SARFAESI Act and Pre-Deposit Requirement: Supreme Court’s Ruling in Sidha Neelkanth Paper Industries Case

The Supreme Court of India recently ruled in the case of M/s Sidha Neelkanth Paper Industries Pvt. Ltd. & Another vs. Prudent ARC Limited & Others, addressing crucial aspects of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The case revolved around the pre-deposit requirement under Section 18 of the SARFAESI Act when appealing decisions of the Debt Recovery Tribunal (DRT).

Background of the Case

The principal borrower, M/s Sidha Neelkanth Paper Industries Pvt. Ltd., availed a credit facility of ₹15.5 crores from Andhra Bank, which was later taken over by Standard Chartered Bank. The borrower failed to make repayments, leading to its account being classified as a Non-Performing Asset (NPA). Consequently, the bank initiated proceedings under Section 13(2) of the SARFAESI Act in 2013, demanding a repayment of ₹16.61 crores.

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After failing to comply with the bank’s demands, the secured assets were put up for auction. The auction resulted in a successful bid of ₹12.5 crores. However, the borrower challenged the auction and filed an appeal before the Debt Recovery Appellate Tribunal (DRAT), seeking a waiver of the mandatory 50% pre-deposit required under Section 18 of the SARFAESI Act.

The DRAT ruled in favor of the borrower, allowing the adjustment of the auction sale proceeds towards the pre-deposit requirement. The bank and auction purchasers challenged this ruling before the Delhi and Madhya Pradesh High Courts, which ruled in favor of the secured creditors. The borrowers then appealed to the Supreme Court.

Arguments by the Appellants (Borrowers)

• The borrowers contended that since the secured property was sold for ₹12.5 crores against a total debt of ₹16.61 crores, more than 50% of the outstanding dues had been recovered.
• They argued that the auction proceeds should be considered as the required pre-deposit under Section 18.
• The borrowers also claimed that further payment would be an unfair burden, as the bank had already realized a substantial portion of the debt.

Arguments by the Respondents (Secured Creditors and Auction Purchasers)

• The secured creditors argued that the SARFAESI Act’s pre-deposit requirement is mandatory and cannot be waived.
• The law requires borrowers to deposit 50% of the ‘debt due’, as defined in the SARFAESI Act.
• The sale proceeds from the auction cannot be adjusted towards the borrower’s pre-deposit requirement.
• The borrowers were simultaneously challenging the auction sale, which meant they could not claim its proceeds to satisfy their pre-deposit obligation.

Supreme Court’s Observations

• “The word ‘borrower shall deposit’ in Section 18 clearly indicates that the borrower is required to make the deposit separately.”
• “If the borrower wants to appropriate the auction sale proceeds, they must unequivocally accept the sale. A borrower cannot simultaneously challenge the auction while seeking to benefit from it.”
• “Section 18(2) states that no appeal shall be entertained unless the borrower deposits 50% of the amount of debt due, as determined by the DRT or claimed by the secured creditor.”
• “The law does not provide for any automatic adjustment of sale proceeds towards the pre-deposit requirement.”

Final Judgment

• The Supreme Court set aside the DRAT’s ruling and held that the borrower must separately deposit 50% of the debt due before filing an appeal.
• The Court ruled that the amount realized through auction cannot be adjusted towards the pre-deposit requirement under Section 18.
• The borrowers’ appeal was dismissed, and the bank’s right to enforce the recovery was upheld.
• The auction sale was confirmed, and the sale certificate issued to the highest bidder remained valid.

Legal Precedents Considered

• Inderjeet Arya vs. ICICI Bank Ltd. (2017): Reaffirmed that the pre-deposit requirement under SARFAESI is mandatory.
• Axis Bank vs. SBS Organics Pvt. Ltd. (2016): Stated that the borrower must deposit 50% of the debt due before an appeal.
• Eskays Construction Pvt. Ltd. vs. Soma Papers & Industries Ltd. (2016): Clarified that auction proceeds cannot be used to satisfy pre-deposit obligations.

Implications of the Judgment

• The ruling reinforces that borrowers must deposit 50% of the outstanding debt when appealing to the DRAT.
• It prevents borrowers from misusing auction proceeds to evade their financial obligations.
• The judgment ensures that secured creditors’ rights remain protected and that recovery processes under SARFAESI are not delayed.
• The decision strengthens the legal framework for loan recovery and financial discipline.

Conclusion

The Supreme Court’s ruling in this case clarifies the interpretation of Section 18 of the SARFAESI Act and upholds the mandatory nature of the pre-deposit requirement. The judgment ensures that borrowers cannot avoid financial obligations by seeking adjustments from auction proceeds while simultaneously contesting the auction sale. This decision sets a precedent for all future disputes related to loan recoveries under the SARFAESI Act, reinforcing financial discipline and legal certainty.

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Petitioner Name: M/s Sidha Neelkanth Paper Industries Pvt. Ltd. & Another.
Respondent Name: Prudent ARC Limited & Others.
Judgment By: Justice M.R. Shah, Justice B.V. Nagarathna.
Place Of Incident: Delhi.
Judgment Date: 05-01-2023.

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