Tenants Are Not 'Borrowers' Under SARFAESI Act: Karnataka High Court Waives Mandatory Pre-Deposit Requirement - 2026-06-09

Tenants Are Not 'Borrowers': Karnataka High Court Clarifies SARFAESI Appeal Rules

In a significant relief for tenants facing displacement due to SARFAESI proceedings, the High Court of Karnataka has ruled that the mandatory pre-deposit requirement under Section 18 of the SARFAESI Act is strictly confined to "borrowers." The division bench, comprising Justice Suraj Govindaraj and Dr. Justice K. Manmadha Rao, clarified that third parties, including tenants, cannot be compelled to deposit a percentage of the debt to exercise their right to appeal.

The Conflict: A Tenant Caught in Debt Recovery

The dispute arose when Ittiam Systems Private Limited , a tenant occupying premises in "Consulate-1," Bengaluru, challenged an order from the Debt Recovery Appellate Tribunal (DRAT). The tenant, having been in occupation since 2001, found itself caught in the middle when the property owner, Mr. Hiro Uttamchandani, defaulted on a loan from Bharath Co-operative Bank (Mumbai) Limited .

As the bank initiated measures under the SARFAESI Act to take physical possession of the asset, the tenant filed an appeal. However, the DRAT insisted on a substantial pre-deposit of approximately ₹3.33 crores, prompting the tenant to approach the High Court.

Arguments from the Trench

The petitioner's counsel argued that the law draws a clear legislative distinction between a "borrower" and "any person aggrieved." They contended that forcing a non-borrowing tenant to pay a portion of a borrower's debt would render the statutory right to appeal illusory.

Conversely, Bharath Co-operative Bank argued that the tenant could not claim the status of a "bona fide non-borrower" because their tenancy agreement was unregistered and allegedly created after the security interest had been established. The bank insisted that the DRAT correctly exercised its discretion in ordering the deposit.

The Legal Analysis: Reading the Statute

The High Court’s analysis centered on the plain language of Section 18 of the SARFAESI Act. The bench noted that while the substantive right to appeal is granted to "any person aggrieved," the condition of pre-deposit is explicitly and exclusively linked to the "borrower."

The Court rejected the bank’s plea to pre-determine the validity of the tenancy at the stage of the appeal's filing. Justice Govindaraj, writing for the bench, emphasized that the validity of a tenancy is a matter to be adjudicated during the final appeal, not a prerequisite for accessing the appellate body.

Key Observations

The judgment is marked by several pivotal clarifications:

• On Legislative Intent: "The language employed in the second proviso is explicit, precise and restrictive... The Court cannot, under the guise of interpretation, enlarge the scope of the second proviso by reading into it words which the legislature has consciously omitted."
• On the Role of the Tenant: "A non-borrower such as a tenant neither avails financial assistance from the secured creditor nor undertakes liability to repay the debt."
• On Judicial Propriety: "The question as to whether the appeal is maintainable in light of the tenancy being founded upon an unregistered lease agreement would be decided at the stage of final hearing of the appeal."
• On Statutory Distinction: "The statutory scheme under Section 18 itself clearly contemplates that appeals may be filed both by borrowers and by non-borrowers."

The Verdict: A Pathway for Tenants

The High Court set aside the DRAT's order and waived the requirement for the pre-deposit, directing the Tribunal to hear the tenant's appeal on its merits within eight weeks.

This ruling serves as a vital safeguard, preventing banks from using the "pre-deposit" hurdle to stifle the legal challenges of third-party occupants. While the court purposefully left the debate over the validity of the tenancy open for the DRAT to decide, it firmly established that the financial obligations of a borrower cannot be transferred to a tenant as a barrier to justice.

Future cases involving SARFAESI actions against third-party occupants will now likely look to this precedent, ensuring that the right to appeal remains accessible rather than becoming a financial impossibility for those who were never part of the original loan contract.