REDEMPTION OF SECURED ASSETS UNDER SECTION 13(8) OF SARFAESI ACT, 2002

[Mr. M. GOVINDARAJAN]

Introduction

The financial sector has been one of the key drivers in India’s efforts to achieve success in a rapidly developing its economy.  The banks and the financial institutions have heavily financed the industries.  A large sum of amount remains unrecovered.  Till 1990 the civil suits were being filed for recovery of the dues of banks and financial institutions. Normal process of recovery of debts through courts is lengthy and time taken and the same are not suited for the recovery of dues of the bank and financial institutions.  Considering the difficulties, the Parliament enacted the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (‘RDBFI Act’ for short).  On the recommendations of the Narasimham Committee and Andyarjuna Committee, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002 (‘SARFAESI’ for short) was enacted to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the Court.

Redemption of secured assets

Initially Section 60 of the Contract Act, 1882 was followed for redemption of secured assets.  Section 60 of said Act protects the right of redemption available to a mortgagor by providing that the mortgagor can exercise such a right by paying the mortgaged money any time after the principal money has become due.  The mortgagor’s right to redeem will survive until there has been completion of sale by the mortgagee by a registered deed. 

Section 13 of the SARFAESI provides for the procedure of enforcement of security interest.  Section 13(8) of SARFAESI provides that 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 secured creditor.

Section 13(8) was amended by Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 with effect from 01.09.2016.  The amended Section 13(8) provides that where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is transferred to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease assignment or sale of secured assets-

• the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and
• in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.

The Supreme Court in CELIR LLP VERSUS BAFNA MOTORS (MUMBAI) PVT. LTD. & ORS. - 2023 (10) TMI 48 - SUPREME COURT upheld the amended provisions of Section 13(8) of SARFAESI.

In the above case, the appellant is an auction purchaser, the respondent No. 1 is the borrower, the respondent no. 2 is the guarantor and the respondent No.3 is the bank, who is the secured creditor.  In this case, the borrower availed credit from the bank to the tune of Rs.100 crore.  The second respondent is the guarantor to his loan.  Out of Rs.100 crore Rs.65 crore was adjusted against the existing lease rental discounting facility granted by the previous bank.  A mortgage was created for the balance Rs.35 crore over a land admeasuring 16200 sq. meters.  The borrower defaulted in payment of loan amount and the same was declared as Non Performing Asset (‘NPA’ for short).

The bank issued a notice dated 25.03.2022 to the borrower under Section 13(2) of the SARFAESI for repayment of principal, interest, cost, charges etc., to the tune of Rs.123.83 crore. Since the borrower and guarantor failed to pay the outstanding dues the bank took possession of the secured assets and decided to put the assets on auction.  The bank attempted for 8 auctions but in vein.   In the meanwhile the borrower filed an application before Debts Recovery Tribunal (‘DRT’ for short) challenging the demand notice issued by the bank and also to quash the sale notice dated 25.03.2022.

The bank went for one more auction on 14.06.2023.  The bank fixed the reserve price for Rs.105 crore.  The appellant participated in the auction proceedings conducted on 27.06.2023 and submitted its bid for Rs.105.05 crore.  The appellant also paid a deposit of Rs.10.5 crore with the bank.  The appellant was declared as a highest bidder.  The bank, in this regard, sent a confirmation letter through email with the direction to the appellant to pay 25% of the bid amount by 01.07.2023 and the balance amount on 15.07.2023.  On 01.07.2023 the appellant paid 25% of the total bid amount. 

On 04.07.2023 the borrower filed redemption application before DRT for the redemption of secured assets by payment of total outstanding sum Rs.123.83 on or before 31.08.2023.  On 27.07.2023 the appellant paid the balance amount to the bank which was accepted by the day.  On that day the DRT heard the application of the borrower for redemption.  The DRT reserved orders to be pronounced on 02.08.2023. The borrower field a writ petition before the High Court seeking directions to the bank to permit them to redeem the mortgage of the secured assets on the apprehension that the DRT might reject the application.  The High Court on 17.08.2023 allowed the application of the borrower subject to the payment of Rs.25 crore on the same day and the balance amount Rs.104 crore on or before 31.08.2023.

The High Court also held that if the borrower paid Rs.104 crore on or before 31.08.2023 the same shall be appropriated by the bank and shall return the title deeds of the secured assets to the borrowers, execute all documents for cancellation of mortgage and issue a ‘No dues certificate’.  If the borrower paid the entire amount, the Court directed the bank to refund the amount Rs.105.05 crore to the appellant with accrued interest on or before 07.09.2023.  In case of failure of the borrower to pay the amount the bank shall be entitled to appropriate the money from the ‘No Lien interest bearing account’ towards the dues payable by the borrowers and the sale of the secured assets shall be confirmed in favor of the appellant and a sale certificate shall be issued in its favor.  The registration shall be done by the bank and the appellant. . 

