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 CaseThe 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 NoticeThe 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 ProtectedIn 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...

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

Padmakshi Sharma

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

Padmakshi Sharma

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