NO SECOND CHANCES: SUPREME COURT CURTAILS BORROWERS' REDEMPTION RIGHTS UNDER SARFAESI!

[Shubham Sharma]

INTRODUCTION

Recently, the Supreme Court (“SC”) in the case of CELIR LLP VERSUS BAFNA MOTORS (MUMBAI) PVT. LTD. & ORS. - 2023 (10) TMI 48 - SUPREME COURT has ruled that under the amended Section 13(8) of the SARFAESI Act, if a borrower fails to pay the entire amount of their dues to the secured creditor before the auction notice is published in the newspaper, the borrower's right to redeem the mortgaged property would stand extinguished from the date of publication of the auction notice. The court further held that once the bank confirms the sale of the property, a successful auction purchaser acquires a vested interest in the property and thus, the bank cannot withhold the sale certificate and enter into a private arrangement with the borrower for redemption. This means that once the auction notice is published, borrowers no longer have the right to redeem their property, even if they are willing to pay the entire amount of their dues and the successful auction purchaser acquires a vested interest in the property. 

This is a landmark ruling in the realm of property law and the SARFAESI Act having far reaching implications on the stakeholders- secured creditors, borrowers and the auction purchasers. In this post, the author will dive into the legal reasoning behind the court’s ruling and highlight the broader implications of the ruling on the various stakeholders such as borrowers, secured creditors and auction purchasers.

FACTS OF THE CASE

In the present case, the borrowers took a loan of Rs. 100 crores from the bank, secured by a mortgage on a parcel of land. When the borrowers defaulted on the loan, the bank put the land up for auction. The appellant was the highest bidder and deposited the balance of the bid amount. In the meantime, the borrowers filed a redemption application with the DRT-1, Mumbai and the Bombay High Court (“High Court”), seeking permission to buy back the land by paying back the loan and some extra money. The bank initially opposed the redemption, but later agreed to it in the High Court. The High Court allowed the redemption and the bank issued a “No Dues Certificate” to the borrowers.

Aggrieved by this, the appellant appealed against the High Court's order. Before the SC, the appellants contended that under the amended Section 13(8) of the SARFAESI Act borrowers lose their right to redeem their property after the publication of the auction notice and that once the sale is confirmed, banks are under a legal obligation to issue a sale certificate as per Rule 9(2) and Rule 9(6) of the Security Interest (Enforcement) Rules, 2002 (“SARFAESI Rules”). Thus, the issue that arose for consideration before the SC was whether the right of redemption of mortgages is extinguished upon auction notice publication, and if a bank can withhold the sale certificate after confirmation under Rule 9(2) SARFAESI Rules and enter into a private arrangement with a borrower.

RULING OF THE COURT

The SC after examining the issues from all legal perspectives ruled that under the amended Section 13(8) of the SARFAESI Act, the borrower's right to redeem the property expires on the date the auction notice is published under Rule 9(1) of the SARFAESI Rules, 2002 and not till the completion of the sale or transfer of the secured asset in favor of the auction purchaser which was stipulated in the unamended Section 13(8) of the SARFAESI Act. It further held that once a sale is confirmed under Rule 9(2) SARFAESI Rules, the successful auction purchaser acquires a vested right to obtain a sale certificate for the immovable property in the form given in Appendix V of the Rules. The court made it clear that a bank cannot withhold the sale certificate under Rule 9(6) of the SARFAESI Rules and enter into a private arrangement with the borrower.

ANALYSING COURT’S RULING

1.   A Tale of Conflicting Judicial Opinion on Amended Section 13(8)

For a long time in India, banks and financial institutions have faced legal challenges in recovering their dues from borrowers due to cumbersome court procedure and frivolous suits instituted by borrowers to restrain them from enforcing their security interests. In response to these challenges, the SARFAESI Act was brought in 2002 to speed up the recovery of debts due to banks and financial institutions. Section 13 of the SARFAESI Act is one such provision that gives impetus to the objective of the Act. It grants power to the secured creditor to enforce their security interest without the intervention of the court or tribunal. Under Section 13, clause 8 stipulates two things: (i) the time limit up to which a borrower can exercise his right of redemption and, (ii) the right of the secured creditor to sell or dispose of the secured asset.

