The Karnataka High Court has delivered a landmark judgment stating that a person who is not a borrower cannot be compelled to make a pre-deposit to file an appeal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act against an order affecting their rights.
Key Ruling by the Division Bench
A division bench comprising Justices Suraj Govindaraj and K Manmadha Rao clarified that the mandatory pre-deposit requirement under Section 18 of the SARFAESI Act applies exclusively to borrowers and not to third parties who are aggrieved by an order. The court emphasized that the provision cannot be extended to individuals or entities that are not directly liable for the debt.
Background of the Case
The ruling came while hearing a petition filed by Bengaluru-based Ittiam Systems Pvt Ltd. The company claimed to be a long-standing tenant in three office units and five car parking spaces located in the Consulate-1 building on Richmond Road in the central business district of Bengaluru. According to Ittiam Systems, 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 Uttamchandani defaulted on repayment, the bank initiated recovery proceedings under the SARFAESI Act and obtained orders to take physical possession of the property.
Tenant's Legal Battle
Claiming that its tenancy rights would be adversely affected, Ittiam Systems approached the Debt Recovery Tribunal (DRT). However, the DRT rejected its plea. Subsequently, the company challenged the DRT order before the Debts Recovery Appellate Tribunal (DRAT) in Chennai. While entertaining the appeal, DRAT directed Ittiam Systems to deposit over Rs 3.3 crore, which constituted 25% of the bank's demand, as a pre-condition for hearing the appeal.
Ittiam Systems challenged this direction before the 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 under the SARFAESI Act.
High Court's Interpretation
Accepting the contention, the High Court examined the provisions of the SARFAESI Act in detail. 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. The court held that imposing such a condition on a third party, such as a tenant, would be unjust and contrary to the legislative intent.
Final Order
Setting aside DRAT's order, the High Court directed the appellate tribunal to hear Ittiam Systems' appeal on its merits without insisting on any pre-deposit. The court further instructed DRAT to dispose of the matter within eight weeks from the date of the order.
This ruling is expected to have significant implications for tenants and other third parties who may be affected by SARFAESI proceedings, ensuring that their rights are protected without the burden of a pre-deposit.
