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How Much Should Be The Amount Of Deposit For Filing an Appeal Before The Debt Recovery Appellate Tribunal?

Deposit For Filing an Appeal Before The Debt Recovery Appellate Tribunal

The article is based upon the judgement by Hon’ble Chief Justice Mr P.R.P. Menon and Hon’ble Justice Mr P.P. Sahu of the High Court of Chhattisgarh in Shri Mohan Products Pvt. Ltd. and Others vs State Bank of India and others.

The judgement describes a peculiar situation where the Debt Recovery Appellate Tribunal (DRAT) rejects upon non-deposit of the claimed amount as set under Section 18 of the SARFAESI Act. The Learned Court corrects the position of law in this judgement which has been described.

The legal framework as created by the SARFAESI is for protecting the secured creditor’s interest if debts are not paid by the debtor, whereas also giving an opportunity to the debtor that the action taken against him is unnecessary and illegal in part of the secured creditor. Thus, maintaining a balance of legal action and legal protection to each party as per the provisions contained in the SARFAESI Act.

What if such legal protection or a judicial principle is hindered by law or interpretation of the law, that may cause a party in not having the just ground to approach the higher judicial authority as set up by the law.

Here, in this case, the petitioner is a borrower, appealed before the Appellate Tribunal (DRAT) which rejected the appeal on the ground that the legal requirement of depositing 50% of the claim amount by the secured creditor has to be deposited before filing the appeal.

Though the said requirement is not improper but judicial interpretation leads to such direction that, the binding requirement of deposit increases because of the secured property is sold in the auction and the auction purchaser has deposited a fixed amount during the auction.

The interpretation is such that, the claimed debt also includes interest charge which is not due or is expected to be due in the further course of the event and labelling it as ‘futures interest’ which is also binding on the Borrower to pay. Such ‘future interest’ increase the liability of the borrower and for filing an appeal, the borrower has to make a further deposit in instituting the appeal.

So, if an auction amount has been deposited does that also adds up into the claim amount for filing an appeal before the Appellate Tribunal, thus, making the hearing more expensive or causing hardship for the appellant for receiving justice.

Facts- The Appellant is a company engaged in manufacturing business, availed financial assistance from the Respondent No.1 Bank and created a security interest over the property of the company. The Appellant suffered losses in the business and was unable to pay monthly instalments.

The Respondent Bank issued a notice under Section 13(2) of the SARFAESI Act, demanding a sum of Rs. 4.15 Crores, which was inclusive of the principal amount and the interest.

The Bank proceeded further and issued a possession notice under Section 13(4) of the SARFAESI on 11.08.2012, providing all details of hypothecated movable, plant and machinery of which possession will be taken by the Bank.

Appellants challenged the proceeding before the DRT by filing a Securitization Application on the grounds that, the possession notice issued under Section 13(4) was in not compliance with the Rule 4(1) & 4(2) of the Securities Interest (Enforcement) Rules, 2002. The application was however dismissed for non-prosecution as the Appellants could not appear before the DRT.

The Appellants later approached for a One Time Settlement Scheme (OTS) and offered Rs 4.25 Crores to avail the benefit of OTS and deposited a sum of Rs. 15 lakhs in a ‘No Lier Account’. However, the Bank without passing any order on OTS published a notice in the newspaper on 05.08.2016 for auction of the property on 07.09.2016. This was as alleged by the Appellants was against the rule under Rule 8(6) and 9(1) of the Enforcement Rules.

The Appellants by regularly informing of the pending OTS scheme conducted the auction sale on 07.09.2016 and sale certificate was issued to the auction purchaser (Respondent No.2). Thus, the allegation of the Appellant on illegalities and irregularities performed by the secured creditor.

The Appellants filed a securitization application against the illegal auction sale held on 07.08.2019 which was dismissed on merit. The appellant filed an appeal under Section 18 of the SARFAESI before the DRAT (Appellate Tribunal).

To properly and successfully entertain the appeal before the appellate court as per the first proviso of Section 18(1), the appellant has to deposit 50% of the claim amount. As per Section 13(2), the claim is of Rs. 4.15 Crores and an additional sum were fetched due to auction an amount of Rs. 2.73 Crores.

The Appellant Court reckoned that the total amount payable is Rs. 7.23 Crores (including future interest) and directed 50% of the said amount has to be deposited as in its order dated 05.07.2018. The Appellant filed a Miscellaneous petition and cited two judgments one from a Division bench of Chennai High Court and other from Allahabad High Court, that, ‘future interest’ cannot be considered as a part of the statutory deposit in terms of the proviso of Section 18(1) of the SARFAESI. However, the court rejected the argument.

The appellant challenged the said order by filing a writ petition. The Writ Court also rejected the petition on the basis of judgment in Parsn Medicinal Plants Pvt. Ltd. & another vs Indian Bank & Others [(2011) 15 SCC 253], thus aggrieved by the decision filed this writ appeal.

Held- The Court corrected the position of law and legal question that arose in the appeal.

