SARFAESI Act: Recent Judicial Concern Over Deposit Orders Passed Without Examining Merits
A significant legal debate is emerging across various proceedings under the SARFAESI Act regarding the growing tendency of certain Debt Recovery Tribunals (DRTs) and appellate forums to insist upon mandatory deposit conditions or dismiss appeals on technical grounds without first examining the substantive merits of the borrower’s challenge. Recent proceedings before several High Courts and the DRAT have highlighted concerns that statutory remedies are increasingly becoming inaccessible due to rigid interpretation of pre-deposit requirements under Section 18 of the SARFAESI Act, particularly where serious allegations of illegal auction, undervaluation, violation of natural justice, defective possession proceedings, or fraudulent mortgage creation are involved. Courts are now being repeatedly called upon to balance the legislative intent of speedy recovery with the constitutional requirement of fair adjudication.
In a recent matter before the Delhi High Court, the Court examined a challenge where the DRAT had refused to entertain the borrower’s appeal solely for non-compliance with the pre-deposit requirement, despite allegations questioning the legality of the mortgage, assignment of debt, and auction proceedings. The petitioner argued that the appeal was rejected “without consideration on merits,” effectively denying statutory appellate remedy. The Court reiterated that Section 18 ordinarily mandates deposit of 50% of the debt, reducible to 25%, and that complete waiver is generally impermissible under existing Supreme Court precedents such as Kotak Mahindra Bank v. Ambuj Kasliwal and Narayan Chandra Ghosh v. UCO Bank.
However, another important judicial trend has simultaneously emerged where High Courts are distinguishing between borrowers and third parties. In a recent judgment of the Bombay High Court, the Court held that tenants and other non-borrower aggrieved persons cannot automatically be subjected to pre-deposit requirements under Section 18. The Court quashed the DRAT order that had insisted upon a 40% deposit and directed restoration of the appeal for hearing on merits without insisting upon pre-deposit. This ruling has become important because many DRT proceedings often mechanically impose deposit conditions even upon persons who are neither borrowers nor guarantors.
Simultaneously, appellate courts are also cautioning High Courts against routinely bypassing the statutory mechanism under SARFAESI. The Allahabad High Court recently emphasized that writ jurisdiction should not ordinarily interfere with DRT orders where statutory remedies exist, unless there is violation of natural justice, lack of jurisdiction, or patent illegality. The Court noted that DRTs are legally empowered under Section 17(3) to restore possession and grant restitutive relief after examining evidence and facts.
Recent judicial observations also reveal increasing frustration with prolonged recovery litigation and strategic delays. The Bombay High Court, while quashing a DRT stay order relating to auction possession proceedings, criticized the “disturbing trend” of chronic defaulters invoking parallel insolvency proceedings after auctions merely to obstruct recovery and delay handing over possession to auction purchasers. The Court observed that SARFAESI recovery mechanisms cannot be paralysed through procedural abuse after auction rights have crystallized.
At the same time, several legal experts argue that many DRTs are increasingly passing interim deposit directions mechanically, often without first recording prima facie findings regarding legality of possession notices, valuation reports, service defects, Rule 8 compliance, or allegations of fraud. Borrowers contend that when tribunals insist upon heavy deposits before examining glaring procedural irregularities, access to justice becomes illusory, particularly for distressed small businesses and residential borrowers already facing financial collapse. Banking institutions, on the other hand, maintain that strict deposit conditions are essential to prevent frivolous litigation and endless delays in recovery proceedings.
The evolving jurisprudence indicates that Indian courts are now attempting to draw a delicate balance between two competing objectives — protecting the banking system from recovery obstruction while also ensuring that statutory remedies under the SARFAESI framework do not become merely technical formalities inaccessible to genuine litigants. The coming months are likely to witness further important rulings clarifying when deposit requirements can be relaxed, when merits must first be examined, and whether procedural fairness can override rigid statutory recovery mechanisms in exceptional circumstances.
