Non-borrower can’t be forced to make pre-deposit payment: Karnataka high court

Bengaluru: In a significant ruling, the high court held that a person who is not a borrower cannot be compelled to make a pre-deposit to file an appeal under SARFAESI Act against an order affecting his or her rights.

A division bench of Justices Suraj Govindaraj and K Manmadha Rao clarified that the mandatory pre-deposit requirement under Section 18 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act applies only to borrowers and not to third parties aggrieved by an order.

The court passed the ruling while hearing a petition filed by Bengaluru-based Ittiam Systems Pvt Ltd, which claimed to be a long-standing tenant in three office units and five car parking spaces in Consulate-1 building on Richmond Road in central business district.

According to the company, it had been occupying the premises as a tenant since 2001. The property was later acquired by Hiro Uttamchandani, who availed a loan from Bharath Cooperative Bank (Mumbai) Ltd. After he defaulted on repayment, the bank initiated recovery proceedings under SARFAESI Act and obtained orders to take physical possession of the property.

Claiming that its tenancy rights would be affected, Ittiam Systems approached Debt Recovery Tribunal (DRT). However, its plea was rejected.

The company then challenged the DRT order before Debts Recovery Appellate Tribunal (DRAT), Chennai. While entertaining the appeal, DRAT directed the company to deposit over Rs 3.3 crore (25% of the bank’s demand) as a pre-condition for hearing the appeal.

Ittiam Systems challenged this direction before high court, arguing that it was merely a tenant and not the borrower who had taken the loan. Therefore, it could not be asked to make the statutory pre-deposit required of borrowers.

Accepting the contention, the high court examined the provisions of SARFAESI Act and held that the obligation to make a pre-deposit is restricted to borrowers alone.

The bench observed that an appeal under Section 18 can be filed not only by a borrower but also by “any person aggrieved” by an order passed under Section 17 of the Act. However, the requirement of depositing a portion of the outstanding debt before filing an appeal applies exclusively to borrowers.

Setting aside DRAT’s order, the high court directed the appellate tribunal to hear Ittiam Systems’ appeal on merits without insisting on any pre-deposit and dispose of the matter within eight weeks.