Introduction

The case of Shri Mohan Products Pvt. Ltd. And Others v. State Bank Of India And Others adjudicated by the Chhattisgarh High Court on May 18, 2020, delves into the interpretation of statutory deposits required under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The central issue revolves around whether the 50% deposit mandated by the second proviso to Section 18(1) should be calculated based on the amount claimed in the initial notice issued under Section 13(2) of the SARFAESI Act or if it should encompass the subsequent interest accrued up to the date of filing the appeal. Additionally, the case examines the admissibility of the amount deposited by the Auction Purchaser toward fulfilling this deposit requirement.

The parties involved include Shri Mohan Products Pvt. Ltd. (Appellant) and State Bank of India (Respondent No. 1), alongside the Auction Purchaser (Respondent No. 2). The Appellant, facing financial distress, challenged the procedures followed by the Bank in declaring assets as non-performing and the subsequent auction process.

Summary of the Judgment

The Chhattisgarh High Court scrutinized the procedural and substantive aspects of the SARFAESI Act as applied in this case. The Appellants contended that the Bank failed to comply with mandatory procedural requirements under the Security Interest (Enforcement) Rules, 2002, leading to an illegal auction of their assets. The primary contention was whether the 50% statutory deposit required for appealing to the Debts Recovery Appellate Tribunal (DRAT) should include future interest or be limited to the amount claimed in the initial Section 13(2) notice.

Upon thorough analysis, the Court concluded that the statutory deposit should be based solely on the amount claimed in the Section 13(2) notice, explicitly excluding any future interest accrued after the issuance of the notice. Furthermore, the Court addressed the incidental issue of whether the Auction Purchaser's deposit could offset the required statutory deposit, ultimately ruling that it could not be considered for this purpose.

Consequently, the High Court set aside the previous judgments that erroneously included future interest in the deposit calculation and directed the DRAT to entertain the appeal on its merits without requiring an additional deposit beyond the amount already deposited by the Auction Purchaser.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to establish the correct interpretation of the SARFAESI Act:

• Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311: This Supreme Court decision struck down the requirement of a 75% deposit for appeals under the SARFAESI Act as unconstitutional.
• Parsn Medicinal Plants Pvt. Ltd. v. Indian Bank (2011) 15 SCC 253: The Apex Court clarified that future interest cannot be included in the calculation of the statutory deposit.
• Aixix Bank v. SBS Organics Pvt. Ltd. (2016) 12 SCC 18: Reinforced that deposits made by the borrower under the second proviso are not secured assets and must be returned if the appeal is successful.
• Eskays Construction Pvt. Ltd. v. Soma Papers & Industries Ltd. (AIR 2017 Bom 10): The Bombay High Court held that auction deposits cannot be considered towards the statutory deposit.
• Sivakumar Textiles v. Debt Recovery Appellate Tribunal (AIR 2012 Mad 57): The Madras High Court supported the interpretation that only the amount claimed under Section 13(2) should be considered for the deposit.

Legal Reasoning

The Court delved into the statutory language of the SARFAESI Act, particularly focusing on the definitions provided under Section 2(h-a) and Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993. It emphasized that "debt" includes all liabilities, inclusive of interest, but only those that are "due" at the time of the claim.

The Court reasoned that including future interest would contravene the legislative intent of the SARFAESI Act, which aims to facilitate swift debt recovery while ensuring that the appellate processes remain accessible and not unduly burdensome. By limiting the deposit to the amount claimed in the Section 13(2) notice, the Court preserved the balance between the rights of the creditors and the borrowers.

Furthermore, the Court clarified that the deposit made by the Auction Purchaser should not be offset against the statutory deposit required by the borrower. This distinction ensures that the funds intended for the auction process remain earmarked for that purpose and do not inadvertently fulfill unrelated statutory requirements.

Impact

This judgment has significant implications for the enforcement mechanisms under the SARFAESI Act:

• Clarity in Deposit Calculation: It provides clear guidance that the 50% deposit must be based solely on the amount claimed in the default notice, excluding future interests.
• Procedural Compliance: The ruling underscores the necessity for banks and financial institutions to adhere strictly to procedural requirements, such as proper notice issuance and adherence to the Security Interest (Enforcement) Rules.
• Protecting Borrower Rights: By limiting the deposit calculation, the ruling makes the appellate process more accessible to genuine borrowers, preventing the overburdening of appellants with excessive deposit requirements.
• Future Litigation: The decision sets a precedent that will guide future cases involving the interpretation of the SARFAESI Act, especially regarding the scope of statutory deposits and the treatment of auction deposits.

Complex Concepts Simplified

SARFAESI Act: A legislation that allows banks and financial institutions to recover non-performing assets (NPAs) without court intervention, by enforcing security interests over borrowers' assets.

Section 13(2) Notice: A formal declaration by a lender that a borrower's loan has become non-performing and demanding repayment within a specified period.

Section 18(1) Second Proviso: A provision requiring borrowers to deposit 50% of the debt claimed by the secured creditor to appeal against the order of the Debts Recovery Tribunal (DRT).

DRAT: Debts Recovery Appellate Tribunal, the appellate authority where borrowers can challenge the orders of the DRT.

Future Interest: Interest that is expected to accrue in the future, beyond the current date.

Auction Purchaser: A third party who purchases the borrower's assets at auction to help the lender recover the outstanding debt.

Conclusion

The judgment in Shri Mohan Products Pvt. Ltd. v. State Bank Of India And Others serves as a pivotal interpretation of the SARFAESI Act, particularly concerning the calculation of statutory deposits required for appeals. By unequivocally excluding future interest from the deposit calculation and disallowing the Auction Purchaser's deposit to offset this requirement, the Chhattisgarh High Court not only reinforces procedural compliance but also upholds the balance between creditor rights and borrower protections. This decision paves the way for more transparent and fair debt recovery processes, ensuring that appellate remedies remain accessible without imposing excessive financial burdens on appellants.