WHETHER A SECURED CREDITOR HAS A LIEN ON THE DEPOSIT MADE FOR FILING APPEAL BEFORE DEBTS RECOVERY APPELLATE TRIBUNAL UNDER SECTION 18 OF ‘SARFAESI’ ACT, 2002

[Mr. M. GOVINDARAJAN]

The Scheme of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was intended to facilitate easy and faster recovery of loans advanced by banks and financial institutions.  The ordinary recovery mechanism contemplated in the Code of Civil Procedure, 1908 was not considered sufficient.  Thus the Recovery of Debts due to Banks and Financial Institutions Act, 1993 was introduced for a special and speedier mechanism for the recovery.  Since the recovery process was not achieved the intended objects and hence the said was enacted.  The Act incorporates a system whereby direct action for recovery of secured debt may be initiated against the secured assets of a borrower after the debt is declared to be a non performing asset. (NPA)

A secured credit is entitled to proceed against the borrower for the purpose of recovering his secured debt by taking action against the secured assets, in case the borrower fails to discharge his liability in full within the period specified notice issued under Section 13(2) of the Act.   Section 13(3) of the Act mandates that the notice issued under Section 13(2) should contain details of the amount payable by the borrower and also the secured assets intended to be enforced by the secured creditor in the event of nonpayment of the dues as per Section 13(2) notice.  Thus, the secured creditor is entitled to proceed only against the secured assets mentioned in the notice under Section 13 (2).   However in terms of Section 13(11), the secured creditor is also free to proceed first against the guarantors or sell the pledged assets.

Section 17 of the Act provides for a right to appeal to the Debt Recovery Tribunal (DRT) in respect of the grievances on the measures taken by the secured creditor under Section 13 of the Act with forty five days from the date on which such measure had been taken.   Though Section 17 of the Act is titled as a ‘Right to Appeal’ the liberty granted to the aggrieved person is to make an application to the DRT and the parties are at a liberty to lead evidence before the Tribunal.  It is actually a trial before the DRT on the grievances of the aggrieved persons in respect of the measures taken by the secured creditor for recovery of dues of the borrower in proceedings against the secured assets.

Any person aggrieved by the order of the DRT under Section 17 of the Act, is entitled to prefer an appeal along with the prescribed fee within the permitted period of 30 days.   For the preferring an appeal, a fee is prescribed.  Whereas for the Tribunal to entertain the appeal, the aggrieved person has to make a deposit of 50% of the amount debt due from him as claimed by the secured creditors or determined by the DRT whichever is less.  This amount can, at the discretion of the Tribunal, in appropriates cases, for recorded reasons, be reduced to 25% of the debt.

What is the fate of such deposit on the disposal is the question and whether the secured creditor has the lien on such deposit amount.  The given below case law gives the answer for the same.

In ‘Axis Bank V. SBS Organics (P) Limited and another’ – (2016 (4) TMI 917 - SUPREME COURT) the first respondent in this case is a borrower.  Since he was aggrieved by the steps taken by the secured creditor filed Securitization Application before Debt Recovery Tribunal, Ahmadabad.    Interim relief was granted by DRT but the same was vacated.  The first respondent, therefore, moved Debt Recovery Appellate Tribunal, Mumbai under Section 18 of SARFAESI.   In requirement with the proviso to Section 18 the first respondent made a deposit of ₹ 50 lakhs before the Appellate Tribunal.

In the meanwhile DRT set aside the sale and decided in favor of the first respondent.  The respondent realized since DRT set aside the sale the appeal before the Appellate Tribunal will not survive and therefore sought permission to withdrawn the same and also for the refund of deposit of ₹ 50 lakhs.  Permission was granted, however, making it subject to the disposal of the appeal.

The first respondent withdrew the appeal but moved the High Court of Gujarat aggrieved by the observation that the withdrawal would be subject to the result of the appeal.  The Single Judge set aside the condition and permitted the first respondent to withdraw the amount unconditionally.  Aggrieved by this the bank filed an intra-court appeal which was dismissed by a Division Bench.  Aggrieved by this the bank filed appeal before the Supreme Court.

Before the Supreme Court the bank contended the following-

The first respondent has no right to get back the deposit made by it as a pre-condition for entertaining the appeal;

The said amount has to be set off against the dues of the first respondent, which has actually been quantified and for which, recovery steps under Section 13 of the Act was permitted;

The appellant bank has to secure the entire debt by the proceeding against the secured assets and therefore the deposit is liable to be appropriated by the bank;

The bank has a lien on the amount under Section 171 of the Indian Contract Act, 1872.

The Supreme Court analyzed the provisions of the Act.  The appeal under Section18 of the Act is permissible only against the order by the DRT under Section 17.  Under Section 17, the scope of the inquiry is limited to the steps taken under Section 13(4) against the secured assets.  The partial deposit before the DRAT as a precondition for considering the appeal on merits in terms of Section 18 is not a secured asset.  It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such deposit in favor of the secured creditor.  Under these circumstances, on disposal of the appeal either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of pre deposit, the same has not be allowed and the pre deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor, but with the consent of the depositors, had already appropriated the pre deposit towards the liability of the borrower, or with consent, had adjusted the amount towards the dues, or if there by any attachment on the pre-deposit in any proceedings under Section 13(10) of the Act read with Rule 11 of the Security Interest (Enforcement) Rules, 2002, or if there by any attachment in any other proceedings known to law.

The Supreme Court did not agree with the contentions of the bank that the bank has lien on the pre-deposit amount under Section 171 of the Indian Contract Act, 1872.  The Supreme Court held that Section 171 of the Indian Contract Act, 1872 provides for retention of goods bailed to the bank by way of security for the general balance of account.  The pre-deposit made by a borrower for the purpose of entertaining the appeal under Section 18 of the Act is not with the bank but with the Tribunal.   It is not a bailment with the bank as provided under Section 148 of the Contract Act.  The Supreme Court further held that conceptually it should be an argument available to the depositor, since the goods bailed are to be returned or otherwise disposed of, after the purpose of accomplished  as per the directions of the bailor.

The Supreme Court held that in this case the first respondent had in fact sought withdrawal of the appeal, since the appellant had already processed against the secured assets by the time the appeal came up for consideration on merits.  There is neither any order of appropriation during the pendency of the appeal nor any attachment on the pre-deposit.  Therefore the deposit made by the first respondent is liable to be returned to the first respondent.