The Bombay High Court has clarified a critical boundary in SARFAESI enforcement proceedings by holding that third parties who are neither borrowers nor guarantors cannot be compelled to comply with mandatory pre-deposit requirements under Section 18. This ruling reinforces the principle that statutory obligations under the SARFAESI Act are personal to those who incurred the debt or provided security, and cannot be extended to innocent purchasers or unrelated stakeholders.
Background & Facts
The Dispute
The petitioner, M/s Shraddha Developers, is a third party that purchased a property through a public auction conducted by Respondent No. 1, N.K.G.S.B. Co-op. Bank Ltd., under the SARFAESI Act. The bank had initiated proceedings against the original borrower for default on a loan secured by the property. The petitioner acquired the asset in good faith, without any liability or involvement in the underlying debt. Subsequently, the Debt Recovery Appellate Tribunal (DRAT) directed the petitioner to deposit Rs. 44 lakhs as a mandatory pre-deposit under the proviso to Section 18 of the SARFAESI Act to pursue its appeal against the Recovery Officer’s order.
Procedural History
- 2025: DRAT issued order directing petitioner to deposit Rs. 44 lakhs as pre-deposit to maintain appeal
- 2025: DRAT dismissed petitioner’s appeal for non-compliance with the pre-deposit order
- 2026: Petitioner filed Writ Petition No. 13363 of 2025 before the Bombay High Court challenging the legality of the pre-deposit direction
Relief Sought
The petitioner seeks quashing of the DRAT’s order directing pre-deposit and restoration of its appeal, arguing that as a third-party purchaser with no liability under the loan agreement, it is not bound by the statutory pre-deposit requirement.
The Legal Issue
The central question was whether the proviso to Section 18 of the SARFAESI Act mandates a third-party auction purchaser, who is neither borrower nor guarantor, to make a mandatory pre-deposit to challenge an order of the Recovery Officer.
Arguments Presented
For the Petitioner
The petitioner relied on the recent decision in Ishtiyaque Aslam Khan v. DCB Bank and Others (2026 SCC OnLine 249), where the Bombay High Court held that third parties not party to the loan agreement cannot be subjected to pre-deposit obligations. It argued that the SARFAESI Act’s pre-deposit requirement is a procedural condition tied to the liability of the debtor or guarantor, and extending it to purchasers violates the principle of personal liability under contract and property law. The petitioner submitted documents proving its status as a bona fide auction purchaser with no connection to the original debt.
For the Respondent
The bank contended that since the petitioner acquired the asset through the enforcement process, it stepped into the shoes of the borrower and thus became subject to the same procedural obligations. However, the court noted that the bank failed to file a comprehensive reply affidavit or supporting documents to substantiate this claim, rendering its arguments speculative and unverified.
The Court's Analysis
The Court examined the language and legislative intent behind Section 18 of the SARFAESI Act, particularly the proviso requiring pre-deposit. It emphasized that the provision is designed to deter frivolous appeals by those who are directly liable for the debt. The Court observed that the statute does not extend the pre-deposit obligation to third parties who have no contractual or statutory liability.
"The proviso to Section 18 is a condition precedent for maintaining an appeal by a person who is liable for the debt. It cannot be stretched to bind a third party who has no connection with the loan transaction or the security interest."
The Court reaffirmed its earlier holding in Ishtiyaque Aslam Khan, noting that the Supreme Court and Delhi High Court have consistently held that auction purchasers are not debtors under the Act. The Court further criticized the DRAT for imposing a condition not contemplated by law, especially in the absence of any evidence linking the petitioner to the original default. The failure of the bank to file a proper reply affidavit further weakened its position.
The Verdict
The petitioner succeeded. The Court held that a third-party auction purchaser, not being a borrower or guarantor, is not bound by the mandatory pre-deposit requirement under the proviso to Section 18 of the SARFAESI Act. The DRAT’s order directing pre-deposit was set aside, and the matter was listed for further hearing alongside WP/16511/2025.
What This Means For Similar Cases
Pre-Deposit Obligation Is Personal to Debtor
- Practitioners must challenge any DRAT or Recovery Officer order demanding pre-deposit from auction purchasers or third parties
- The burden lies on the bank to prove the purchaser’s direct liability - mere acquisition of secured asset is insufficient
- Any such demand without evidence of debtor status is legally unsustainable
Documentary Proof of Third-Party Status Is Critical
- Buyers in SARFAESI auctions must retain and produce: auction notice, sale certificate, payment receipts, and title documents
- Absence of loan agreement, guarantee, or possession prior to auction strengthens third-party claim
- Oral assertions by banks without documentary backing will not suffice in court
DRAT Cannot Create New Conditions
- Tribunals cannot impose procedural conditions beyond statutory mandates
- Orders requiring pre-deposit from non-debtors are ultra vires and subject to writ jurisdiction
- Petitioners may seek costs for vexatious litigation arising from such unlawful directions
