Borrowers Cannot Bypass SARFAESI Pre-Deposit Requirement By Challenging Original NPA Classification: Karnataka High Court

The Karnataka High Court has recently ruled that borrowers cannot use a fresh writ petition to circumvent the statutory pre-deposit requirement for appeal under the SARFAESI Act.

The bench held that borrowers cannot reopen recovery proceedings by challenging the original classification of their loan accounts as non-performing assets (NPAs) after their statutory appeal fails for non-compliance with the pre-deposit requirement.

A division bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha dismissed an appeal filed by four cashew-processing businesses against a single judge's order dated February 16, 2026. The single judge had rejected their writ petition on grounds of delay, laches and the availability of an alternative statutory remedy.

“The statutory requirement of pre-deposit under Section 18 of the SARFAESI Act cannot be rendered otiose in this manner. Once the appellants elected to pursue the statutory remedies and the appellate proceedings failed on account of non-compliance with the pre-deposit requirement, permitting them thereafter to reopen the entire recovery process by tracing their grievance to the original classification of the loan accounts as NPA would, in substance, permit them to accomplish indirectly what the statutory scheme did not permit them to accomplish directly. It is precisely such a 'circuitous route' that the Supreme Court deprecated in Varimadugu Obi Reddy (supra),” the bench observed.

The dispute arose after Canara Bank classified the loan accounts of the four businesses as NPAs. The borrowers contended that the bank had failed to consider their requests for restructuring under the applicable MSME revival and restructuring framework and the Reserve Bank of India's COVID-19 resolution framework.

Canara Bank issued demand and possession notices under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The borrowers challenged successive recovery measures before the debts recovery tribunal, but their challenges were dismissed.

They subsequently approached the debt recovery appellate tribunal in Chennai. Their appeal was dismissed on September 29, 2025, for failure to comply with the statutory pre-deposit requirement under Section 18 of the SARFAESI Act.

The borrowers then filed a writ petition challenging the original NPA classification and the consequential recovery proceedings. A single judge dismissed the petition on February 16, 2026, citing delay, laches and the availability of an alternative statutory remedy.

The division bench relied on Supreme Court rulings, including Varimadugu Obi Reddy v. B. Sreenivasulu, which cautioned against using writ proceedings to avoid the statutory pre-deposit requirement.

The bench also noted the considerable delay in challenging the NPA classification. It found no reason to interfere with the single judge's order and dismissed the writ appeal as devoid of merit.

For Appellants: Senior Advocate Dhyan Chinnappa, Advocate Rudrabhushan CB

For Respondents: Harsha P. Banad, CGC, Prakasha Hegde, Advocate