KOTAK MAHINDRA BANK PVT. LIMITED Vs. AMBUJ A. KASLIWAL

CASE TITLE	KOTAK MAHINDRA BANK PVT. LIMITED VSAMBUJ A. KASLIWAL
EQUIVALENT CITATIONS	AIR 2021 SUPREME COURT 1041, AIRONLINE 2021 SC 60
DATE OF JUDGEMENT	16 FEBRUARY, 2021
CASE NO:	CIVIL APPEAL NO. 538 OF 2021(ARISING OUT OF SLP (CIVIL) NO.21555 OF 2019)
CASE TYPE	CIVIL APPEAL
APPELLANT	KOTAK MAHINDRA BANK PVT. LIMITED
RESPONDENT	AMBUJ A. KASLIWAL & OTHERS
BENCH	HON’BLE JUSTICE V. RAMASUBRAMANIAN, HON’BLE JUSTICE A. S. BOPANNA, HON’BLE JUSTICE S. A. BOBDE
STATUTES REFERRED	SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002. THE RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993

INTRODUCTION

The case at hand deals with interpretation and application of the pre-deposit requirement under Section 21 of the Recovery of Debts and Bankruptcy Act, 1993 (RDBA). The origins of the dispute trace back to financial assistance availed by Hindon River Mills Ltd. from IFCI Ltd., which eventually led to the classification of the account as a non-performing asset and subsequent auctioning, with Kotak Mahindra Bank emerging as the successful bidder. The core issue presented to the Supreme Court involved whether the High Court of Delhi erred in permitting the respondents to appeal before the Debts Recovery Appellate Tribunal (DRAT) without adhering to the statutory pre-deposit requirement. The Supreme Court’s judgment not only clarified the statutory interpretation of Section 21 of the RDBA but also set a precedent for future cases, ensuring the balance between the rights of debtors and the efficacy of the debt recovery process.

FACTS

The brief facts giving rise to appeal are as follows: – 

Background and Initial Proceedings

The case involves a financial assistance arrangement availed by Hindon River Mills Ltd. (respondent No.3) from IFCI Ltd. (respondent No.6). The personal guarantees for the financial assistance were provided by respondents No.1 and 2. Due to default in repayment, the account was classified as a non-performing asset and subsequently auctioned by IFCI Ltd., with Kotak Mahindra Bank (the appellant) emerging as the successful bidder. The assignment of the unpaid debt and non-performing asset was challenged by respondents No.1 to 3 in the High Court, but the challenge was dismissed. A settlement was reached where respondents No.1 to 3 agreed to repay Rs.145 Crores with interest by 31.07.2012, which they failed to adhere to. Consequently, Kotak Mahindra Bank initiated recovery proceedings before the Debts Recovery Tribunal (DRT) in New Delhi, claiming Rs.572,18,77,112/- as of 31.12.2014.

Developments During DRT Proceedings

During the pendency of the recovery application before the DRT, the National Highways Authority of India (NHAI, respondent No.7) acquired a portion of the mortgaged property of respondent No.3. Compensation of Rs.62,31,87,312/- was deposited with the DRT, which was later enhanced to Rs.72,96,12,827/-. The total compensation of Rs.152,81,07,159/- was credited to the account of respondent No.3. The DRT considered these developments and ultimately limited the decretal amount to Rs.145 Crores with future interest at 9% per annum, to be adjusted against the compensation amount received during the proceedings.

Appeals and Pre-Deposit Issue

Both Kotak Mahindra Bank and respondents No.1 to 3 were aggrieved by the DRT’s order dated 15.03.2018 and filed appeals before the Debt Recovery Appellate Tribunal (DRAT). The respondents No.1 and 2 also sought a waiver of the pre-deposit required to file their appeal. The DRAT, considering the amount already recovered by the appellant bank, calculated the balance debt due as Rs.68,18,92,841/- and directed fifty percent of this amount to be deposited. The review of this order was dismissed on 09.04.2019.

High Court Proceedings

Respondents No.1 and 2, aggrieved by the DRAT’s orders, approached the High Court of Delhi. The High Court, considering the appellant bank’s recovery of Rs.152,81,07,159/-, permitted the respondents No.1 and 2 to prosecute their appeal without the pre-deposit. Kotak Mahindra Bank challenged this order before the Supreme Court.

