SARFAESI ACT Borrower’s right to redeem mortgage lapses when bank publishes auction notice for secured property: Supreme Court

The Supreme Court on Thursday (September 21) delivered a judgment holding that the borrower’s right to mortgage redemption under the Securitization and Reconstruction of Financial Assets and Security Interest Enforcement Act, 2002 (SARFAESI Act) ceases after the bank publishes the auction. Will go. Notice for sale of secured property. The bench gave this verdict Chief Justice of India DY Chandrachud and Justice JB Pardiwala The need to protect the sanctity of the auction process conducted under the SARFAESI Act was also underlined and it was said that banks are bound to follow the provisions of the law like other litigants.

facts of the case

The issue arose when the borrowers in the case availed credit facility from the bank worth Rs. 100 crores. While the amount is Rs. The balance amount of Rs 65 crore was adjusted against the then existing LRD facility. A security of Rs 35 crore was created in the form of a simple mortgage over a parcel of land. The borrower defaulted in repayment of the loan amount and the loan account was declared as non-performing asset. The bank issued a demand notice under Section 13(2) of the SARFAESI Act for repayment of the principal amount along with interest, costs, charges etc., which came to Rs. 123.83 crores. The borrower was unable to pay it and the bank decided to auction the secured asset. In the ninth attempt, the bank achieved sale of assets for Rs 105 crore. The Appellant was declared the highest bidder and deposited the total bid amount. Meanwhile, the borrower filed a redemption application before the DRT-I and while the parties were waiting for the DRT’s order, the borrower also moved the High Court, seeking permission for the bank to redeem the mortgage of the secured property. Demanded to give instructions. Before the High Court, the borrowers expressed their willingness to pay Rs. 129 crores to redeem the mortgage and the bank accepted it. The High Court allowed borrowers to redeem the mortgage of secured property subject to payment. The Appellant (the auction bidder) approached the Supreme Court against the High Court order.

The borrower’s right to redeem the mortgage ceases upon publication of the auction notice.

The Supreme Court held that the failure of the borrower to deposit the entire dues before the publication of the auction notice as per Section 13(8) of the SARFAESI Act amounts to “termination of the right of redemption of the mortgage” (para 63 of the judgment). The Court held that Once the Section 13(8) phase is over and the auction ends, the borrower no longer has any right of redemption under Section 13(8). The judgment written by Justice Pardiwala said:

,The right of redemption under the SARFAESI Act is expressly restricted to the date of publication of the sale notice, whereas the said right continues till the execution of the transfer of the mortgaged property under Section 60 of the Transfer of Property Act 1882.,

In its judgment, the court further explained that after the 2016 amendment of the Act, the expression was used in Section 13(8) of the SARFAESI Act “Before the date of publication of notice inviting quotations or tenders from public auction or public or private treaty for transfer by way of lease, assignment or sale of secured assets, The court said that this expression is not in line with the general rule under Section 60 of the Transfer of Property Act, 1882, according to which the right of redemption ceases only after the transfer by registered deed.

In light of the inconsistency between the two sections, the court held that section 13(8) of the SARFAESI Act, being a special enactment, would override the general enactment of section 60 of the Transfer of Property Act, 1882 (para 68 of the judgment) . ,

Legal sanctity of the auction process must be protected under SARFAESI

The court said in its judgment that there is no other explanation in such cases “will have a very cooling effect“, where there shall be no sacrilege of any kind in any auction conducted under the SARFAESI Act. The court said-

,Such a scenario is even more worrying, because the general public who participate in such auctions are often neither aware nor informed by the secured creditors conducting the auction until the sale certificate is issued. , till then they will not get rights in it. The said property and the borrower whose property is being auctioned may foreclose and redeem the mortgage at any time, and thereby forfeit their rights and the auction process.,

In light of the same, it was found necessary to interpret Section 13(8) of the SARFAESI Act in a manner where the legal sanctity associated with the auction process is protected. If this was not done, the court said that all auctions under the SARFAESI Act “Useless“And would render void the purpose of Section 13 and the overall scheme of the SARFAESI Act to enable banks to recover their dues on time, without interference of the courts. The court said-

,…It is the duty of the courts to zealously protect the sanctity of any auction conducted. “Courts should refrain from interfering in auctions, otherwise it would defeat the very purpose and object of auctions and hamper public confidence in and participation in them” (paragraphs 86, 87 of the judgment).

