Introduction:
In a significant interpretation of Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Kerala High Court has held that the Debt Recovery Appellate Tribunal (DRAT) is not bound by law to invariably demand 50% of the total debt due as a pre-deposit while entertaining appeals. Justice C. Jayachandran, while delivering judgment in Glenny C.J. and Another v. Authorised Officer, Canara Bank and Another, underscored that the DRAT must exercise its discretion judiciously based on the facts of each case, including the subject matter of the appeal, and must record reasons in writing if it chooses to deviate from the statutory limit. The Court observed that rigidly insisting on a fixed percentage without considering the nature of the dispute would amount to an illegal exercise of discretion. The judgment reinforces judicial prudence and proportionality in financial litigation, ensuring that justice is not denied merely due to procedural or monetary rigidity.
Arguments of the Petitioners:
The petitioners, represented by Advocate Praveen K. Joy, approached the Kerala High Court under Article 227 of the Constitution, challenging the DRAT, Chennai’s order directing them to deposit 40% of the total debt due—amounting to ₹4.04 crores—as a precondition for entertaining their appeal. The petitioners contended that the impugned order was arbitrary and inconsistent with the statutory scheme under Section 18 of the SARFAESI Act.
They submitted that the appeal before the DRAT concerned only one property mortgaged to the bank, which was auctioned for ₹3.39 crores. The entire subject matter of the appeal was thus limited to the sale of that single property. Since their challenge did not involve the total debt due but only the validity of the auction sale, they argued that directing them to deposit an amount greater than the sale value would be excessive, onerous, and legally unsustainable.
The petitioners further argued that Section 18 of the SARFAESI Act empowers the DRAT to exercise discretion in determining the quantum of pre-deposit. The third proviso to Section 18(1) expressly provides that the Tribunal may reduce the pre-deposit amount from 50% to not less than 25%, provided reasons are recorded in writing. However, in the present case, the DRAT had fixed the pre-deposit at 40% without assigning any reasoning, thereby rendering the order arbitrary and contrary to the statutory mandate.
They also clarified that while the debt due might exceed ₹10 crores, their appeal specifically pertained to the auction of one asset valued at ₹3.39 crores, which was already sold. Therefore, compelling them to deposit a higher sum merely for the purpose of maintaining the appeal was neither equitable nor legally justified.
In response to the argument raised by the respondents that the petition should have been filed under Article 226 instead of Article 227, the petitioners argued that the mere misquoting of a constitutional provision cannot deprive a litigant of relief when the grievance and facts otherwise fall within the High Court’s supervisory jurisdiction.
Arguments of the Respondents:
The respondents—Canara Bank and the auction purchaser—opposed the petition through their counsels, Senior Counsel M. Gopikrishnan Nambiar, and Advocates S.S. Aravind and Tinu Abraham. They argued that Section 18 of the SARFAESI Act clearly stipulates that no appeal shall be entertained by the DRAT unless the borrower deposits 50% of the debt due, with limited discretion to reduce the same to 25% for recorded reasons. Thus, the discretion vested in the DRAT pertains only to reducing the quantum between 25% and 50% of the total debt due, not to correlate the pre-deposit amount with the subject matter of the appeal.
They further contended that the statute uses the expression “debt due”—not “subject matter of the appeal.” Therefore, the benchmark for calculating the pre-deposit must be the total debt determined by the Debts Recovery Tribunal (DRT), irrespective of the specific property or issue being contested in the appeal. According to the respondents, accepting the petitioners’ contention would amount to rewriting the statute, as the legislature had deliberately linked the pre-deposit requirement to the total debt and not the limited dispute being appealed.
It was further argued that financial discipline and certainty were the cornerstones of the SARFAESI framework, and allowing borrowers to contest recovery proceedings without substantial deposit would defeat the very object of the law—to enable expeditious recovery of secured assets and minimize frivolous appeals. The respondents maintained that the DRAT, in directing a 40% pre-deposit, had exercised its discretion within statutory limits and that there was no illegality or perversity warranting interference under the High Court’s supervisory jurisdiction.
Lastly, the respondents urged that the High Court should not exercise powers under Article 227 to substitute its view for that of a specialized appellate tribunal, particularly in financial matters governed by specific statutory schemes and expertise.
Court’s Judgment and Analysis:
After a detailed hearing, Justice C. Jayachandran began by clarifying the scope of judicial review under Article 227. The Court observed that while technical errors such as misquoting the constitutional provision cannot deprive a litigant of relief, the Court’s role remains confined to ensuring that tribunals exercise jurisdiction properly and in accordance with law.
On the primary issue—whether the DRAT had lawfully fixed 40% of the debt due as pre-deposit—the Court undertook a careful examination of Section 18 of the SARFAESI Act. The first proviso to Section 18(1) requires borrowers to deposit 50% of the debt due before an appeal is entertained, while the third proviso empowers the DRAT to reduce this amount to not less than 25%, “for reasons to be recorded in writing.”
Justice Jayachandran noted that the provision, though mandatory in requiring a deposit, also confers discretion upon the DRAT to tailor the pre-deposit based on the facts of the case. The exercise of such discretion, however, must be informed by rational factors, and one such relevant factor is the subject matter of the appeal. The Court emphasized that the legislative intent behind granting such discretion was to prevent mechanical or uniform application of a 50% rule in every case.
In the words of the Court:
“It cannot be said that the subject matter of the appeal is completely and wholly irrelevant when the pre-deposit amount to entertain the appeal is to be determined. In every case, it is not the mandate of law—irrespective of the attendant facts—that the pre-deposit amount to entertain the appeal shall be 50% of the debt due, invariably.”
The Court further observed that when an appeal challenges only a portion of the debt—such as an auction sale of one secured property—it would be unjust and disproportionate to demand pre-deposit exceeding the value of that subject matter. To do so, the Court held, would constitute an “illegal exercise of discretion” falling foul of the statutory purpose.
On examining the DRAT’s order, the High Court found that no reasoning had been recorded to justify the fixation of 40% as pre-deposit. The absence of such reasoning vitiated the order, as recording reasons is an essential safeguard to ensure transparency and fairness in the exercise of judicial discretion.
Justice Jayachandran thus concluded that the DRAT’s order was unsustainable for two reasons—first, for not considering the relevance of the subject matter of the appeal, and second, for failing to record reasons as required under the third proviso to Section 18(1).
Consequently, the Court modified the DRAT’s order and directed the petitioners to pay 33.53% of the debt due, equivalent to ₹3.39 crores (the sale value of the property in question), as a pre-deposit. The Court allowed the petitioners to pay the amount in two installments, thereby balancing equity and statutory compliance.
The judgment also carries broader implications for future cases, reaffirming that appellate tribunals under SARFAESI cannot adopt a one-size-fits-all approach. Instead, they must assess each appeal on its factual matrix and ensure that pre-deposit conditions are proportionate to the issues raised. The Court’s interpretation restores the balance between the rights of financial institutions to secure repayment and the rights of borrowers to seek fair appellate remedies without being financially crippled at the threshold.