ISSUE

The issue involved in these appeals was: 

Whether the High Court of Delhi erred in permitting Respondents No.1 and 2 to prosecute their appeal before the Debts Recovery Appellate Tribunal (DRAT) without the pre-deposit of a portion of the debt as mandated under Section 21 of the Recovery of Debts and Bankruptcy Act, 1993 (RDBA Act)?

CONTENTIONS

Arguments made by the appellant: Mr. V. Giri, an adept senior advocate

• Non-Compliance by Respondents: 

The appellant, Kotak Mahindra Bank, contended that respondents No. 1 and 2 did not comply with the Supreme Court’s order dated 22.11.2019, which directed them to deposit an amount of Rs. 20 Crores within 8 weeks. This non-compliance was the basis for the appellant filing a contempt petition against the respondents

• Failure to Adhere to Settlement Terms: 

The appellant argued that respondents No. 1 to 3 failed to adhere to the settlement terms agreed upon in the earlier proceedings. The respondents were supposed to repay a sum of Rs. 145 Crores with interest at 15% per annum by 31.07.2012, which they did not, leading the appellant to initiate recovery proceedings before the Debts Recovery Tribunal (DRT), New Delhi​.

• Claim for Outstanding Amount:

 The appellant claimed that due to the respondents’ failure to meet the settlement terms, they were liable for the entire outstanding amount. The appellant sought recovery of Rs. 572,18,77,112 (Rupees Five Hundred Seventy-Two Crores Eighteen Lakhs Seventy-Seven Thousand and One Hundred Twelve) as due on 31.12.2014, including interest and other charges.

• Pre-Deposit Requirement: 

According to Section 21 of the Recovery of Debts and Bankruptcy Act, 1993, the appellant claimed that the respondents should not be allowed to pursue their appeal before the Debts Recovery Appellate Tribunal (DRAT) if they have not made the required pre-deposit. The appellant challenged the High Court of Delhi’s order that allowed the respondents to appeal without this deposit. 

Arguments made by the respondent: Mr. Ritin Rai, an adept Senior Advocate

• Position on Compensation Amount

The respondents argued that the receipt of Rs.152,81,07,159/- by the appellant bank should significantly affect the pre-deposit requirement. They contended that the compensation amount received from the land acquisition should be considered when determining the debt still due, thereby reducing the financial burden on them.

• High Court’s Tangent Approach

The respondents highlighted the High Court’s reasoning, which factored in the compensation amount received by the appellant bank before the final judgment. They argued that the High Court’s approach effectively reduced the decretal amount of Rs.145 Crores with interest at 9% per annum, even though it was not explicitly stated.

• Wiping Out the Decretal Amount

They suggested that the compensation amount received should essentially wipe out the decretal amount owed. The respondents emphasized that since the compensation was received prior to the decree, it should substantially diminish the amount that would otherwise be required as a pre-deposit under Section 21 of the concerned Act.

• DRAT’s Calculation

The respondents disputed the DRAT’s calculation that after crediting the compensation amount, the balance of the decretal amount payable was Rs.68,18,92,841/-. They maintained that the High Court rightly concluded that the receipt of the compensation amount should not be denied as a benefit to the respondents, even though it was received before the passing of the final judgment.

• Pre-Deposit Waiver

The respondents argued for a waiver of the pre-deposit requirement. They contended that the High Court’s order should be upheld, allowing them to proceed with their appeal without the need for a pre-deposit. They believed that since a substantial portion of the debt was already settled through the compensation amount, the pre-deposit requirement should be significantly reduced or waived entirely.

JUDGEMENT

After taking note of the case in the first instance, this Court ordered respondents No. 1 and No. 2 to deposit Rs. 20 crores in the Court Registry within eight weeks through an order dated November 22, 2019. The aforementioned judgment specified that the appeal’s further proceedings before the DRAT would be postponed until either the next hearing date or the respondents Nos. 1 and 2 deposit the specified amount, whichever comes first. The respondents Nos. 1 and 2 have not made the deposit as instructed by this Court. Thus, the appellant/Bank has filed the attached Contempt Petition, alleging that respondents 1 and 2 are in violation of the order issued by this Court. Against that backdrop, both of these concerns are considered and resolved by this single order since they relate to the same subject.

