The Supreme Court has said a deposit made by a debtor to show his bonafides in a case of loan settlement cannot be considered a secured asset under the SARFAESI Act and has to be refunded.

“The deposit was not towards satisfaction of the debt in question, and that is precisely why the High Court had directed that the deposit would be treated (as) a deposit in the Registry of the High Court,” the SC said in Kut Energy Pvt Ltd versus PNB .

Referring to an earlier ruling in the case of Axis Bank, the SC noted that a secured creditor would be entitled to proceed only against the secured assets mentioned in the notice under Sec 13(2) of the SARFAESI Act, 2002.

“In the instant case also, the money was expressly to be treated to be with the Registry of the High Court,” said the bench comprising justices UU Lalit and Vineet Saran, and directed that ₹40 crore deposited by the appellants be refunded. It was hearing an appeal against an order passed by the High Court of Himachal Pradesh in Shimla in March this year. In 2008, Kut Energy, along with others, entered into an agreement to set up a 24 MW Kut Hydro Electric Project in Shimla. It took a loan from a consortium of banks, including Punjab National Bank (PNB), Corporation Bank, and Central Bank of India.

The account was declared NPA in September 2015, and a demand notice for ₹106.07 crore was issued by PNB in March 2017 under Sec 13(2) of the SARFAESI Act. Three proposals for one-time settlement were made by the appellants. In August 2017, the bank issued a possession notice for the project, and then issued a sale notice for e-auction with a reserve price of ₹120 crore.

The appellant then sought interim relief from the Debt Recovery Tribunal, Chandigarh, which was rejected. It then revised its offer for OTS to ₹140 crore, and filed a civil writ petition in the High Court. They submitted during the hearing in October 2017 that to establish their bonafides, they were willing to deposit ₹140 crore with the bank.

The HC said the deposit will be treated as a deposit in the Registry of the Court. The appellant then deposited ₹40 crore, but the bank rejected the revised proposal for OTS.

In May 2018, PNB filed a writ petition for appropriation of ₹40 crore, while the appellants filed a writ for refund of the money. These applications were disposed off by the High Court, which noted that the “prayer made by the bank deserves to be accepted in part to the extent that let the amount of ₹40 crore lying deposited with the bank without any lien be deposited with DRT”. It also directed the DRT to keep it in a nationalised bank to fetch maximum rate of interest.

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