Court’s decision
The Kerala High Court set aside the pre-deposit condition imposed by the appellate authority under the SARFAESI Act, holding that the direction to deposit 40% of the debt due—an amount exceeding the value of the property that constituted the subject matter of the appeal—was unsustainable. The Court observed that the appellate tribunal failed to provide any reasons for choosing 40%, despite the statutory requirement under the third proviso to Section 18 that reasons must be recorded when exercising discretion to reduce the pre-deposit.
The Court emphasized that pre-deposit cannot exceed the consideration involved in the challenged auction sale, which was ₹3.39 crores, and that requiring a higher sum violates the fundamental principles of judicial procedure recognised in Mask & Co. and later affirmed in Dhulabhai. Consequently, the Court modified the pre-deposit to ₹3.39 crores (33.53% of the debt due), payable in two instalments within one month.
The Court also rejected the objection regarding maintainability, holding that misquoting Article 227 instead of Article 226 is not fatal when the Court otherwise possesses jurisdiction to entertain the challenge.
Facts
The Petitioners challenged an appellate tribunal order directing them to deposit 40% of the debt due as a pre-condition for entertaining their appeal against an auction sale. The dispute arose when one of their secured properties was auctioned for ₹3.39 crores towards recovery of dues claimed by the secured creditor. The Petitioners filed an appeal before the appellate tribunal seeking to challenge the auction proceedings, but their waiver application was only partly allowed, fixing the pre-deposit at 40% without stating any reasons.
The Petitioners contended before the High Court that the appellate tribunal’s order lacked reasoning and imposed a harsh pre-deposit amount exceeding the very consideration of the auction sale under challenge. They argued that such a direction made the statutory right of appeal illusory. They therefore sought modification of the pre-deposit requirement and contended that the appellate tribunal had mechanically exercised discretion contrary to the statutory scheme.
Issues
- Whether the High Court could entertain the petition despite it being styled under Article 227 rather than Article 226.
- Whether the appellate tribunal’s direction to deposit 40% of the debt due complied with the requirements of the third proviso to Section 18 of the SARFAESI Act.
- Whether a pre-deposit amount exceeding the value of the property, which forms the subject matter of the appeal, violates established judicial standards.
- Whether the tribunal’s failure to supply reasons rendered its discretionary order legally unsustainable.
Petitioner’s arguments
The Petitioners argued that the appellate authority imposed an excessive and unjustified pre-deposit condition by requiring payment of 40% of the debt due, even though the challenged auction sale involved only ₹3.39 crores. They emphasized that the appellate tribunal failed to provide any reasons in writing despite being statutorily obligated to justify the quantum of reduction from 50% under the third proviso to Section 18. They asserted that the absence of reasoning vitiated the order entirely.
They further submitted that requiring a deposit exceeding the subject matter of the appeal—the auction value—was oppressive and inconsistent with judicial principles that prevent appellate remedies from being rendered illusory. They maintained that the tribunal must evaluate surrounding circumstances and cannot mechanically impose a percentage divorced from the facts. They also contended that the writ was maintainable despite the incorrect citation of constitutional articles.
Respondent’s arguments
The secured creditor argued that the statute mandates a 50% pre-deposit to entertain an appeal, and the appellate tribunal had already exercised discretion to reduce it to 40%. They contended that Petitioners had no legal basis to claim a further reduction to 25% and that the tribunal acted within the permissible statutory range. They maintained that the quantum must be based on the overall debt due, not the subject matter of the appeal.
The auction purchaser argued that the writ was not maintainable because the appellate tribunal was situated outside the territorial jurisdiction of the Court, and further that misquoting Article 227 meant that the writ was improperly filed. They also maintained that the subject matter of the appeal was irrelevant when fixing the pre-deposit, asserting that the legislative standard focused solely on debt due and not auction value.
Analysis of the law
Section 18 of the SARFAESI Act imposes a statutory pre-deposit requirement for entertaining an appeal. The second proviso obligates payment of 50% of the debt due, while the third proviso empowers the tribunal to reduce this to not less than 25%, subject to reasons recorded in writing. This statutory scheme is intended to balance the right of appeal with the need to curb frivolous litigation. The discretion conferred is therefore not absolute but is conditioned upon a demonstrable evaluative process.
The Court applied foundational principles of judicial review, holding that when statutory discretion is exercised without reasons, the decision is arbitrary. Further, the Court interpreted “debt due” in conjunction with the subject matter of the appeal, observing that appellate review must not be obstructed by disproportionate financial burdens.
Precedent analysis
The Court relied on the Privy Council’s articulation of fundamental principles of judicial procedure in Mask & Co., later reaffirmed in Dhulabhai. The core principle holds that statutory bodies must act consistently with judicial norms, particularly fairness and proportionality.
By invoking these principles, the Court emphasized that an appellate remedy cannot be conditioned upon a deposit greater than the value of the challenged transaction, as it violates fairness and renders the right of appeal illusory.
Court’s reasoning
The Court reasoned that although the statute allows a 25–50% range, the tribunal must articulate reasons for placing a case at any point within that bracket. The tribunal’s failure to provide any reasoning rendered the order defective. Additionally, the Court held that the subject matter of the appeal—here, an auction sale for ₹3.39 crores—was a relevant consideration when evaluating the proportionality of the pre-deposit.
A pre-deposit higher than the auction value would, according to the Court, surpass judicial tolerances and offend the fundamental principles of procedure, especially since such a deposit serves only as a threshold for admission, not an adjudication on merits.
Conclusion
The Court modified the pre-deposit to ₹3.39 crores, representing 33.53% of the debt due. It directed that this amount be deposited in two instalments within one month. It reaffirmed that appellate tribunals must justify pre-deposit percentages based on objective reasoning and factual context. The writ petition was accordingly disposed of.
Implications
This judgment significantly clarifies the contours of appellate discretion under Section 18 of SARFAESI. It signals to tribunals that proportionality, subject-matter relevance, and reasoned decision-making are indispensable. The ruling strengthens borrowers’ access to appellate remedies by ensuring that pre-deposit requirements do not become punitive barriers. It also reinforces judicial safeguards against mechanical application of statutory percentages.
