SARFAESI Act | Borrower's Right To Redeem Mortgage Extinguishes Once Bank Publishes Auction Notice For Secured Asset: Supreme Court

The Supreme Court on Thursday (September 21) pronounced a judgement holding that the borrower's right of redemption of mortgage under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will get extinguished once the bank publishes an auction notice for the sale of the secured asset. The judgement delivered by a bench of Chief Justice of India DY Chandrachud and Justice JB Pardiwala also underlined the need to protect the sanctity of the auction process carried under the  SARFAESI Act and asserted that the banks were to duty bound to follow provisions of law just like other litigants. 

Facts of the Case

The issue arose when the borrowers in the case availed a credit facility from the Bank to the tune of Rs. 100 crore. While the amount of Rs. 65 crore was adjusted against the then existing LRD facility, for the balance amount of Rs. 35 crore a security in the form of a simple mortgage was created over a parcel of land. The borrower defaulted in repayment of the loan amount and the loan account was declared as a 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, cost, charges, etc which came up to Rs. 123.83 crore. The borrower was unable to pay the same and the Bank decided to put the secured asset to auction. On the ninth try, the Bank secured the sale of the asset at Rs 105 crore. The appellant was declared as the highest bidder and deposited the sum of the total bid amount. Meanwhile, the borrower filed a redemption application before DRT-I and while the parties were awaiting for the DRT order, the borrowers also went to the High Court, seeking directions to the Bank to permit them to redeem the mortgage of the secured asset. Before the High Court, the borrowers expressed their willingness to pay  Rs. 129 crore for redeeming the mortgage and the bank accepted the same. The High Court permitted the borrowers to redeem the mortgage of the secured asset subject to the payment. The appellant(auction bidder) approached Supreme Court against the High Court order.

Borrower's Right Of Redemption Of Mortgage Extinguishes On Publication Of Auction Notice

The Supreme Court held that the  failure on the part of the borrower in tendering the entire dues before the publication of the auction notice as per Section 13(8) of the SARFAESI Act constituted an "extinguishment of right of redemption of mortgage"(para 63 of the judgment). The court held that once the Section 13(8) stage was over and the auction was concluded, the borrower did not have any right of redemption under Section 13(8) left. The judgment authored by Justice Pardiwala stated :

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

In its judgement, the court further highlighted that after the 2016 Amendment of the Act, Section 13(8) of the SARFAESI Act used the expression “before the date of publication notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets”. The court stated that this expression was not in consonance with the general rule under Section 60 of the Transfer of Property Act, 1882 as per which the right of redemption got extinguished only after conveyance 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 Auction Process Under SARFAESI Must Be Protected

In its judgement, the court went on to state that any other interpretation in such matters "would lead to a very chilling effect", where no auction conducted under the SARFAESI Act would have any form of sanctity. The court added–

"Such a scenario is all the more worrisome, because the general public who participate in such auctions are often neither aware nor informed by the secured creditors conducting the auctions, that as long as the sale certificate is not issued, they will not have a right in the said asset and that the borrower whose asset is being auctioned could sweep-in and redeem the mortgage any time, and thereby thwart their rights and the very 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 attached to an auction process was protected. If the same was not done, the court stated that all auctions under the SARFAESI Act would be "meaningless" and would render the object of Section 13 and the overall scheme of the SARFAESI Act of enabling the banks from recovering its dues in a timely manner, without the interference of courts futile. The court added–

"...It is the duty of the courts to zealously protect the sanctity of any auction conducted. The courts ought to be loath in interfering with auctions, otherwise it would frustrate the very object and purpose behind auctions and deter public confidence and participation in the same" (Paragraph 86, 87 of the judgment)

It also reiterated that any other interpretation of Section 13(8) would encourage mischievous borrowers and discourage the 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. 

Banks Duty Bound To Follow Provisions Of Law

The court also commented on the conduct of the bank and stated that the bank was duty bound to follow the provisions of the law as any other and could not be permitted to act in a manner "so as to keep the sword hanging on the neck of the auction purchaser". It stated that the entire issue arose because of the illegitimate conduct of the Bank in placing its own concerns above the clear provisions of the law. The court underlined that the law treats everyone equally which includes the Bank and its officers.

The Court also stated that the High Court should not entertain writ petitions in matters relating to SARFAESI Act.

"This Court has time and again, reminded the High Courts that they should not entertain petition under Article 226 of the Constitution if an effective remedy is available to the aggrieved person under the provisions of the SARFAESI Act"

Conclusions of the judgment

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

(i) The High Court was not justified in exercising its writ jurisdiction under Article 226 of the Constitution more particularly when the borrowers had already availed the alternative remedy available to them under Section 17 of the SARFAESI Act. 

(ii) The confirmation of sale by the Bank under Rule 9(2) of the Security Interest (Enforcement) Rules, 2002 invests the successful auction purchaser with a vested right to obtain a certificate of sale of the immovable property in form given in appendix (V) to the Rules i.e., in accordance with Rule 9(6) of the SARFAESI.

(iii) In accordance with the 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 stand terminated on the date of the auction sale of the secured asset itself and remained alive till the transfer was completed in favour of the auction purchaser, by registration of the sale certificate and delivery of possession of the secured asset. 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 stands extinguished thereunder on the very date of publication of the notice for public auction under Rule 9(1) of the Rules of 2002. In effect, the right of redemption available to the borrower under the present statutory regime is drastically curtailed and would be available only till the date of publication of the notice under Rule 9(1) of the Rules of 2002 and not till the completion of the sale or transfer of the secured asset in favour of the auction purchaser.

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

(v) The High Court under Article 226 of the Constitution could not have applied equitable considerations to overreach the outcome contemplated 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 lay down the correct position of law. In the same way, the decision of the Punjab and Haryana High Court in the case of Pal Alloys (supra) also does not lay down the correction 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 K.V.V. Prasad Rao Gupta (supra) lay down the correct position of law while interpreting the amended Section 13(8) of the SARFAESI Act.

The auction purchasers (appellants) were represented by Senior Advocate Mukul Rohatgi, Senior Advocate Neeraj Kishan Kaul, Advocate Mahesh Agarwal, Agarwal Law Associates ( AoR, Supreme Court), Kunal Mehta, Counsel and Robin Fernandes, Partner, Vesta legal (AoR, Bombay High Court)

Case Title: Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. And Ors C.A. No. 5542-5543/2023

Citation : 2023 LiveLaw (SC) 808; 2023INSC838

Click Here To Read Judgement