The borrower paid the balance amount of Rs.104 crore on 26.08.2023 to the bank.  On this the bank issued ‘No dues certificate’ on 28.08.2023.  On the same day the borrower entered into an agreement of Assignment of Leasehold Rights with a third party for the transfer of leasehold rights in the secured assets and the said agreement was registered.

The appellant, being aggrieved against the order of High Court, filed the present appeal before the Supreme Court.  The appellant submitted the following before the Supreme Court-

• The writ petition is not maintainable as there is an alternative remedy available to the borrower under Section 17 of SARFAESI which has not been considered by the High Court.
• The appellant was declared as the successful bidder.  Therefore the High Court ought not to have entertained the writ petition.
• Mere apprehension on the part of the borrower that DRT might be passed an adverse order will not be a ground to invoke writ jurisdiction.
• The High Court failed to consider the amended provision of Section 13(8) of SARFAESI which provides that the right of redemption of mortgage stood extinguished upon publication of the auction notice.  If the borrower is permitted to redeem the mortgage at the very last moment, more particularly even after payment of the entire amount by the auction purchaser, then no auction would even attain finality, the borrower is given indefinite time to pay the outstanding amount.
• The appellant has a vested right on the secured assets since the bank has already confirmed the same of the secured assets to the appellant.
• The appellant is willing to pay the entire amount of Rs.129 crore by depositing Rs.23.95 crore with the bank, in addition to the amount of Rs.105.05 already deposited with the bank.

The appellant cited various case laws of Supreme Court to support his case.

The borrower submitted the following before the Supreme Court-

• There was no outstanding payable to the bank from the borrower as well as the personal guarantor.  In this regard the bank issued ‘no dues certificate’.  The borrowers executed a deed of release to the third party.
• Since the borrowers has been in full compliance of the impugned order and by the bank the appeals have become infructuous.
• The borrowers have no reason to interfere in the way of refund by the bank to the appellant.
• The High Court correctly interpreted section 13(8) of SARFAESI.  The right of redemption is nowhere mentioned in the SARFAESI.  Therefore Section 60 of the Transfer of Property Act is looked into.  The said section has been interpreted to reserve the right of mortgagor to redeem the property till the stage of the same being conveyed to a third party.

The appellant also relied on some judgments of the Supreme Court to support his case.  The appellant contended that there is no deviation from the general principle that the mortgagor’s right of redemption is not extinguished till the execution of conveyance.   Various High Courts have consistently held that the right of redemption has to be executed in terms of Section 60 of the Transfer of Property Act and not under Section 13(8) of SARFAESI.  Section 13(8) of SARFAESI does not exclude the application of Section 60 of the Transfer of Property Act.  Therefore the borrower contended that there is no merit in the appeal and it is liable to be dismissed.

The Supreme Court considered the submissions made by the parties and gone through the materials on record and framed the following issues for its consideration-

• Whether the High Court was justified in exercising writ jurisdiction when the alternative remedy is available to the borrowers has already been availed of?
• Whether the confirmation of sale by the bank invests the successful auction purchaser vested with a right?
• What is the effect of amendment to Section 13(8) of the SARFAESI read with Section 60 of the Transfer of Property Act?
• Whether a bank after confirming the sale can uphold the sale certificate and enter into a private agreement with a borrower?
• Whether the right of redemption of mortgage stood extinguished upon publication of notice of auction?

The Supreme Court analyzed the provisions of Section 13(8) of SARFAESI and Rules 8 and 9 which prescribe the procedure to be followed for the sale of immovable secured assets. 

The Supreme Court observed that Section 13(8) of SARFAESI is in two parts-

1. It enables the borrower to exercise the right of redemption up to a particular point of time; and
2. It enables the secured creditor to exercise its power to deal or dispose of the secured asset.

According to Rule 8(6) it is clear that the authorized officer of the bank shall serve on the borrower a notice of 30 days for sale of immovable property.  If the sale of such secured assets is by way of public auction, the bank/secured creditor shall cause publication of such notice in two leading newspapers, one in vernacular language having sufficient circulation in the locality by setting  out the terms of sale. Rule 9(1) provides that such sale shall not take place before the expiry of 30 days from the date on which the public notice of sale is published in newspapers.

The Supreme Court, then, analyzed the provisions of Section 60 of the Transfer of Property Act, 1882.  The Supreme Court in NARANDAS KARSONDAS VERSUS SA. KAMTAM & ANR - 1976 (12) TMI 186 - SUPREME COURT held that the mortgagor’s right to redeem will be extinguished only after completion of sale by registered deed.

