SARFAESI | Borrowers' Redemption Right Not Lost By Auction Sale If Balance Consideration Was Paid After Timelimit : Supreme Court

The Supreme Court has observed that under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, where an auction purchaser fails to deposit the balance sale consideration within time, the sale remains incomplete and does not attain finality; consequently, the borrower cannot be divested of their property if they repay the entire outstanding debt to the creditor.

The Court held that if the balance sale consideration was not deposited within the 3 month period stipulated by Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, then the sale remains incomplete. The fact that a sale certificate was issued will not make such a sale legal and complete, and if the borrower had repaid the dues in the meantime, then the property can be redeemed.

“If the process suffers from material irregularities or fails to conform to mandatory requirements, thereby rendering the sale inchoate, the Court would be justified in intervening, particularly where the borrower has, in the interregnum, discharged the outstanding liability, so as to obviate disproportionate deprivation of property and uphold substantive justice.”, observed a bench of Justice Dipankar Datta and Justice Satish Chandra Sharma, while affirming the Madras High Court's decision to set aside the auction sale and restore the secured assets to the Respondent-borrower.

The Respondent-borrower took a ₹4 crore loan from the Central Bank of India in 2017 but later defaulted. The bank-initiated recovery under the SARFAESI Act and conducted an auction in September 2020, when the auction purchasers paid 25% of the amount.

The borrowers challenged the auction before the DRT and the High Court, which passed interim orders stopping completion of the sale. Although the bank was allowed to accept the remaining amount, the auction purchasers delayed payment and paid the balance only in March 2022, about 15 months later. A sale certificate was then issued.

During this period, the borrowers kept paying amounts and eventually cleared the entire outstanding dues in December 2022. However, the bank refused to accept the payment, saying the property had already been sold.

The High Court later set aside the auction due to a delay in payment of the balance sale consideration and irregularities and restored the property to the borrowers, leading to appeals before the Supreme Court by the secured creditor and the auction purchaser.

The core issue before the Supreme Court was whether the issuance of the sale certificate in favour of the auction purchaser, upon belated payment of the balance sale consideration, would justify the Court's intervention in the recovery proceedings against the borrower, when it had deposited the debt amount.

Dismissing the appeals, the judgment authored by Justice Dipankar Datta, referring to Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, noted that since the auction purchaser deposited the remaining 75% of the sale consideration beyond the prescribed three-month period, the sale did not attain finality. Consequently, the sale certificate carried no legal significance, and the borrower was not precluded from redeeming the secured assets upon clearing the dues during the pendency of the proceedings.

“A sale that remained inchoate in favour of the auction purchasers, owing to non-compliance with mandatory timelines prescribed under Rule 9(4) of the 2002 Rules, cannot be invoked to defeat the right of the borrowers to redeem, especially when the borrowers remitted the entire remaining dues.”, the court observed.

“The failure to receive the balance sale consideration or the delay in deposit of the balance sale consideration, whatever one would like to call it, therefore, inures to the benefit of the borrowers and operates against the finality of the sale. A transaction which proceeds in violation of the statutory timeline cannot be pressed into service, for divesting the borrowers of their secured assets.”, the court added.

The Court rejected the Appellant's reliance on Celir LLP v. Bafna Motors Pvt. Ltd, (2024) 2 SCC 1, to contend that issuance of the auction sale certificate bars interference at the belated stage. Instead, distinguishing Bafna Motors Pvt. Ltd. (supra), the Court clarified that auction purchasers acquire protected rights only when statutory conditions are strictly complied with. Since the timeline was violated and the sale had not attained legal finality, no vested rights accrued to the auction purchaser.

“The present case stands on an entirely different footing. Here, the completion of sale itself was prorogued far beyond the period contemplated by Rule 9(4), not on account of any default attributable to the borrowers, but owing to subsisting judicial orders and procedural restraints. The very bedrock upon which finality was recognised in Bafna Motors Pvt. Ltd. (supra) is, thus, conspicuously absent in the present case.”, the court observed.

“…we find ourselves in complete accord with the conclusion arrived at by the High Court that (i) the impugned auction sale having not attained finality qua the auction purchasers in the manner contemplated by law and (ii) the borrowers, in the interregnum, having discharged the entire outstanding liability, they could not have been divested of the secured assets.”, the court held.

The auciton purchaser relied on the judgment in M Rajendran v M/s KPK Oils and Proteins India Ltd to contend that borrower's right to redeem has been lost after the sale confirmation. However, the Court held that the dictum in M Rajendran will not apply when sale proceedings were not completed.

Accordingly, the appeals were dismissed.

Cause Title: E. MUTHURATHINASABATHY & ORS. VERSUS M/S. SRI INTERNATIONAL & ORS. (with connected case)

Citation : 2026 LiveLaw (SC) 319

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Appearances

For petitioners :  Mr. P.B.A. Srinivasan, Adv.; Mr. Amit K. Nain, AOR; Ms. Barnali Paul, Adv.; Ms. Rajshree Dhapola, Adv.;

Dr. S. Muralidhar, Sr. Adv.; Mr. Ayyam Perumal Karthik M, Adv.; Ms. Ninni Susan Thomas, Adv.; Ms. Megha, Adv.; Mr. Venkataraman R., AOR  

For respondents :

Mr. Guru Krishnakumar, Sr. Adv.; Mr. Vinodh Kanna B., AOR; Mr. Aswin Kumar, Adv.; Ms. Thilagavathi P., Adv.