It is to be noted that the pre-amendment Section 13(8) had a right akin to right of redemption given under Section 60 of the Transfer of Property Act, 1882 (“Act 1882”). Under Section 60 of the Act 1882, borrowers have the right to redeem their mortgaged property at any time before the sale of the property has been completed by a registered deed. In a similar tone, the pre-amendment Section 13(8) provided that if the borrower tenders to the secured creditor the entire debt “at any time before the date fixed for sale or transfer”, the secured creditor would be precluded from selling or transferring the secured asset. The interplay of right of redemption of mortgage under pre-amendment Section 13(8) vis-à-vis the Act of 1882 was considered by the Supreme Court in the Mathew Varghese case, where the court found no conflict between the two provisions and held that “a borrower shall continue to have a right of redemption of mortgage until the execution of the conveyance of the secured asset by way of a registered instrument.”

However, in 2016, Section 13(8) underwent an amendment by virtue of the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“2016 Amendment”). The amendment now gives borrowers time only until the date of the publication of auction notice to redeem their mortgage. Now, this gives rise to the question whether the position of law laid down in Mathew Varghese with regards to interplay of right of redemption of mortgage under pre-amendment Section 13(8) vis-à-vis the Act of 1882 continue to operate even for cases arising out of the post-amendment Section 13(8). The High Courts in India have given varied views on this question but majority of them have sided with the view that the right of redemption under Act of 1882 would continue till the execution of conveyance or issuance of sale certificate even under the post-amendment Section 13(8) cases.

For instance, the Andhra Pradesh High Court in SRI SAI ANNADHATHA POLYMERS AND ORS. VERSUS THE CANARA BANK - 2018 (6) TMI 1840 - ANDHRA PRADESH HIGH COURT held that Section 13(8) of the SARFAESI Act has undergone a radical change inasmuch as the right of the borrower to redeem the secured asset would stand extinguished thereunder on the very date of publication of the notice for public auction under Rule 9(1) of the Rules of 2002. This view was referred and relied by the Telangana High Court in K.V.V. PRASAD RAO GUPTA VERSUS STATE BANK OF INDIA - 2021 (2) TMI 1361 - TELANGANA HIGH COURT in a similar case. However, the same court in CONCERN READYMIX AND ORS. VERSUS THE AUTHORISED OFFICER, CORPORATION BANK AND ORS.  - 2018 (12) TMI 1982 - TELANGANA HIGH COURT while upholding the general provision of Act of 1882 held that the amended Section 13(8) only restricts the right of the secured creditor to deal with the secured asset and not the borrowers right of redemption, which will continue to exist until the execution of the conveyance. This view was further relied by another bench of the same court in AMME SRISAILAM VERSUS UNION BANK OF INDIA AND ORS. - 2022 (8) TMI 1440 - TELANGANA HIGH COURT. Again, a similar view was taken by the Punjab & Haryana High Court in PAL ALLOYS & METAL INDIA PRIVATE LIMITED AND ORS. VERSUS ALLAHABAD BANK AND ORS. - 2021 (12) TMI 1462 - PUNJAB AND HARYANA HIGH COURT  where it was held that the amended Section 13(8) of the SARFAESI Act didn’t not exclude the application of Section 60 of the Act 1882 in view of Sections 37 of the SARFAESI Act and Report of the Joint Committee on the 2016 Amendment.

2.   Amended Section 13(8): A Departure from the Past

The SC in its judgment had put forth two major arguments in support of its conclusion. First, it argued that SARFAESI Act, 2002 being a special legislation would prevail over the Act of 1882 which is a general legislation. Second, SARFAESI Act will override Act of 1882 in light of overriding provisions of Section 35 and 37.