It also reiterated that any other interpretation of Section 13(8) would encourage mischievous borrowers and discourage members of the public from participating in the auction process. Thus, it was held that it would be in the larger public interest to maintain the sanctity of the auction process under the SARFAESI Act.

It is the duty of banks to follow the provisions of law

The court also commented on the conduct of the bank and said that the bank is bound to follow the provisions of law like other provisions and it cannot be allowed to act in this manner.So that the sword hangs on the neck of the auction buyer“. It said that the entire issue arose due to the illegitimate conduct of the bank in placing its concerns above the express provisions of law. The court underlined that the law treats everyone equally including the bank and its officers. .

The Court also said that the High Court should not entertain writ petitions in cases related to the SARFAESI Act.

“This Court has repeatedly reminded the High Courts that they should not entertain a petition under Article 226 of the Constitution if an effective remedy is available to the aggrieved person under the provisions of the SARFAESI Act.”

conclusion of the verdict

The findings of the judgment are as follows (para 105):

(i) It was not appropriate for the High Court to exercise its writ jurisdiction under Article 226 of the Constitution, especially when the borrowers had already availed themselves of the alternative remedy available to them under Section 17 of the SARFAESI Act.

(ii) Confirmation of sale by the Bank under Rule 9(2) of the Security Interest (Enforcement) Rules, 2002 confers on the successful auction purchaser a vested right to obtain a certificate of sale of the immovable property in the form given in the Appendix. (V) As per rules i.e. as per Rule 9(6) of SARFAESI.

(iii) As per unamended Section 13(8) of the SARFAESI Act, the right of the borrower to redeem the secured asset was available till the sale or transfer of such secured asset. In other words, the borrower’s right of redemption did not expire on the date of auction sale of the secured asset and survived until the transfer in favor of the auction purchaser is completed by registration of the sale certificate and delivery of possession. of secured property. However, the amended provisions of Section 13(8) of the SARFAESI Act, make it clear that the right of the borrower to redeem the secured asset ceases to exist on the date of publication of the notice for public auction under Rule 9(1). ) of the 2002 rules. In fact, the right of redemption available to the borrower under the present statutory regime has been significantly reduced and will be available only up to the date of publication of the notice under Rule 9(1) of the 2002 Rules. and not until the completion of the sale or transfer of the secured asset in favor of the auction purchaser.

(iv) The bank could not withhold the sale certificate under Rule 9(6) of the 2002 Rules after confirming the sale under Rule 9(2) of the 2002 Rules and could not enter into a private arrangement with the borrower Could have done.

(v) Under Article 226 of the Constitution the High Court could not apply equitable considerations to arrive at the result required by the statutory auction process prescribed under the SARFAESI Act.

(vi) The two decisions of the Telangana High Court in the case of Concern Readymix (supra) and Amme Srisailam (supra) do not state the correct position of law. Similarly, the decision of the Punjab and Haryana High Court in the case of Pal Alloys (supra) also does not lay down a corrective position of law.

(vii) The decision of the Andhra Pradesh High Court in Sri Sai Annadhatha Polymers (supra) and the decision of the Telangana High Court in the case of KVV Prasad Rao Gupta (supra) lay down the correct position of law while interpreting the amended section. Section 13(8) of SARFAESI Act.

Case Title: Cellir LLP vs. Bafna Motors (Mumbai) Pvt. Ltd. & Others CA No. 5542-5543/2023

Citation: 2023 Livelaw (SC) 808; 2023INSC838

Click here to read the decision

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