NAME OF THE CASE	Axis Bank vs. SBS Organics Pvt. Ltd. & Anr.
CITATION	CIVIL APPEAL NO. 4379 OF 2016
DATE OF JUDGEMENT	April 22, 2016
APPELLANT	Axis Bank
RESPONDENT	SBS Organics Pvt. Ltd. & Another
BENCH /JUDGE	Justice Rohinton Fali Nariman  Justice Kurian Joseph
STATUTES INVOLVED	Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 The Indian Contract Act, 1872
IMPORTANT SECTIONS/ARTICLE	Section 13 of SARFAESI Act, 2002 Section 17 of SARFAESI Act, 2002 Section 18 of SARFAESI Act, 2002 Section 171 of the Indian Contract Act 1872

Overview of the Case

The case of Axis Bank v. SBS Organics Pvt. Ltd. & Anr. This judgment centered around an important question of law dealing with the nature of a deposit under Section 18 of the SARFAESI Act, 2002. A controversy arises here because the dispute arises between the two parties; the bank seeks the deposit made to file an appeal before the DRAT to be adjusted towards the borrower’s dues. The Supreme Court of India had to adjudicate whether the deposit could be refunded post-withdrawal of appeal or could be appropriated by the creditor. The judgment analyzed the statutory provision, procedural fairness, and the principle of equity while keeping in mind both parties’ interests.

Facts of the Case

SBS Organics Pvt. Ltd., which was a borrower, obtained finance from Axis Bank, creating a secured interest with the bank. Due to non-payment, the account was classified as a Non-Performing Asset (NPA), which called for recovery actions from Axis Bank under Section 13 of the SARFAESI Act. Aggrieved by these measures, SBS Organics filed a Securitisation Application before the Debt Recovery Tribunal (DRT) in Ahmedabad challenging the action of the bank. It had initially granted interim relief, but it vacated it later.

Subsequently, SBS Organics filed an appeal before the DRAT, Mumbai, under Section 18 of the SARFAESI Act, deposited ₹50 lakhs as mandatorily required. While the appeal was pending, DRT also disposed of the securitization application in favor of SBS Organics by setting aside the sale of secured assets by the bank. Since the appeal became unnecessary, SBS Organics filed to withdraw the appeal and requested a refund of the deposit. Although the DRAT granted leave for the withdrawal, it required that the refund only be made upon the outcome of the appeal.

Unsatisfied with this order, SBS Organics approached the Gujarat High Court and it decided in favor of the borrower, allowing a refund of the deposit absolutely free. Axis Bank then moved an appeal before the Supreme Court, opposing the refund and claiming appropriation of the deposit.

Concepts and Provisions Involved

• Section 13 of the SARFAESI Act, 2002: This section provides a mechanism for secured creditors to enforce their security interest without judicial intervention. The section empowers the creditors to issue notices to defaulting borrowers and takes steps such as possession, management, or sale of the secured assets to recover the debt.

• Section 17 of the SARFAESI Act, 2002: A borrower can make an application in the DRT also before availing any steps given by the secured creditor in section 13(4) for relief.

• Section 18, SARFAESI Act, 2002: This section allows appeals to the DRAT but mandates that the borrower deposit 50% of the debt as a precondition, which may be reduced to 25% by the tribunal for recorded reasons. The provision aims to discourage frivolous appeals while safeguarding creditor rights.

• Section 171 of the Indian Contract Act, 1872: It permits bankers to absorb goods bailed to them as security for a general balance of account. It does not, however, include statutory deposits placed with tribunals.

• Rule 11 of the Security Interest (Enforcement) Rules, 2002: It deals with the steps for recovery of shortfall in secured debt and thus allows creditors to recover what remains due as unpaid from the sale of secured assets.

Issue Before the Court

The primary question was whether the deposit made by SBS Organics under Section 18 of the SARFAESI Act as a condition precedent to filing an appeal could be returned to the borrower at the time of withdrawal of the appeal or could be appropriated by Axis Bank towards its claims.

Arguments of the Appellant 

Axis Bank had raised its claim that the amount deposited in the court ₹50 lakh was part of the loan liability of the borrower, and it could appropriate such amount towards its own debt. The bank has asserted its right as a secured creditor to recover dues in the manner provided, even though the statutory deposit is in this case. It invoked Section 171 of the Indian Contract Act, claiming a general lien over the deposit and asserting that such funds were liable to be adjusted against unpaid debts.

Axis Bank relied on Section 13(10) of the SARFAESI Act, which enables creditors to recover the shortfall after enforcing the secured assets. It argued that the deposit would be treated as part of the recoverable dues. It was submitted that allowing the refund would vitiate the recovery framework of the SARFAESI Act.

Arguments of the Respondent  

In so holding, SBS Organics argued that the deposit was made only pursuant to the statutory requirement prescribed under Section 18 of the SARFAESI Act for filing an appeal. The company also decried that the deposit formed no secured debt or assets and was not liable for appropriation by the bank in question. It claimed that the deposit was with the tribunal, not with the bank, and thus, Section 171 of the Indian Contract Act did not apply.

SBS Organics further pointed out that Axis Bank had neither initiated attachment proceedings nor obtained any order to appropriate the deposit during the appeal’s pendency. The company contended that allowing the deposit to be appropriated would violate the statutory intent and procedural fairness.

Judgments Referred

• Mardia Chemicals v. Union of India (2004):

This judgment satisfied the sections of the SARFAESI Act, and it was under this judgment that the law attempted to balance speedy recovery with debt and protection to debtors from arbitrary exercises of power. It has brought an end to the vagaries of appeals, and redresses under the Act must strictly follow procedural safeguards.

• Lakshmi Rattan Engineering Works Ltd. v. Assistant Commissioner Sales Tax (1968)

The judgment interpreted the term “entertain” in the provisions of the statutory appeal. It maintained that the appeals cannot be entertained unless preconditions are met, including deposit requirements. This principle was explained to explain the role of deposits under Section 18 of the SARFAESI Act.

• Babu Ganesh Singh Deepnarayan v. Union of India (2009):

This case held that deposits made under Section 18 are not secured debts and must be refunded unless appropriated through a valid legal mechanism. It emphasized that borrowers are entitled to a refund if the appeal does not proceed or is withdrawn.

Judgment

The Supreme Court upheld the Gujarat High Court’s ruling favoring SBS Organics. It clarified that the deposit made under Section 18 of the SARFAESI Act was not a secured asset or debt and could not be appropriated by Axis Bank. The Court emphasized that the deposit was made solely to fulfill a statutory precondition and was refundable unless legally appropriated or attached.

The Court dismissed Axis Bank’s claim under Section 171 of the Indian Contract Act, stating that the deposit was not in the bank’s custody and did not qualify as bailed goods. It ruled that the bank had no inherent lien over the deposit. Further, the Court noted that Axis Bank had not initiated any legal proceedings to appropriate the deposit during the appeal’s pendency.

The Court, however, concluded by ordering a refund of the deposit into the SBS Organics account. It restated the proposition that such deposits act as procedural safeguards to check and do not vest creditors with automatic rights of appropriation.

Conclusion

This case makes the point that, in accordance with the SARFAESI Act, compliance with the statute and procedural fairness is essential. The ruling makes sure that borrowers are not arbitrarily deprived of statutory deposits and that such deposits have only a procedural nature and do not amount to any secured interest on the part of the creditors. A judgment in this light, therefore, balances both sides and strengthens the legal framework concerning the resolution of disputes under the SARFAESI Act, thereby reiterating the notions of equity and justice.