SARFAESI Act | Supreme Court Flags Inconsistency Between S.13(8) Act & Rules On Borrower's Redemption Right, Urges Govt To Amend

The Supreme Court on Monday (Sep. 22) flagged a significant inconsistency between the SARFAESI Act, 2002 ("Act") and the Rules concerning the borrower's right of redemption after the 2016 amendment. A bench of Justice JB Pardiwala and Justice R Mahadevan heard the case arising out of the Madras High Court's decision which had quashed a sale certificate issued in favour of auction purchasers (appellants) and permitted the original borrowers to redeem the mortgaged property by repaying the outstanding loan amount even after the publication of an auction notice. Overturning the High Court's ruling, a judgment authored by Justice Pardiwala held that the 2016 amendment to Section 13(8) strictly limits redemption rights to the period before publication of the auction notice. Once the notice is issued, the borrower's right is extinguished. However, it came across a glaring inconsistency between Section 13(8) of the Act and Rules 8 & 9 of the SAEFAESI Rules. The Court observed that while Section 13(8) restricts redemption strictly to the period before the publication of the auction notice, Rules 8 and 9 of the SARFAESI Rules, 2002 still envisage the borrower's participation even beyond the auction notice stage. For instance, Rule 9(1) requires a 30-day gap between notice and auction, leaving scope for borrowers to claim rights that Section 13(8) had already extinguished at the pre-auction notice stage. The Court described this as a “glaring anomaly” that has clogged up the Debt Recovery Tribunals (DRTs) and the Debt Recovery Appellate Tribunals (DRATs) with litigation. It lamented that the “ill-wording” of Section 13(8) and the unamended Rules had left secured creditors and auction purchasers high and dry, undermining the certainty intended by the amendment. “Despite a catena of amendments, the glaring anomaly that we have come across in respect of Section 13(8) of the SARAFESI Act and Rule(s) 8 and 9 of the SARFAESI Rules persists. The same renders the very mandate of the provision otiose.”, the court said. “We are, however, at our wit's end to note how the ill-wording of Section 13(8) of the SARFAESI Act has resulted in a glaring inconsistency between the aforesaid provision and the SARFAESI Rules framed in lieu thereof. It is unfortunate that the ambiguities within the statutory provisions of the SARFAESI Act and Rules thereunder have left the interests of secured creditors and auction purchasers high and dry. The interpretative deadlock between the provision and the rules has single handedly resulted in a huge mess insofar as enforcement of security interest is concerned, giving birth to an endless pipeline of litigation clogging the specialized forums of the DRT and DRAT, that are expected to expeditiously decide matters of recovery of debt....We humbly urge the Ministry of Finance to take a serious look at these provisions and bring about necessary changes, before it is too late in the day”, the Court added. The Court further directed “the Registry to forward one copy each of this judgment to all the High Courts across the country and also to the Principal Secretary, Ministry of Finance and the Principal Secretary, Ministry of Law & Justice.”The Court noted that such ambiguities arising due to drafting errors gave birth to complext litigations, defeating the very purpose of the SARFEASI Act- which was to provide a speedy resolution for non-performing assets."It has been almost twenty-three years, since the SARFAESI Act has remained in force. It is indeed very sad to note that even after these many years procedural issues such as the one involved in the case at hand, have continued to plague the legislation."The Court noted that though the 2016 amendment restricted the borrower's right of redemption till the date of publication of auction notice, there existed confusion regarding the "publication of notice" - whether it was paper publication, or serving of notice on the borrower etc.The Court clarified that for the purpose of the amended Section 13(8) of the SARFAESI Act, the expression “before the date of publication” used therein, has to be construed to refer and mean the publication of a valid “notice of sale” for the secured asset, although such publication may vary depending upon the mode of sale chosen by the secured creditor."The word “publication” used in Section 13(8) of the SARFAESI Act, has to be understood to mean and include the service, publication in newspaper, and the affixation and uploading of the “notice of sale”, as may be required under the SARFAESI Rules. Wherever, the chosen mode of sale requires the secured creditor to effectuate the “notice of sale” in any or all of the aforesaid manner, as the case may be, the expiry of thirty-days as required under Rule 9(1) from the day when the secured creditor complies with the requirement of giving the notice of sale, as per the applicable rules, would be the date on which the secured creditor is said to have validly published the...

SARFAESI Act | Supreme Court Flags Inconsistency Between S.13(8) Act & Rules On Borrower's Redemption Right, Urges Govt To Amend

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SARFAESI Act | Supreme Court Flags Inconsistency Between S.13(8) Act & Rules On Borrower's Redemption Right, Urges Govt To Amend

Yash Mittal

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