The Supreme Court took note of the amendment carried out in Section 13(8) of

SARFAESI in Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 with effect from 01.09.2016.  The amendment brought in a radical change inasmuch as the right of the borrower to redeem the secured asset would stand extinguished there under on the very date of publication of the notice for public auction under Rule 9(1).  In effect, the right of redemption available to the borrower under the present statutory regime stands drastically curtailed and would be available only till the date of publication of the notice under Rule 9(1) and not till completion of the sale or transfer of the secured asset in favor of the auction purchaser.      

The Supreme Court observed that in the present case there was a failure on the part of the borrower in tendering the entire dues including the charges, interest, costs etc. before the publication of the auction notice as required under Section 13(8) of SARFAESI would also sufficiently constitute extinguishment of right of redemption of mortgage by the act of the parties.  The borrowers entered into the foray only after coming to know of the confirmation of auction.  Once the section 13(8) stages was over and auction stood concluded it could be said that there was an intentional relinquishment of his right of redemption under section 13(8), whereby the Bank declared the appellant as the successful auction purchase having offered the highest bid in accordance with the terms of the auction notice. 

The Supreme Court held that SARFAESI Act is a special law containing an overriding clause in comparison to any other law in force.  Section 60 of the Transfer of Properties Act, 1882 is a general law vis-à-vis the amended Section 13(8) of SARFAESI which is a special law.  Therefore the right of redemption is clearly restricted till the date of publication of the sale notice under SARFAESI where the right continues under Section 60 of the Transfer of Properties Act till the execution of conveyance of the mortgaged property. 

The Supreme Court held as follows-

• The High Court was not justified in exercising its writ jurisdiction under Article 226 of the Constitution more particularly when the borrowers had already availed the alternative remedy available to them under Section 17 of the SARFAESI Act.
• The confirmation of sale by the Bank under Rule 9(2) of the Rules of 2002 invests the successful auction purchaser with a vested right to obtain a certificate of sale of the immovable property in form given in appendix (V) to the Rules i.e., in accordance with Rule 9(6) of the SARFAESI.
• In accordance with the unamended Section 13(8) of the SARFAESI Act, the right of the borrower to redeem the secured asset was available till the sale or transfer of such secured asset. In other words, the borrower’s right of redemption did not stand terminated on the date of the auction sale of the secured asset itself and remained alive till the transfer was completed in favor of the auction purchaser, by registration of the sale certificate and delivery of possession of the secured asset. However, the amended provisions of Section 13(8) of the SARFAESI Act, make it clear that the right of the borrower to redeem the secured asset stands extinguished thereunder on the very date of publication of the notice for public auction under Rule 9(1) of the Rules of 2002. In effect, the right of redemption available to the borrower under the present statutory regime is drastically curtailed and would be available only till the date of publication of the notice under Rule 9(1) of the Rules of 2002 and not till the completion of the sale or transfer of the secured asset in favor of the auction purchaser.
• The Bank after having confirmed the sale under Rule 9(2) of the Rules of 2002 could not have withhold the sale certificate under Rule 9(6) of the Rules of 2002 and enter into a private arrangement with a borrower.
• The High Court under Article 226 of the Constitution could not have applied equitable considerations to overreach the outcome contemplated by the statutory auction process prescribed under the SARFAESI Act.
• The decision of the Andhra Pradesh High Court in Sri ‘Sai Annadhatha Polymers  v. Canara Bank’ - LENINDORD 2018 AP 108 and the decision of the Telangana High Court in the case of ‘K.V.V. Prasad Rao Gupta v. State Bank of India’ - 2021 SCC Online TS 328, lay down the correct position of law while interpreting the amended Section 13(8) of the SARFAESI Act.

The Supreme Court allowed the appeals filed by the auction purchaser. The Supreme Court directed the bank to refund the entire amount deposited by the borrowers i.e., an amount of Rs.129 crore paid by them in lieu of the redemption of mortgage of the secured asset at the earliest. The appellant shall pay an additional amount of Rs. 23.95 crore to the Bank within a period of one week from today and subject to such deposit, the Bank shall issue the sale certificate in accordance with Rule 9(6) of the Rules of 2002.

Conclusion

Prior to the amendment of Section 13(8) of SARFAESI the Supreme Court consistently held that the 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.   The amendment brought a radical change in Section 13(8).  The amended Section 13(8) of SARFAESI provides that the right of borrower to redeem the secured asset would stand extinguished on the very date of publication of the notice for public auction under Rule 9(1).