• INTERPRETATION OF SECTION 21 OF RDBA – PREDEPOSIT OF DEBT DUE 

In order to address the issue with regard to the correctness or otherwise of the order passed by the DRAT and the High Court of Delhi in the matter relating to pre-deposit of the debt due, the court looked into Section 21 of the Recovery of Debts and Bankruptcy Act, 1993 which provides for deposit of the amount of debt due on filing the appeal. The entirety of Section 21 of the RDBA is as follows: Deposit of amount of debt due, upon filing appeal – In the event that an appeal is filed by a person whose debt is owed to a bank, financial institution, or group of banks or financial institutions, the Appellate Tribunal will not consider the appeal unless the person has deposited [fifty percent] of the amount of debt so due from him, as determined by the Tribunal in accordance with section 19: 

With the caveat that the Appellate Tribunal may [lower the amount to be deposited by such amount which shall not be less than twenty-five percent of the amount of such debt thus owing] to be deposited under this section for reasons to be documented in writing. (provided emphasis)

While interpreting this section the Supreme court has overturned the high court judgement by stating: “The provision stating “appeal shall not be entertained” prohibits the Appellate Tribunal from considering an appeal by someone who owes a debt to the Bank unless they deposit fifty percent of the debt amount determined by the Tribunal under Section 19 of the Act. The proviso allows the Appellate Tribunal to reduce this deposit, with reasons in writing, but not below twenty-five percent of the debt amount owed. Thus, the discretion to waive the pre-deposit ranges from fifty percent to twenty-five percent but cannot go below twenty-five percent or be fully waived. In this case, the DRAT ordered a fifty percent deposit. Respondents 1 and 2, seeking waiver of the deposit, argued that the Bank had received Rs. 152,81,07,159 during the proceedings, more than the Rs. 145 crore debt claimed in the recovery certificate by the DRT, implying no debt is outstanding.

The High Court concluded that the DRAT did not correctly consider the pre-deposit issue. The Bank received Rs. 152,81,07,159 during the case, but did not adjust its claim in the Original Application or limit its claim for the remaining amount. Therefore, the DRT proceeded under the assumption that the Bank is bound by the Rs. 145 crore settlement and entitled to future interest on the balance. The High Court ruled that it cannot completely waive the pre-deposit as required by Section 21. While the law mandates fifty percent deposit, in some cases, a deposit of at least twenty-five percent of the debt due is permissible with reasons recorded, but complete waiver is not allowed. Therefore, any complete waiver of pre-deposit would contradict statutory provisions and is legally unsustainable. The High Court’s order is hence subject to being overturned”. 

• REMEDY OF APPEAL-SECTION 18 OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002. 

In addressing the pre-deposit requirement for utilizing the appeals process, the court looked at a comparable clause found in Section 18 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (or simply “SARFAESI”). In the case of Narayan Chandra Ghosh v. UCO Bank and Others (2011) 4 SCC 548, the court expressed a similar view: 

“A person who feels wronged by an order made by the Debts Recovery Tribunal under Section 17 of the Act has the legal right to appeal to the Appellate Tribunal under Section 18(1) of the Act. Nonetheless, the restriction outlined in the second proviso of Section 18(1) applies to the right granted under that section. According to the second proviso, no appeal will be allowed unless the borrower deposits with the Appellate Tribunal fifty percent of the total amount of debt that is owed to him, as assessed by the Debts Recovery Tribunal or as claimed by the secured creditors, whichever is smaller. Nonetheless, as per the third proviso of the subsection, the Appellate Tribunal possesses the authority to decrease the sum, with written justification, to a minimum of twenty-five percent of the debt mentioned in the second proviso. Because of this, an appeal under Section 18 of the Act cannot be entertained unless the previously specified criteria is met. The Appellate Tribunal cannot consider an appeal under the aforementioned paragraph unless the borrower deposits a pre-deposit of fifty percent of the debt that is owed by him or determined. The aforementioned proviso’s phrasing is unambiguous and clear.”