The Court firstly, observed that in the latter part of the judgement passed in Parsn Medicinal, that if the Bank were permitted to appropriate the amount generated by way of the auction sale of the property and the Bank had no objection to having the appeal entertained without any further deposit in terms of the second proviso to Section 18(1) of the SARFAESI Act. The Supreme Court after consideration directed the DRT to have the appeal considered on merits without any further deposit with the liberty to the Bank to have the auction deposit to be appropriated.   

The Court observed and corrected the position of law set by the learned Single Judge in the Writ Petition, which misquoted the judgment in Parsn Medicinal case, that if a Bank was permitted to appropriate the amount generated by way of auction sale of the property and the Bank had no objection in having the appeal entertained without any further deposit in terms of the second proviso of Section 18(1) of the SARFAESI Act. The Supreme Court in the said case after consideration directed the DRT to have the appeal to be decided on merits without any further deposit with the liberty to the Bank to have the auction deposit to be appropriated.

When the amount generated by auction purchaser can be termed ‘additional’ under Section 18(1) of the second proviso?

The said amount generated by auction purchase, cannot be added if the Borrower has challenged the auction sale, it should not be added under the second proviso of Section 18(1) of the Act. This has been opined in the S.C judgment of Axix Bank vs SBS Organics Pvt. Ltd. & Another [(2016) 12 SCC18] that the amount deposited by the borrower in terms of the second proviso to Section 18(1) of the SARFAESI Act is not a secured asset or a secured debt and if the borrower succeeds, the said amount has to be returned to the borrower. The amount deposited by the auction purchaser is in respect with the property of the borrower and if the borrower succeeds in an appeal, the auction amount will naturally be returned to the auction purchaser.

Similarly, in the Eskasys Construction Pvt. Ltd vs Soma Papers & Industries Ltd. & Others. [AIR 2017 Bombay 10], the learned Division Bench of the Bombay H.C contended that auction deposit cannot be reckoned for the purpose of satisfaction of the statutory deposit in terms of the second proviso to Section 18(1) of the SARFAESI for entertaining the appeal filed by the borrower.

Thus, the above two judgments form a considerate opinion of law that amount which is deposited by an auction purchaser cannot be included as a part of the statutory deposit as per the first proviso of Section 18(1) of the SARFAESI.

How much should be the deposit as per Section 18(1)?

As per the Section 18(1) of the SARFAESI Act a satisfaction of 50% of the amount due which is claimed by the Bank or as determined by the Tribunal, whichever is less is to be fixed. Though the deposit limit can be brought down to 25% but not lower than that, as per the third proviso of Section 18(1).

The law nowhere claims the future interest is also included for filing an appeal, as it will go against the scheme of the statute and will make the right to appeal mere ‘illusory’. This has been explained in Mardia Chemicals Ltd. & Others vs Union of India & Others [(2004) 4 SCC 311] wherein, the original provision was challenged as the deposit limit was set to 75% of the amount. The Hon’ble Supreme Court struck down that it as unconstitutional.

To further elaborate, in the Division Bench Judgment of the High Court of Bombay in M/s Mrb Roadconst Pvt. Ltd vs Rupee Co-op Bank Ltd. [AIR 2016 (NOC) 334 (BOM.)], the bench referred to the definition of ‘debt’, as used in Section 2(h-a) of the SARFAESI Act, which referred to Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, wherein the term ‘debt’ included ‘interest’ as well which is claimed as due from any person by a bank or financial institution and hence it will take in the ‘future interest’ as well.

Also, under Section 13(2) the secured creditor can raise a claim of the ‘principal amount’ and also the ‘interest’ which will be the total claim figure against the borrower towards the ‘debt’. For fulfilling the liability, where if the borrower escapes from discharging the debt, Section 13(4) enables the secured creditor to pursue measures for recovery.

The purpose of the realization of debts is to empower the secured creditor to take possession of the securities and sell without the intervention of the Courts. 

In so far, the ‘debt’ contains, ‘interest’ as well but these qualifications can be exclaimed by the term ‘as claimed by the secured creditors’ which is provided in the first proviso of Section 18(1) of the Act. This term signifies only the debt as claimed by the borrower shall be admissible as a scale for determining the deposit for filing an appeal as per Section 18(1).

In contrast, the debt as is due from the borrower which is claimed by the secured creditor can only be the amount which is due on the month of ‘March’ instead of interest payable for the month of ‘April’ or ‘May’ which will not become due as debt.

This can be explained by Section 13(2) of the SARFAESI a recovery notice is issued by the secured creditor, it includes the principal amount and also ‘interest’ which became due as on the date of issuance. It cannot include any ‘future interest’ to have it termed as ‘due’ as on the date of said notice. The proviso under Section 18(1) terms ‘debt’ as claimed not as to say ‘claimable’ so as to include ‘future interest’ into it.

Conclusion

The Court order to set aside the Single Judge judgement in the Writ Petition and directed the Appellate Tribunal (DRAT) to restore the appeal and to decide the matter with merits of the petition.

Thus, no future interest can be part of the claimed amount while filing an appeal as per Section 18 of the Act for filing an appeal before the DRAT. The deposit should be the only extent to 50% of the claimed amount as envisaged in the notice under Section 13(2). This deposit amount can be lower not below 25% of the claimed amount by the borrower. Thus, to evaluate a future interest into the claimed amount is improper.

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