SARFAESI Act | Right Of Redemption Cannot Be Taken Away By Insufficient Notice: Allahabad High Court

The Allahabad High Court has held that right of redemption under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is an important right which cannot be taken away or breached by the authorities by insufficient notice.

[Right of redemption allows an opportunity to the borrower to repay the entire dues and redeem the secured asset]

While observing that it is settled law that service of notice upon the borrower is mandatory under Rule 8 of the Security Interest (Enforcement) Rules, 2002, the bench comprising Justice Ashwani Kumar Mishra and Justice Syed Qamar Hasan Rizvi held,

“Right of redemption is an important right available to a borrower, who is in default. Such important right cannot be taken away and any action taken in its breach cannot be approved of.”

The Court observed that the date of auction being in knowledge is not sufficient if notice has not been served following due procedure prescribed under Rule 8 of the Security Interest (Enforcement) Rules, 2002.

Factual Background

Appellant had defaulted on the loan availed from the respondent bank, Bank of Maharashtra. Notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) were issued to the appellant. Steps were initiated by the bank under Section 13(4) of the Act of 2002. Two notices were issued for sale of the property but such attempts ultimately failed. The Competent Tribunal had set aside the auction proceedings.

Thereafter, the respondent bank proceeded to issue fresh notices to the borrowers under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002. Three notices were sent addressed to: Sharp Industries through its proprietor Raju Solanki, the wife of the proprietor Smt. Prabha Solanki and Mrs. Anil Kumari. The service of these notices is disputed.

The Debt Recovery Appellate Tribunal had quashed the order of the Debt Recovery Tribunal and set aside the auction sale held by the respondent bank. The DRAT directed the respondent bank to refund the auction money to the auction purchaser after restoring possession of immovable and movable property from the auction purchaser to the borrower. It was observed that the change of address had already been intimated to the bank via email and service of notice on previous address was not sufficient service. The bank was granted liberty to proceed afresh from the stage of issuance of sale notice since no notice was actually served upon the appellant borrower.

The single judge, in writ jurisdiction, set aside the order of the DRAT on grounds that on the appellant (borrower) was aware of the date of the auction and had knowledge of the auction notice. The order of the single judge was challenged by the appellant in special appeal under Chapter VIII Rule 5 of the Allahabad High Court Rules, 1952 (Special Appeals).

Counsel for appellant (borrower) argued that the procedure prescribed under Rule 8 of Security Interest (Enforcement) Rules, 2002 protects the interest of the borrower and confers the right of redemption on the borrower. It was argued that failure to comply with procedure under Rule 8 would invalidate auction proceedings. It was argued that non-service of notice in terms of Section 13(4) read with Rule 8(6) of the Rules of 2002 caused serious prejudice to the appellant, as the right of redemption guaranteed under the Act could be availed.

Further, it was contended that even if fresh proceedings are initiated, it is necessary for the Bank to serve notice under Rule 8(6) of the Rules of 2002 on the borrower to ensure that he has the right of redemption.

Per contra, counsel for respondent bank urged that only change of address of the proprietor was intimated to the bank, the other two notices were served on the original address. Since the borrower had not come up with a plan till the disposal of the writ petition, appellant was not entitled to any relief claimed in the appeal even if notice was not sufficient.

High Court Verdict

The Court observed that disposal of immovable secured asset under Section 13(4) of the SARFAESI Act necessarily attracts Rule 8 of the Security Interest (Enforcement) Rules, 2002.

Relying on the decision of Supreme Court in Mathew Verghese vs. M Amritha Kumar & others, the Court held that “service of notice upon the borrower in terms of Rule 8(6) is mandatory.”

The Court held that the right of redemption being an important right available to the borrower under the Act cannot be taken away or breached. The Court held that even if the borrower had mentioned the date of auction in the email intimating change of address, service of notice under Rule 8(6) cannot be said to be made.

“We are not in agreement with the view taken by the learned Single Judge that merely because appellant had the knowledge of the date of auction it would mean that non- adherence with the requirement of notice under Rule 8(6) would stand obliterated. On this aspect we are inclined to endorse the view taken by the appellate tribunal that non- service of notice upon the appellant would be a material irregularity and the subsequent action of the bank cannot be approved of.”

Accordingly, the Court has granted an opportunity to the appellant (borrower) to exercise the right of redemption had pay dues along with interest as on the date of notice under Rule 8(6).

The case is directed to be listed on 5^th February, 2024.

Case Title: Sharp Industries vs. Bank Of Maharashtra And 3 Others 2024 LiveLaw (AB) 21 [SPECIAL APPEAL No. - 220 of 2023]

Case Citation: 2024 LiveLaw (AB) 21

Counsel for Appellant: Kumar Kartikeya, Vinayak Mithal

Counsel for Respondent: Shruti Malviya, Vivek Yadav