Introduction

In the landmark judgment of Eskays Construction Pvt. Ltd. v. Soma Papers & Industries Ltd., decided by the Bombay High Court on November 30, 2016, the court delved deep into the procedural intricacies of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The case primarily revolved around the compliance of Section 18 of the SARFAESI Act, which mandates specific procedural obligations for borrowers seeking appeals to the Debt Recovery Appellate Tribunal (DRAT). The petitioner, Eskays Construction Pvt. Ltd., challenged the orders of the DRAT that had significant implications on the sale of secured assets under the SARFAESI framework.

The central issues in this case were:

• Whether the DRAT had the jurisdiction to waive the mandatory deposit requirement under Section 18 of the SARFAESI Act.
• Whether the sale of secured assets was vitiated due to non-compliance with specific SARFAESI Rules.
• The interpretation and applicability of mandatory provisions within the SARFAESI Act and their potential for waiver.

The parties involved included Eskays Construction Pvt. Ltd. as the petitioner, and multiple respondents including Soma Papers & Industries Ltd., various banking institutions, and I.B. Enterprises.

Summary of the Judgment

The Bombay High Court, presided over by Justices S. C. Dharmadhikari and B. P. Colabawala, meticulously analyzed the orders passed by the DRAT dated April 1, 2009, and January 7, 2014. The April 1, 2009 order granted a complete waiver of the deposit required under Section 18 of the SARFAESI Act, a provision that mandates borrowers to deposit a certain percentage of the debt amount when appealing DRAT decisions.

The DRAT's January 7, 2014 order set aside a previous decision of the Debt Recovery Tribunal (DRT) concerning the sale of secured assets, citing non-compliance with SARFAESI Rules 6(2) and 8(6), which require mandatory notices to borrowers before the sale of movable and immovable assets, respectively.

Upon appeal, the High Court found the DRAT's complete waiver of the deposit requirement to be contravene the explicit mandates of Section 18. Furthermore, the court concluded that the DRAT erred in setting aside the sale based on alleged procedural lapses, recognizing that the borrower had effectively waived its right to certain procedural protections by agreeing to sell the assets to settle debts.

Consequently, the High Court quashed both the 2009 and 2014 orders of the DRAT, reinforcing the non-negotiable nature of certain SARFAESI provisions.

Analysis

Precedents Cited

The judgment references critical precedents that reinforce the statutory interpretation of the SARFAESI Act. Notably:

• Narayan Chandra Ghosh v. UCO Bank: A Supreme Court decision emphasizing the non-negotiable nature of Section 18's deposit requirements, affirming that DRATs cannot waive these mandatory provisions.
• R.G. Dalpatrai and Co. v. Bank of Baroda: Further underlining that deposits under Section 18 cannot be circumvented by borrowers, ensuring the integrity of the SARFAESI framework.
• General Manager, Sri Siddeshwara Cooperative Bank Ltd. v. Ikbal & Ors.: Highlighting that even mandatory rules within SARFAESI can be waived if the borrower consents, but emphasizing that such waivers must be explicit and justified by the facts.

Legal Reasoning

The core of the court's analysis hinged on the interpretation of Section 18 of the SARFAESI Act. The High Court underscored that the second proviso of Section 18, which mandates a deposit of 50% (reducible to 25% under specific conditions), is of a mandatory nature and cannot be waived outright unless specific conditions are met. The SRFAESI Act was designed to streamline debt recovery, reducing judicial intervention and expediting processes while ensuring fairness.

The court found that the DRAT's decision to entirely waive the deposit requirement was in direct violation of the statutory provisions, as there was no justifiable reason recorded in writing to substantiate such a waiver. Additionally, regarding the sale's alleged procedural shortcomings, the High Court concluded that the borrower's prior actions, including proposing and agreeing to sell the properties to settle debts, effectively amounted to a waiver of rights under SARFAESI Rules 6(2) and 8(6).

Impact

This judgment has profound implications for the enforcement of the SARFAESI Act:

• **Reinforcement of Mandatory Provisions**: The decision solidifies the inviolable nature of certain SARFAESI provisions, ensuring that borrowers cannot bypass essential requirements without explicit and justified waivers.
• **Clarity on Waiver of Rights**: It provides clarity on how and when borrowers can waive their rights under the SARFAESI Act, emphasizing that such waivers must be evident from the conduct or explicit agreements.
• **Preservation of Loan Recovery Mechanisms**: By upholding the statute's mandates, the judgment ensures that financial institutions retain robust mechanisms for debt recovery, reducing prolonged litigation and associated inefficiencies.
• **Guidance for DRATs and DRTs**: Lower tribunals are guided to adhere strictly to statutory provisions, avoiding discretionary overreach that might undermine legislative intent.

Complex Concepts Simplified

Section 18 of the SARFAESI Act

This section outlines the procedure for appealing decisions made by the Debts Recovery Tribunal (DRT) to the Debt Recovery Appellate Tribunal (DRAT). It requires borrowers to deposit a percentage of their debt before their appeal is considered:

• Mandatory Deposit: Borrowers must deposit 50% of their debt amount when filing an appeal.
• Discretionary Reduction: The DRAT can reduce this deposit to a minimum of 25% but not waive it entirely.
• Jurisdictional Bar: Without complying with the deposit requirement, the DRAT lacks the authority to hear the appeal.

Waiver of SARFAESI Rules

Certain procedural protections under the SARFAESI Rules are designed to benefit the borrower, such as mandatory notices before the sale of assets. However, these protections can be waived if:

• The borrower explicitly agrees to forego these protections.
• The borrower's conduct indicates a relinquishment of these rights, such as agreeing to an asset sale to settle debts.

Ex-facie Bar

An ex-facie bar refers to a situation where an action is inherently invalid due to a legal prohibition. In this case, waiving the mandatory deposit under Section 18 without meeting the statutory criteria is intrinsically illegal, rendering any related proceedings null and void.

Conclusion

The Bombay High Court's decision in Eskays Construction Pvt. Ltd. v. Soma Papers & Industries Ltd. serves as a pivotal reference for the interpretation and application of the SARFAESI Act's provisions, particularly Section 18. By emphatically ruling against the DRAT's unwarranted waiver of mandatory deposit requirements, the court reinforced the sanctity of statutory mandates, ensuring that debt recovery mechanisms remain robust and less susceptible to judicial overreach. Additionally, the judgment clarifies the boundaries within which waivers of procedural protections can be legitimately exercised, safeguarding both creditors' rights to recover debts efficiently and borrowers' rights to fair treatment under the law. This decision not only streamlines the debt recovery process but also instills greater confidence in financial institutions regarding the enforceability of secured agreements.