It is impossible to argue that the conditions covered by the aforementioned proviso are burdensome given the intent of the Act. As a result, the court rules that the predeposit requirement under paragraph (1) of Section 18 of the Act is essential and that there is no justification for failing to fully implement the Act’s requirements. It is well known that the Legislature may place restrictions on the exercise of an appeal right granted by a statute, provided that the restrictions do not become unjustifiable and virtually completely eliminate the right.

From that point of view, no court may refuse to fully implement the terms of the Statute, much less the Appellate Tribunal, which is an institution of the Act itself. Although the deposit under the second proviso of Section 18(1) of the Act is a prerequisite for filing an appeal under that Section, we have no qualms about concluding that the Appellate Tribunal committed a legal error by accepting the appeal without instructing the appellant to fulfil the aforementioned mandatory requirement.

The court emphasized that According to the second proviso to subsection (1) of Section 18 of the Act, the amount of fifty percent that the borrower is required to deposit is computed either with reference to the debt due from him as claimed by the secured creditors or as determined by the Debts Recovery Tribunal, whichever is less. This makes the argument made by the appellant’s learned counsel, that since the amount of debt due had not been determined by the Debts Recovery Tribunal, the appeal could be entertained by the Appellate Tribunal without insisting on predeposit, equally erroneous.

Therefore, as the second and third provisos to the aforementioned Section make clear, the condition of pre¬ deposit being mandatory—a complete waiver of deposit by the appellant with the Appellate Tribunal—was beyond the Act’s requirements. It seems sense that in cases where the Debts Recovery Tribunal has not yet decided the exact amount of debt, the borrower filing an appeal would be required to deposit half of the debt that the secured creditors are claiming is due from him. 

The Appellate Tribunal may have, at most, lowered the 50% deposit amount to a sum equal to or less than 25% of the debt mentioned in the second proviso after recording the reasons. The court was therefore persuaded that the Appellate Tribunal’s decision to accept the appellant’s appeal without requiring a pre-deposit was manifestly unsustainable, and as a result, the High Court’s decision to set it aside could not have been erroneous.

• EXTENT OF PRE-DEPOSIT TO BE ORDERED

In this case, the issue of determining the pre-deposit amount has been contested by the Senior Advocates on both sides, who have presented different figures for the actual debt currently due. However, the court has decided not to delve into the exact amount at this stage. Instead, it has referred to the amount specified in the order dated 27.02.2019 by the Debt Recovery Appellate Tribunal (DRAT). The court has determined the decretal sum owing as Rs. 68,18,92,841/- in order to determine the pre-deposit.

Mr. Mukul Rohtagi, a learned Senior Advocate, argued that a portion of the property belonging to respondent No.3 has been acquired, and the remaining property is still under mortgage. He contended that requiring a pre-deposit would be burdensome for respondents No.1 and No.2, especially since the entire compensation amount has been deposited and a major portion of the debt has been discharged.

The court noted that a total waiver of the pre-deposit would be against statutory provisions. However, given the circumstances of this case, including the earlier settlement taken into account by the Debt Recovery Tribunal (DRT) and the payment of a major portion of the debt (albeit through appropriation of the compensation amount), the court deemed it appropriate to modify the pre-deposit requirement. It decided that, considering the facts and circumstances, the respondents should be permitted to pre-deposit twenty-five percent of the amount noted by the DRAT, which is twenty-five percent of Rs.68,18,92,841/-.

This modification pertains only to the pre-deposit requirement, and all other issues, including the actual amount of debt due, remain open for consideration in the pending appeals.

CONTEMPT PETITION 

In light of the aforementioned conclusions, the interim direction requiring the deposit of Rs.20 Crores, as ordered on 22.11.2019, is no longer relevant. Although the original order mandated that this amount be deposited within a specific time frame and there was non-compliance, the final order passed in the appeal supersedes this requirement. Therefore, there is no reason to continue with the Contempt Petition initiated by the appellant, despite the previous notice issued to the respondent.

