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Supreme Court Affirms Borrower's Right to Redeem Mortgage Ceases on Auction Notice Publication under SARFAESI Act

In a significant legal development, the Supreme Court of India, on September 21, delivered a landmark judgement that clarified a critical aspect of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The judgement emphasized that once a bank publishes an auction notice for the sale of a secured asset, the borrower's right to redeem the mortgage extinguishes.
Unveiling the Legal Context

The case in question revolved around borrowers who had availed a substantial credit facility from a bank. The borrowers had taken a loan amounting to Rs. 100 crore, out of which Rs. 65 crore was adjusted against an existing Loan against Receivables and Debt (LRD) facility. The remaining balance of Rs. 35 crore was secured through a simple mortgage over a parcel of land.

Unfortunately, the borrowers defaulted in repaying the loan amount, resulting in the loan account being declared a Non-Performing Asset (NPA). In response, the bank issued a demand notice under Section 13(2) of the SARFAESI Act, seeking the repayment of the principal amount along with interest, costs, charges, etc., totaling Rs. 123.83 crore. However, the borrowers were unable to pay, prompting the bank to initiate auction proceedings for the secured asset. After several attempts, the bank successfully auctioned the asset for Rs. 105 crore, with the appellant emerging as the highest bidder and depositing the bid amount.

During this process, the borrowers filed a redemption application before the Debt Recovery Tribunal (DRT-I) while also approaching the High Court, seeking directions to the bank to permit them to redeem the mortgage of the secured asset. The borrowers expressed their willingness to pay Rs. 129 crore for redeeming the mortgage, a proposal accepted by the bank. Subsequently, the High Court permitted the borrowers to redeem the mortgage, subject to payment. Aggrieved by this decision, the appellant, who was the auction bidder, approached the Supreme Court, leading to this significant legal pronouncement.

Right to Redemption: A Matter of Timing

The Supreme Court's verdict primarily rested on the interpretation of Section 13(8) of the SARFAESI Act. The Court held that the borrower's failure to tender the entire due amount before the publication of the auction notice led to the extinguishment of the right of redemption of the mortgage.

"The right of redemption is clearly restricted till the date of publication of the sale notice under the SARFAESI Act," stated the judgement.

However, the Court observed an inconsistency between Section 13(8) of the SARFAESI Act and Section 60 of the Transfer of Property Act, 1882. The former specified the termination of redemption rights upon auction notice publication, whereas the latter held redemption rights till the execution of a conveyance of the mortgaged property. The Court clarified that the SARFAESI Act, being a special enactment, would take precedence over the general provisions of the Transfer of Property Act in this context.

Upholding the Sanctity of Auction Process

The Court emphasized the need to preserve the legal sanctity of auctions under the SARFAESI Act. It noted that any interpretation allowing borrowers to redeem after the auction would undermine the very purpose of the act and deter public confidence in the auction process. The Court stressed that courts should be cautious in interfering with auctions, ensuring the process's integrity.

In the Court's words, "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."

The Court further iterated that any other interpretation of Section 13(8) would encourage mischievous borrowers and discourage members of the public from participating in the auction process. Thus, it was held that it would be in the larger public interest to maintain the sanctity of the auction process under the SARFAESI Act.

Banks' Legal Responsibility

The Supreme Court also highlighted the bank's responsibility to adhere to the law's provisions, treating all parties equally. It stated that the issue arose because of the illegitimate conduct of the bank in placing its own concerns above the clear provisions of the law. The Court underlined that the law treats everyone equally, including the bank and its officers.

Moreover, the Court reiterated that High Courts should refrain from entertaining writ petitions when alternative remedies under the SARFAESI Act are available. "This Court has time and again reminded the High Courts that they should not entertain petitions under Article 226 of the Constitution if an effective remedy is available to the aggrieved person under the provisions of the SARFAESI Act."

Key Points

The judgement laid down several significant conclusions, affirming the curtailment of a borrower's right to redemption post-auction notice publication. It emphasized the importance of upholding statutory auction processes and ensuring compliance with legal provisions.

Limitation of Redemption Rights: The Court clarified that the right of the borrower to redeem the secured asset gets extinguished upon the publication of the auction notice, as per the amended Section 13(8) of the SARFAESI Act.

SARFAESI Act Overrides General Provisions: The judgement highlighted that Section 13(8) of the SARFAESI Act, being a special enactment, takes precedence over the general provisions of Section 60 of the Transfer of Property Act, 1882, in matters of redemption rights.

Preservation of Auction Sanctity: The Court emphasized that upholding the legal sanctity of auctions conducted under the SARFAESI Act is vital to ensure public confidence and participation in the auction process.

Bank's Legal Duty: The Court underscored that the bank must adhere to the provisions of the law and treat all parties in a case impartially, ensuring compliance with legal norms.

This Supreme Court ruling serves as a pivotal clarification regarding a borrower's right to redeem a mortgage under the SARFAESI Act, redefining the legal landscape surrounding secured asset auctions. It ensures that the auction process maintains its sanctity and operates within the defined legal framework, further contributing to a robust and transparent financial ecosystem.

Case Title: Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. And Ors C.A. No. 5542-5543/2023.