In approaching the first argument, the court began its analysis of the special status of the SARFAESI Act by examining the history and legislative backdrop that ultimately led to its enactment. The court observed that in contrast to the general provision of Section 60 of the Act of 1882, Section 13(8) of the SARFAESI Act is a special law that enables the banks and the financial institutions to expedite the recovery of their dues without the intervention of the courts. Reliance was placed on the statement of objects and reasons of the amending act which specifically stated “to facilitate expeditious disposal of recovery applications, it has been decided to amend the said Acts….”. The court was of the view that any interpretation of Section 13(8) vis-à-vis Section 60 of the Act of 1882 which doesn’t further the said object and reasons would defeat the very object and purpose as well as the clear language of the amended Section 13(8). The court further observed that while previously there was no inconsistency between the general rule under the Act 1882 the pre-amendment Section 13(8) as the right of redemption continued till the execution of the conveyance under both the provisions, the same cannot be said for the post-amendment Section 13(8) as in the present scheme, the right of redemption stands extinguished on the publication of auction notice. Thus, in the light of clear inconsistency between the two provisions, the SC upheld the primacy of amended Section 13(8) of SARFAESI Act over the statutory right of redemption under Act 1882.

In approaching the second argument, the court argued that SARFAESI Act would have overriding effect over Act of 1882 in light of Section 35. Further, Act of 1882 would not be read in addition to SARFAESI Act under the scheme of Section 37 as the scope of the same is limited to laws which deal with securities or occupy the same field as the SARFAESI Act. For this, the court referred to its ruling in M/S MADRAS PETROCHEM LTD. AND ANR. VERSUS BIFR & ORS.  - 2016 (2) TMI 132 - SUPREME COURT  and M.D. FROZEN FOODS EXPORTS PVT. LTD. & ORS. VERSUS HERO FINCORP LTD.  - 2017 (9) TMI 1266 - SUPREME COURT

3.   Guarding the Sanctity of the Auction Process

One laudable aspect of this ruling is that through this judgment, the SC has taken a step forward in securing the sanctity of the auction process under the SARFAESI Act. The court argued that Section 13(8) cannot be interpreted to mean it is binding only on the secured creditors and not the borrowers as it would harm the sanctity of the auction process. Referring to its judgment in K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple, the court observed that “any other interpretation of the amended Section 13(8) will lead to a situation where multiple redemption offers would be encouraged by a mischievous borrower, the members of the public would be dissuaded and discouraged from in participating in the auction process and the overall sanctity of the auction process would be frustrated thereby defeating the very purpose of the SARFAESI Act.”

The court also warned banks against engaging in any malpractice in as much they are under a legal obligation to follow the law, like any other person. The court observed that the SARFAESI Act was made to help banks recover debts quickly and to benefit the public, but it does not give the bank and its officers the right to break the law and keep the sword hanging over the neck of the auction purchaser.

IMPLICATIONS OF THE RULING

This judgment is significant for several reasons. First, it protects the interest of legitimate auction purchasers under the SARFAESI Act. Previously, banks were allowing borrowers to exercise their right to redemption even after the auction procedure had been initiated, sometimes at a higher price than the genuine auction purchaser. This practice was unfair to auction purchasers and created uncertainty in the auction process.

Second, the judgment addresses the malpractice of banks allowing borrowers to exercise their right to redemption at any time. This malpractice was undermining the purpose of the SARFAESI Act, which is to provide a speedy and efficient mechanism for banks to recover their dues from borrowers.

Third, the judgment provides clarity on the intent behind the amended Section 13(8) of the SARFAESI Act. The amendment was made to ensure that borrowers cannot use the right to redemption to delay the auction process indefinitely. The Supreme Court has now confirmed that the right to redemption is extinguished once the auction notice is published.

CONCLUSION

This judgment has sent a clear message to both borrowers and banks. Borrowers need to be disciplined in repaying their dues and exercise their right to redemption in a timely manner. Banks, on the other hand, need to act in accordance with the SARFAESI Act and cannot decide the course of action against the provisions of the Act.