Mortgage Creates Borrower Status: Bombay High Court Enforces Pre-Deposit Requirement Under SARFAESI

Posted On - 1 April, 2026 • By - Siddartha Karnani

Introduction

In a recent ruling, the Bombay High Court clarified that an individual who mortgages property to secure a loan availed by another cannot evade the statutory pre-deposit requirement under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). 

The Court held that such a mortgagor falls within the ambit of the term “borrower” for the purposes of Section 18 and, therefore, must comply with the mandatory pre-deposit requirement to maintain an appeal before the Debts Recovery Appellate Tribunal (“DRAT”). 

The decision reinforces the strict statutory framework under the SARFAESI Act and underscores that the right of appeal is conditional and not absolute. 

Statutory Framework: Section 18 and the Pre-Deposit Requirement

Section 18(1) of the SARFAESI Act provides a right of appeal to the DRAT against any order passed by the Debts Recovery Tribunal (“DRT”) under Section 17. However, the second proviso to Section 18(1) mandates that no appeal shall be entertained unless the borrower deposits 50% of the amount of debt due, as claimed by the secured creditor or as determined by the DRT, whichever is less. 

The DRAT is vested with limited discretion to reduce this amount, but not below 25% of the debt due. Judicial precedents have consistently held that this requirement is mandatory and constitutes a condition precedent to the maintainability of an appeal (see, e.g., Narayan Chandra Ghosh v. UCO Bank). 

The legislative intent is to discourage frivolous or dilatory litigation and to ensure that secured creditors are not prejudiced by prolonged appellate proceedings. 

Factual Background: Mortgage in a Redevelopment Transaction

The dispute arose from a redevelopment project undertaken pursuant to co-development agreements executed in 2011. As part of the commercial arrangement, registered deeds of simple mortgage were created in favour of HDFC Bank to secure loans extended to a co-developer. 

Upon default, the bank initiated measures under the SARFAESI Act, including enforcement of the security interest. Possession of the secured asset was taken, and the property was ultimately auctioned in December 2019. 

The mortgagor approached the DRT challenging the measures taken by the bank. After becoming aware that the auction had been concluded, the mortgagor sought to amend its pleadings and implead the auction purchaser. 

By an order dated October 2022, the DRT dismissed these applications. Aggrieved, the mortgagor sought to prefer an appeal before the DRAT but contended that: 

  • it was not the “borrower” within the meaning of the Act; and  
  • the DRT’s order was merely procedural in nature.  

On this basis, it argued that the pre-deposit requirement under Section 18 should not apply. 

Issues for Consideration

The High Court considered the following key issues: 

  1. Whether a mortgagor who creates a security interest to secure a loan availed by a third party qualifies as a “borrower” under the SARFAESI Act for the purposes of Section 18; and  
  2. Whether the DRT’s order rejecting amendment and impleadment applications could be characterised as purely procedural or interlocutory, thereby exempting it from the pre-deposit requirement. 

    The High Court’s Analysis

    The Division Bench rejected both contentions. 

    Interpretation of “Borrower” 

    • The Court adopted a plain and purposive interpretation of the term “borrower” as defined under Section 2(1)(f) of the SARFAESI Act. 
    • It held that the definition is sufficiently broad to include any person who has created a mortgage or security interest in favour of a secured creditor, even if such person is not the principal debtor. 
    • Accordingly, a mortgagor who secures the debt of another assumes obligations under the Act and falls within the statutory framework governing enforcement and appellate remedies. 
    • The Court declined to read a restrictive meaning into the provision, emphasising that voluntary creation of a security interest attracts the statutory consequences of the SARFAESI regime. 

    Nature of the DRT’s Order

    On the second issue, the Court held that the DRT’s order was not merely procedural or interlocutory. 

    By rejecting the applications for amendment and impleadment, the DRT effectively foreclosed the challenge to the auction sale, particularly when third-party rights had already crystallised. 

    Such an order has substantive consequences and, therefore, falls within the category of orders appealable under Section 18, subject to compliance with the pre-deposit requirement. 

    Outcome

    The High Court accordingly dismissed the writ petition and upheld the applicability of the pre-deposit condition. 

    1. Expanded Scope of “Borrower”: The judgment clarifies that third-party mortgagors cannot avoid classification as borrowers under the SARFAESI Act merely because they are not principal debtors. The statutory definition prevails over contractual characterisations. 
    2. Mandatory Nature of Pre-Deposit: The decision reaffirms that the pre-deposit requirement under Section 18 is strictly mandatory. The right of appeal under SARFAESI is a statutory right subject to conditions, not an inherent or unfettered right. 
    3. Finality of Auction Sales: The ruling strengthens the principle that completed SARFAESI auctions should not be lightly disturbed, particularly where third-party rights have crystallised. 

    The pre-deposit requirement acts as a safeguard against belated or non-serious challenges. 

    Conclusion

    The Bombay High Court’s ruling provides much-needed clarity on the scope of the term “borrower” under the SARFAESI Act. By holding that a mortgagor securing another’s debt is bound by the statutory pre-deposit requirement, the Court reinforces the creditor-centric and procedurally rigorous framework of the Act. 

    For developers, guarantors, and third-party mortgagors, the message is clear: once a security interest is created in favour of a secured creditor, the full rigour of the SARFAESI regime applies including the financial condition attached to appellate remedies.