Can auction money count as borrower's deposit? SC says no

The borrower had a simple argument: the bank already took Rs 12.5 crore from selling my property, so why do I need to deposit 50% of the debt to appeal? A paper company that defaulted on a Rs 16.61 crore loan stood before the Supreme Court, arguing that the auction of its mortgaged property had already given the bank more than half of what was owed. The question was deceptively simple: could auction money count as the borrower's own deposit?

When the bank came knocking

A company called M/s Sidha Neelkanth Paper Industries borrowed money from Andhra Bank. The loan went bad. The bank declared the account a non-performing asset (NPA) — a loan that has stopped generating income — and issued a demand notice under Section 13(2) of the SARFAESI Act (the law that lets banks seize and sell assets without going to court first). The amount demanded: about Rs 16.61 crore. The notice, printed on the bank's letterhead, carried the weight of an impending seizure.

The borrower did not pay. So the bank took possession of a mortgaged property in Delhi under Section 13(4) of the same Act (the stage where the bank actually takes control of the asset). Eventually, the property was sold at auction for Rs 12.5 crore. The sale certificate — a thin document with official seals — was issued to the auction purchaser. The bank's debts were later assigned to Prudent ARC, an asset reconstruction company that buys bad loans.

The borrower's move: challenge everything

The borrower did not accept the bank's actions. It challenged both the bank's seizure of the property and the auction sale itself before the Debt Recovery Tribunal (DRT) — a special court that handles bank loan disputes. When the DRT dismissed the borrower's application, the borrower appealed to the Debt Recovery Appellate Tribunal (DRAT) — the next level of appeal.

Here came the twist. To file an appeal before the DRAT under Section 18 of the SARFAESI Act, a borrower must make a mandatory pre-deposit — 50% of the "debt due". The borrower argued: the bank already recovered Rs 12.5 crore from the auction. That is more than 50% of Rs 16.61 crore. So the pre-deposit obligation should be considered satisfied.

The legal knot: whose money was the auction money?

The borrower's logic had surface appeal. The bank had taken Rs 12.5 crore from selling the property. If the total debt was Rs 16.61 crore, then 50% was about Rs 8.3 crore. The bank already had Rs 12.5 crore. So why should the borrower deposit anything more?

The bank and Prudent ARC saw it differently. The auction proceeds, they argued, belonged to the bank — not the borrower. The borrower was challenging the auction itself. You cannot simultaneously say the auction was illegal and claim the money from that auction as your own deposit.

Connected cases from Madhya Pradesh involving Bank of Baroda home loans raised the same issue. In those cases, auction purchasers had bought properties under the SARFAESI process, only to find the borrowers challenging the sales. The High Court of Madhya Pradesh, Bench at Indore, had dismissed the purchasers' writ petitions on April 12, 2022, confirming the DRAT orders that had allowed waiver of the pre-deposit. The Supreme Court had to settle the law once and for all.

What Section 18 actually says

Section 18 of the SARFAESI Act requires a borrower who appeals to the DRAT to deposit 50% of the "debt due" before the appeal can be heard. The second proviso to Section 18 gives the DRAT some discretion to reduce this amount, but the deposit itself is mandatory — no deposit, no appeal.

The key phrase was "debt due". What did it mean? The SARFAESI Act defines "debt" in Section 2(ha) by referring to the definition in Section 2(g) of the Recovery of Debts and Bankruptcy (RDB) Act, 1993. That definition is broad: it includes any liability owed, inclusive of interest.

The borrower wanted the court to read "debt due" as the principal amount only, excluding interest. That would have made the pre-deposit smaller. The borrower also wanted the auction proceeds to be treated as money already deposited by the borrower.

The Supreme Court's answer: no shortcut

Justice M.R. Shah and Justice B.V. Nagarathna, writing for the bench on January 5, 2023, rejected both arguments. The courtroom fell silent as the judgment was read. The court held that "debt due" under Section 18 includes the entire liability — principal plus interest — as claimed by the bank. The interest component cannot be excluded while computing the pre-deposit amount.

On the auction proceeds question, the court drew a sharp line. The bench stated plainly: "the borrower can take the benefit of auction proceeds only if he unequivocally accepts the sale." A borrower who challenges the auction sale cannot claim the benefit of auction proceeds toward the pre-deposit. Why? Because the borrower is saying the auction was invalid. You cannot treat the sale as valid enough to give you credit, but invalid enough to challenge it.

The court also clarified what "debt due" means when the borrower challenges both the bank's seizure and the auction. In that situation, "debt due" means the higher of two amounts: the amount mentioned in the bank's initial demand notice under Section 13(2), or the total liability including interest as claimed by the bank.

The bench relied on earlier decisions to support its reasoning. In Narayan Chandra Ghosh v. UCO Bank (2011) 4 SCC 548, the court had held that the pre-deposit requirement under Section 18 is mandatory and cannot be waived entirely. In Axis Bank v. SBS Organics Private Limited (2016) 12 SCC 18, the court had reiterated that the appellate tribunal has limited discretion to reduce the deposit, but the obligation to deposit remains. The court also cited Eskays Construction Pvt. Ltd. v. Soma Papers & Industries Limited & Others (2016 SCC OnLine Bom 9827) and M/s Shilpa Shares and Securities v. National Cooperative Bank Ltd. (SLP Civil No. 14717/2022, decided on 21.11.2022) to reinforce the principle that statutory pre-deposits serve a purpose — they ensure that borrowers do not file frivolous appeals merely to delay recovery.

Why this matters for every borrower

For lawyers and borrowers dealing with SARFAESI appeals, the rule is now clear. The mandatory pre-deposit under Section 18 is calculated on the full debt — principal plus interest — as claimed by the bank. Auction proceeds from the sale of the borrower's property cannot be counted toward this deposit if the borrower is also challenging that sale.

The practical consequence: a borrower who wants to challenge both the bank's seizure and the auction must arrange for 50% of the total claimed amount in cash, regardless of how much the bank has already recovered from selling the property. The only way to use auction proceeds as a deposit is to accept the auction as valid — which means giving up the challenge to the sale.

For auction purchasers, the judgment brings relief. The sale certificate they hold — bearing the official stamp and signatures — is protected from being overturned by a borrower who refuses to pay the pre-deposit. The creditor's appeals were allowed, meaning the auction purchasers who had bought properties in the Madhya Pradesh cases got their sales confirmed. The borrower's appeal was dismissed.

The court also clarified the procedural journey that led to this point. The borrower had filed Securitization Application No. 264/2013 before the DRT-III, Delhi, challenging the Section 13(4) measures. The DRT had granted a conditional interim stay with a deposit direction. On December 5, 2018, Prudent ARC, as the assignee of the debt, sold the property at auction for Rs 12.5 crore and issued the sale certificate. The DRT dismissed the borrower's application on October 5, 2019. When the borrower appealed to the DRAT, the tribunal allowed a waiver of the statutory pre-deposit. The Delhi High Court, on December 22, 2020, partly allowed the creditor's writ petition and directed the borrower to deposit 50% of the remaining Rs 4.1 crore. The Supreme Court finally settled the matter on January 5, 2023.

THE PLAY: When challenging both a bank's seizure and the auction of your property under SARFAESI, you must deposit 50% of the full claimed debt (including interest) in cash — auction proceeds cannot be counted as your deposit unless you accept the sale as valid.

The borrower's appeal was dismissed. The creditor's appeals were allowed. The auction purchasers — who had bought the property at auction — got their sale confirmed. And the borrower was left with a simple truth: the bank's money is the bank's money, even when it comes from selling your land. The file on the judge's desk, thick with pleadings and affidavits, now held a final answer.