SARFAESI - Borrower Can't Seek Discharge By Only Paying Highest Bid Amount Or Reserve Price If Bank Dues Are More : Supreme Court

A Bench comprising Justices M.R. Shah and Sanjiv Khanna allowed an appeal filed by the Bank of Baroda assailing the order of the Division Bench of the Rajasthan High Court, which had directed the bank to release the mortgaged property and to hand over possession and original title deeds to a borrower on payment of partial dues.

Factual Background

Bank of Baroda granted a term loan of Rs 100 lakhs and cash credit limit of Rs. 95 lakhs to M/s. Karwa Trading Company ("borrower") against two properties - an industrial plot and a residential property. The borrower failed to repay and on 31.10.2012, its account became NPA.

Thereafter, the borrower was served with a notice under Section 13(2) of the SARFAESI Act for a sum of Rs. 1,85,37,218.80. Constructive possession of the immovable property was taken and the bank issued a notice under Section 13(4) of the SARFAESI Act.

Eventually, on 25.11.2013, the bank took possession of the residential property mortgaged with it. A sale notice was issued on 16.12.2013 for public auction of the property and the reserve price was fixed at Rs. 48.65 lakhs. The auction was challenged by the borrower under Section 17 of the SARFAESI Act before DRT, Jaipur, which passed an interim order directing the borrower to deposit Rs. 20 lakhs by the day of auction and balance payment of Rs. 28.65 lakhs by 27.01.2014. If such a deposit is made, the bank was directed to deliver possession to the borrower. The borrower made the payment as directed. The interim order was challenged by the bank before the DRAT. It argued that if the borrower was interested he could redeem the property by paying the due of Rs. 2 crores or atleast pay Rs 71 lakhs, which is the highest bid in the public auction. The DRAT dismissed the appeal, which was challenged before the Single Judge of Rajasthan High Court. It set aside the orders of DRT as well as DRAT holding them to be be contrary to Section 13(8) of the SARFAESI Act. The borrower was successful in the appeal before the Division Bench and the bank was directed to release the residential property and handover title deeds upon the borrower depositing Rs. 17 lakhs.

Contentions raised by the appellant

Advocate, Ms. Praveena Gautam appearing on behalf of Bank of Baroda submitted that the borrower did not come forward to redeem the property but to make an offer for the property as a purchaser on payment of the reserved price. She highlighted that the same was also noted by the Division Bench. It was asserted that when the notice under Section 13(2) was issued the dues amounted to Rs. 1,85,37,218.80. Therefore, the borrower cannot be discharged from his liability upon paying Rs. 71 lakhs for the mortgaged residential property. It was clarified that the bank had agreed to handover the possession for Rs. 71 lakhs, but not forgo the liability of the outstanding dues. She assailed the order of the Division Bench for being contrary to Section 13(8) of the SARFAESI Act, which reads as under -

"13. Enforcement of security interest.-

[...]

8. If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secure asset."

It was pointed out that when the interim order passed by DRT was limited to handing over possession on payment of reserve price i.e. Rs. 48.65 lakh, it was not proper for the Division Bench to discharge the borrower of its entire liability on payment of Rs. 65.65 lakhs.

Contentions raised by the respondent

Advocate, Ms. Christi Jain appearing on behalf of the borrower submitted that the bank had agreed to release the property on payment of Rs. 65.65 lakhs. She also contended that the borrower was ready to pay Rs. 71 lakhs which was the highest bid received by the bank.

Analysis by the Supreme Court

The Court noted that the borrower had not deposited the entire amount of the dues which it was supposed to under Section 13(8) in order to prevent the bank from transferring the mortgaged property. It was observed that the Division Bench was aware that the borrower had offered Rs. 71 lakhs as a purchaser and not for redeeming the property. Therefore, the order passed by the Division Bench was in contravention of Section 13(8) of the SARFAESI Act. The Court was of the view that by paying Rs. 71 lakhs the borrower could not have been discharged of its liability which was at least Rs. 1,85,37,218.80. Even if the bank auctioned the property to a third party for Rs.71 lakhs, the borrower was duty bound to pay off the outstanding dues. It was also noted that the DRT could not have directed the borrower to make partial payment and take possession when Section 13(8) clearly required the dues to be paid in full in order to stall the transfer of concerned property in the auction process.

Now, while the DRT hears the application challenging the auction, the Court kept it open for the bank to proceed with the auction proceedings. It further observed that the concerned property being residential property if the borrower is already in possession, it shall not be disturbed till the auction is finalised. However, upon finalisation of the auction the borrower is to hand over the peaceful and vacant possession. It directed that in the meanwhile, the borrower shall not transfer possession or title of the concerned property and the title deed of the property is to be retained by the bank.

[Case Name: Bank of Baroda v. M/s. Karwa Trading Company And Anr.

Citation: 2022 LiveLaw (SC) 253

Case No. and Date: Civil Appeal No 363 of 2022 | 10 Feb 2022

Corum: Justices M.R. Shah and Sanjiv Khanna

Authored By: Justice M.R. Shah

Headnotes

Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secure asset - Borrower did not deposit entire outstanding dues with the bank, therefore bank could have sold the mortgaged property in a public auction.

Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Even by paying the highest bid amount the borrower cannot be discharged of its liability of the outstanding due to be paid to the bank.

Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Even if the mortgaged property was sold off to a third party at a price lower than the outstanding dues, the remaining amount had to be paid by the borrower.

Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Unless the borrower was ready to deposit the entire outstanding amount along with costs and expenses, the DRT could not have stalled the auction by directing it to pay only the reserve price.