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The Supreme Court Division Bench comprising Justices M.R. Shah and B.V. Nagarathna while hearing miscellaneous appeals on the issue of the borrower's pre-deposit, held that the amount deposited by the auction purchaser on the purchase of the secured assets cannot be adjusted towards the borrower's pre-deposit. If the borrower challenges the auction sale, they cannot use the sale proceeds to fulfil the pre-deposit requirement.
The present case involves the interpretation of certain provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts and Bankruptcy Act, 1993. The main question is whether, while calculating the amount to be deposited as pre-deposit under Section 18 of the SARFAESI Act, the amount deposited by the auction purchaser on the purchase of the secured assets should be adjusted towards the amount of pre-deposit to be deposited by the borrower.
The Supreme Court observed that Section 18 of the SARFAESI Act, which requires the borrower to deposit 50% of the amount of debt due from them as claimed by the secured creditors or determined by the Debts Recovery Tribunal (DRT), whichever is less, in order to file an appeal before the Appellate Tribunal. The SC Bench also noted the definitions of "debt" in the SARFAESI Act and the Recovery of Debts and Bankruptcy Act.
The SC Bench observed a similar decision by the Bombay High Court, which held that the borrower cannot use the sale proceeds to fulfil the pre-deposit requirement under Section 18 while simultaneously challenging the sale. The court agrees with the Bombay High Court's reasoning and confirms its decision.
In the present case, the respective High Courts have seriously erred in directing to adjust/appropriate the amount realised by the auction sale of the secured properties/ deposited by the auction purchasers while considering the 50% of the amount as pre-deposit to be deposited by the borrower, while preferring an appeal before the DRAT. Even the High Court of Delhi has erred in excluding the amount payable towards interest while considering the “debt due”. As per Section 2(g) of the Act 1993, “debt” means liability inclusive of interest as claimed by the bank/financial institution.
The Supreme Court noted held that the borrower is the one who has to deposit 50% of the debt due, and the amount deposited by the auction purchaser cannot be adjusted towards the borrower's pre-deposit. If the borrower wants to benefit from the amount realized from the sale of the secured assets, they must accept the auction sale. However, if the borrower challenges both the auction sale and the steps taken under Section 13(2) and 13(4) of the SARFAESI Act, they must deposit 50% of the amount claimed by the secured creditor along with interest.
The respective appeals preferred by the financial institution/assignee and auction purchasers are Civil Appeal Nos. 8970, 8972, 8973 and 8974 of 2022 have been allowed.
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