Court’s Decision
The Kerala High Court, in a significant ruling delivered by Justice Mohammed Nias C.P., held that for the purpose of computing the mandatory pre-deposit under Section 18(1) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the term “debt due” includes future interest accrued after the issuance of the notice under Section 13(2) of the Act.
The Court dismissed a petition filed by a borrower challenging the Debt Recovery Appellate Tribunal (DRAT), Chennai’s order, which had directed the borrower to deposit 40% of the amount mentioned in the possession notice — inclusive of interest — as a condition for hearing the appeal.
Justice Nias observed:
“The term ‘debt due’ under the proviso to Section 18(1) of the Act necessarily includes the interest accruing even after the issuance of notice under Section 13(2). Liability is a continuing one until full discharge of the debt.”
Facts
The petitioner had availed two housing loans — ₹50 lakh and ₹35 lakh — from South Indian Bank, secured by 44 cents of land. Her husband’s company, Kaerl Tech Projects Pvt. Ltd., also obtained an overdraft facility of ₹2.5 crore, secured by another property measuring 75.5 cents with a building.
On default, the bank clubbed both accounts and issued a demand notice (Ext.P1) under Section 13(2) of the SARFAESI Act for ₹3.64 crore, followed by a possession notice (Ext.P2). The petitioner challenged the recovery action before the Debt Recovery Tribunal (DRT), Ernakulam, in S.A. No. 40 of 2017, which was later dismissed.
The bank’s loan portfolio was subsequently assigned to Phoenix ARC Pvt. Ltd., which stepped into the lender’s shoes under Section 5 of the SARFAESI Act. The petitioner then appealed to the DRAT, Chennai (Appeal AIR 1561/2023), seeking waiver of pre-deposit under Section 18(1).
The DRAT directed her to deposit ₹1.57 crore (40% of the debt due) within six weeks in two instalments. Despite having deposited ₹2.25 crore, including ₹75 lakh after filing the appeal, the DRAT dismissed the appeal (Ext.P23) when the balance was not deposited.
Aggrieved, the petitioner approached the High Court contending that the DRAT wrongly included future interest in computing the “debt due” figure and that her prior payments satisfied the statutory deposit requirement.
Issues
- Whether future interest accruing after the issuance of notice under Section 13(2) should be included in computing the “debt due” under Section 18(1) of the SARFAESI Act.
- Whether the DRAT acted contrary to the statutory mandate by directing additional deposit despite the petitioner having already paid more than 50% of the demand amount.
- Whether the High Court can interfere under Article 227 of the Constitution with the DRAT’s discretionary order on pre-deposit.
Petitioner’s Arguments
The petitioner argued that the expression “debt due” under Section 18(1) must be confined to the amount claimed in the Section 13(2) notice, and not expanded to include future interest. Relying on rulings of the Madras, Delhi, and Chhattisgarh High Courts, it was submitted that the legislature intended the pre-deposit to be based on the amount “claimed”, not on amounts “claimable” later.
Counsel relied heavily on:
- Mekala Raj v. DRAT Chennai (2017 SCC OnLine Mad 16033) — holding that “debt claimed” refers only to the amount in the Section 13(2) notice, excluding subsequent interest;
- Mohan Products Pvt. Ltd. v. State Bank of India (MANU/CG/0390/2020) — holding that future interest cannot form part of “debt due”; and
- Sivakumar Textiles v. DRAT Chennai (AIR 2012 Mad 57) — clarifying that the phrase “as claimed by the secured creditor” restricts the computation to the notice amount, not future accruals.
The petitioner further submitted that the Supreme Court’s ruling in Narayana Chandra Ghosh v. UCO Bank (2011) 4 SCC 548) was not considered in the Division Bench judgment of the Kerala High Court in Union Bank of India v. R. Dhanalakshmi (2020), thereby rendering that decision per incuriam.
Hence, it was urged that the DRAT lacked authority to insist on a pre-deposit including interest beyond the amount claimed in the Section 13(2) notice.
Respondent’s Arguments
Phoenix ARC Pvt. Ltd., represented by Senior Advocate A.V. Thomas, contended that the issue was settled by the Supreme Court in Sidha Neelkanth Paper Industries Pvt. Ltd. v. Prudent ARC Ltd. (2023 SCC OnLine SC 12), which authoritatively held that “debt due” includes interest as defined under Section 2(g) of the RDDB Act, 1993, read with Section 2(ha) of the SARFAESI Act.
The respondents argued that since the petitioner was in default since 2015 and her outstanding exceeded ₹13 crore, the DRAT had already shown leniency by computing the deposit based on the 2015 possession notice, not the updated dues.
They also pointed out that the payments claimed by the petitioner were made under conditional interim orders or failed one-time settlements (OTS) and therefore could not be treated as compliance with the statutory pre-deposit requirement under Section 18(1).
