secured assets are involved, the "debt due" means the higher of the amounts claimed, inclusive of interest.

Since the Petitioners had challenged the sale notice as well, the Court held that the higher amount inclusive of accrued interest must be considered, consistent with the Supreme Court's reasoning. Therefore, the reliance on Sidha Neelkanth to limit the deposit amount to the Section 13(2) notice figure was rejected.

Issue 4: Adequacy of Time Granted to Deposit the Amount

The Petitioners argued that the two-day period granted by the DRAT to deposit Rs.10.25 Crores was unreasonably short given the large sum involved.

The Court found this argument untenable. It noted that possession of the secured asset was scheduled for 19th January 2024, and the Petitioners themselves undertook to deposit the said amount by that date to avoid dispossession. The Court further observed that the impugned order of the DRT was passed on 5th July 2023, and the limitation period to challenge the order expired on 5th August 2023, yet the Petitioners filed the appeal only on 14th January 2024 and moved the DRAT thereafter. The Court held that the Petitioners had delayed action and that the two-day period was granted to accommodate their undertaking and to prevent immediate dispossession, which was reasonable in the circumstances.

Additional Findings

When questioned whether the Petitioners were in a position to deposit Rs.25 Crores (approximately 50% of Rs.49 Crores), their counsel admitted that they were not. This further weakened their plea for waiver or reduction of the deposit amount.

The Court clarified that its order would not prejudice any One Time Settlement (OTS) proposal the Petitioners might wish to make to the secured creditor, which the creditor was free to consider independently.

Significant Holdings

The Court held:

"On a plain reading of the 2nd proviso to section 18(1) of the SARFAESI Act read with the definition under the word 'debt' as defined in section 2(g) of the RDDB Act, it is clear that before an appeal can be entertained by the DRAT, the borrower has to deposit 50% of the amount of debt due from him as claimed by the secured creditors or as determined by the DRT whichever is less. If there is no determination of the debt by the DRT under the provisions of the RDDB Act, then the borrower would have to deposit 50% of the amount of debt due from him as claimed by the secured creditors. The provision on a plain reading does not in any way exclude taking into consideration the future interest that is accrued on the debt owed by the borrower to the secured creditor." (Para 6)

"Therefore, if the claim made by the secured creditor in the section 13(2) notice includes future interest, the same would certainly be included in the 'amount of the debt due' from the borrower to the secured creditor as contemplated under the 2nd proviso to section 18(1) of the SARFAESI Act. There is therefore no justification to hold that it is only the figure that is mentioned in the section 13(2) notice that is to be taken into consideration and not the future interest accrued on the said sum, whilst determining the deposit amount under the 2nd proviso to section 18 of the SARFAESI Act." (Para 6)

"If we were to accept the contention of the petitioner that the amount to be deposited by the borrower [under the 2nd proviso to section 18(1)] would be only on the basis of the sum/figure as mentioned in the section 13(2) notice and not the interest accrued thereon after the date of the said notice, the same would be violating the plain language of the statute." (Para 6)

"The amount of deposit would have to be determined on the basis of the amount of debt due by the borrower to the secured creditor on the date when the appeal is filed in DRAT. This would not only include the amount mentioned in the section 13(2) notice but also interest accrued thereon till the date of filing of the appeal under section 18 of the SARFAESI Act." (Para 6)

"Under Section 17, the scope of enquiry is limited to the steps taken under Section 13(4) against the secured assets. Therefore, 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. 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. 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." (Paragraph 34 of the Supreme Court decision, reproduced at Para 7)

The Court concluded that the DRAT's order directing deposit of Rs.35 Crores was justified and consistent with the statutory provisions and judicial precedents. The Petitioners' challenge to the order was dismissed for lack of merit. The Court also found the time granted for deposit reasonable under the circumstances and noted the Petitioners' inability to deposit even the lower amount they claimed.

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