FINAL ORDER

1. The High Court of Delhi’s order dated 16.07.2019 in WP(C) No.7530 of 2019 is set aside.
2. The 27.02.2019 DRAT order on IA No. 511 of 2018 in Appeal No. 311 of 2018 is changed. Within eight weeks, respondents No. 1 and 2 must now deposit twenty-five percent of Rs. 68,18,92,841/-. The appeal won’t be accepted if they don’t comply with this.
3. The appeal is partially allowed with no costs.
4. The Contempt Petition No.569 of 2020 is dismissed as unnecessary.
5. Any pending applications are disposed of.

ANALYSIS

The Supreme Court’s decision in this case fundamentally addresses the interpretation and enforcement of the pre-deposit requirement stipulated under Section 21 of the Recovery of Debts and Bankruptcy Act, 1993 (RDBA). The crux of the matter was whether the High Court of Delhi erred in allowing the respondents to appeal to the Debts Recovery Appellate Tribunal (DRAT) without adhering to the mandated pre-deposit of a portion of the debt.

The Supreme Court underscored the obligatory nature of Section 21, which requires appellants to deposit fifty percent of the debt amount determined by the Tribunal before their appeal can be entertained. The proviso permits the DRAT to reduce this amount to not less than twenty-five percent, provided reasons are recorded. This interpretation aligns with the legislative intent to ensure that appellants demonstrate a genuine commitment to settling their debts, thereby preventing frivolous or insincere appeals. The Court’s decision reinforces the purpose of the pre-deposit requirement, striking a balance between safeguarding the creditors’ interests and providing a fair opportunity for appellants to contest Tribunal decisions.

The ruling is significant for several reasons. Firstly, it upholds the legislative intent behind the pre-deposit requirement, ensuring that the process is not abused and that only serious appellants can proceed. This measure is crucial in expediting debt recovery and maintaining the integrity of the appellate process. Secondly, the Court’s decision acknowledges the substantial amount already recovered by Kotak Mahindra Bank but ensures that the respondents still meet their statutory obligations. By modifying the pre-deposit requirement to twenty-five percent, the Court considered the unique circumstances of the case without completely exempting the respondents from their financial responsibilities.

Additionally, the judgment is consistent with previous rulings, such as in Narayan Chandra Ghosh vs. UCO Bank, where the Supreme Court upheld similar pre-deposit mandates under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). This consistency enhances legal stability and predictability, essential for maintaining confidence in the debt recovery system. The Supreme Court also exhibited judicial prudence by focusing on statutory compliance rather than delving into the exact debt amount due, thus avoiding unnecessary complications and allowing substantive financial disputes to be addressed during the appeal’s merit stage.

The implications of this case are far-reaching. By reinforcing the mandatory nature of the pre-deposit requirement, the Supreme Court ensures that the debt recovery process is not only expedited but also more robust against potential abuses. This decision will likely deter frivolous appeals, as appellants must demonstrate a tangible commitment to settling their debts before their appeals can be heard. This requirement helps reduce the backlog of cases, thereby enhancing the efficiency and effectiveness of debt recovery mechanisms. Additionally, the ruling sets a clear precedent for lower courts and tribunals, emphasizing that statutory pre-deposit requirements are integral and cannot be entirely waived. This precedent will guide future cases, ensuring that the legislative intent of these provisions is upheld consistently across the judiciary, fostering a more predictable and stable legal environment for debt recovery.

Overall, this decision sets a clear precedent for lower courts and tribunals, emphasizing that statutory pre-deposit requirements are integral and cannot be completely waived. This is likely to impact future cases, ensuring that appellants meet their financial obligations before proceeding with appeals, thereby reducing backlog and enhancing the efficiency of debt recovery processes

CONCLUSION

The Supreme Court’s decision underscores the importance of adhering to statutory provisions and balances the need for fair debt recovery mechanisms with the rights of appellants. By modifying the pre-deposit requirement to twenty-five percent, the Court acknowledges the specific circumstances of the case while upholding the legislative intent behind Section 21 of the RDBA. This ruling not only provides clarity on the application of pre-deposit requirements but also reinforces the principles of fairness and judicial prudence in debt recovery proceedings.

Written by Mahak Pamnani an intern under legal vidhiya

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