The respondents relied on Union Bank of India v. R. Dhanalakshmi (W.A. No. 233/2020), where the Kerala High Court had followed M.R.B. Roadconst Pvt. Ltd. v. Rupee Co-op Bank Ltd. (2016 2 AIR BomR 256) to hold that the entire subsisting liability, including interest, forms part of the “debt due” for the purpose of pre-deposit.
Analysis of the Law
Justice Mohammed Nias undertook a comparative study of decisions from various High Courts divided on the issue. The judgment meticulously summarised the two lines of precedent in Table A and Table B:
- Table A (Madras, Delhi, Chhattisgarh HCs): Held future interest excluded.
- Table B (Kerala, Bombay, Madras DB): Held future interest included.\
The Court noted that the definition of “debt” under Section 2(ha) of the SARFAESI Act refers to Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, which defines debt as “any liability (inclusive of interest)”.
Justice Nias observed:
“The statutory scheme indicates that the borrower’s liability under the SARFAESI Act is a continuing one, and the term ‘debt due’ must reflect the total subsisting liability as on the date of appeal, comprising both principal and interest.”
The Court found that the Supreme Court’s decision in Sidha Neelkanth Paper Industries Pvt. Ltd. settled the conflict, affirming that the borrower must deposit 50% of the amount claimed by the secured creditor along with interest.
Precedent Analysis
- Sidha Neelkanth Paper Industries Pvt. Ltd. v. Prudent ARC Ltd. (2023 SCC OnLine SC 12) — Supreme Court held that the borrower must deposit 50% of the “debt due,” inclusive of interest, as per Section 2(g) RDDB Act. The borrower cannot seek adjustment of amounts recovered through auction if the sale is under challenge.
- Union Bank of India v. R. Dhanalakshmi (Kerala HC, 2020) — Division Bench ruled that “debt due” includes future interest since the liability continues till payment.
- M.R.B. Roadconst Pvt. Ltd. v. Rupee Co-op Bank Ltd. (Bombay HC, 2016) — Confirmed that pre-deposit must include interest accrued up to appeal date.
- Mekala Raj v. DRAT (Madras HC, 2017) and Mohan Products Pvt. Ltd. v. SBI (Chhattisgarh HC, 2020) — Earlier views excluding future interest were expressly overruled.
- Golden Netsoft Pvt. Ltd. v. HDFC Bank Ltd. (Delhi HC, 2024), Shree Ram Rayon v. Tamilnad Mercantile Bank Ltd. (Gujarat HC, 2023), and Sony Mony Developers Pvt. Ltd. v. Asset Care and Reconstruction Enterprises (Bombay HC, 2024) — all followed Sidha Neelkanth, holding that interest must be included in the computation of “debt due.”
Court’s Reasoning
The High Court reasoned that since Section 2(g) of the RDDB Act defines “debt” as a liability inclusive of interest, the term “debt due” in Section 18(1) of the SARFAESI Act must be given its full meaning.
“There is no exclusion in the statute of future or accrued interest. Therefore, the computation of ‘debt due’ must necessarily reflect the total liability as on the date of filing of the appeal before the DRAT.”
ZAKIR
The Court held that excluding interest would defeat the legislative intent, which seeks to ensure that only genuine borrowers approach the appellate forum after fulfilling part of their financial liability.
Accordingly, since the DRAT’s direction to deposit 40% of the possession notice amount did not exceed the statutory ceiling of 50%, the High Court refused to interfere.
Conclusion
The Court dismissed the borrower’s petition, upholding the DRAT’s order and clarifying the legal position that:
“For the purpose of Section 18(1) of the SARFAESI Act, the term ‘debt due’ includes all liabilities — principal and interest — continuing until full discharge.”
ZAKIR
However, the Court granted the petitioner three weeks’ time as a last opportunity to make the deposit directed by the DRAT, after which her appeal would be heard on merits.
Implications
This decision settles the long-standing controversy on whether future interest forms part of “debt due” for computing pre-deposit under Section 18(1) SARFAESI.
It aligns Kerala’s jurisprudence with the Supreme Court’s ruling in Sidha Neelkanth, reinforcing that borrower liability under SARFAESI is continuing until full payment.
The ruling also strengthens the creditor’s position, ensuring that borrowers cannot artificially freeze liabilities at the date of the demand notice to secure reduced pre-deposits.
FAQs
1. What is meant by “debt due” under the SARFAESI Act?
It refers to the entire liability claimed by the secured creditor, inclusive of principal and accrued interest, continuing until full repayment.
2. Does the borrower have to deposit interest accrued after Section 13(2) notice?
Yes. The High Court clarified that “debt due” includes future interest accrued till the filing of the appeal.3. Can High Courts interfere with DRAT’s pre-deposit orders?
Only in exceptional cases of patent illegality or perversity. The High Court generally refrains from re-assessing the DRAT’s discretion on deposits.
