Supreme Cout Decodes The Extent Of The Borrowers' Right To Redeem The Mortgage Of Secured Assets And Restricts It To The Date Of Publication Of The Notice For Public Auction

Introduction

The Supreme Court of India ("Supreme Court") in a recent judgment¹ held that under Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), the right of the borrower to redeem the secured asset stands extinguished on the very date of publication of the notice of public auction under Rule 9(1) of the Security Interest (Enforcement) Rules, 2002 ("Rules").

Facts

Bafna Motos (Mumbai) Pvt. Ltd. ("Borrower"/ "Respondent") had availed credit facilities from Union Bank of India ("Bank"), which were secured by a simple mortgage over a certain parcel of land located at Thane ("Secured Asset"). On committing a default, the Bank issued a demand notice and then subsequently took possession of the Secured Asset. The Bank published the auction notice and thereafter conducted the auction proceedings at which time, Celir LLP ("the Auction Purchaser"/ "Appellant") was declared as the highest bidder. The Auction Purchaser deposited 25% of the bid amount within the timelines as directed by the Bank.

The Borrower thereafter filed a Redemption Application² before the Debt Recovery Tribunal of Mumbai ("DRT") for redemption of the mortgage of the Secured Asset. On the day when the redemption application was heard, the Auction Purchaser had deposited the balance sum of the total bid amount which was received by the Bank.

Whilst awaiting the orders to be passed by the DRT on the Redemption Application, the Borrower approached the Bombay High Court by filing a Writ Petition³ seeking directions to the Bank to permit them to redeem the mortgage of the Secured Asset. The High Court allowed the Writ Petition and permitted the Borrowers to redeem the mortgage of the Secured Asset. The Auction Purchaser, being aggrieved by the order of the High Court approached the Supreme Court.

Arguments advanced:

The Auction Purchaser argued that in view of the amended provisions of Section 13(8) of the SARFAESI Act, the right of redemption of mortgage stood extinguished upon publication of the auction notice. The Bank had already confirmed the sale of the Secured Asset to the Auction Purchaser and as such the Auction Purchaser had a vested right to the Secured Asset. Once the sale was confirmed, the Bank in accordance with Rule 9(2) read with Rule 9(6) of the Rules was under a legal obligation to issue a sale certificate to the Auction Purchaser. The Auction Purchaser also raised a ground of maintainability of the Writ Petition in view of the alternate remedy available to the Borrowers under Section 17 of the SARFAESI Act and already availed by the Borrower.

The Borrower argued that upon payment of the entire outstanding amount, the Bank had issued a No Dues Certificate to the Borrower. The right of redemption is not mentioned in the SARFAESI Act. Section 60 of the Transfer of Property Act, 1882 ("the TP Act") is relevant which has been interpreted by courts to reserve the right of the mortgagor to redeem the mortgage till the stage of the same being conveyed or transferred to a third party by a registered deed⁴. Further, while considering the right of redemption of mortgage under the SARFAESI Act vis-ŕ-vis the TP Act, the Supreme Court had earlier in 2014 held the equity of redemption is not extinguished by mere contract for sale and the most important and vital principle stated was that the mortgagor's right to redeem will survive until there has been completion of sale by the mortgagee by a registered deed⁵. The Telangana High Court has held that the amended and unamended provisions of Section 13(8) of the SARFAESI Act and Rule 9(1) of the Rules is that both of them do not speak about the equity of redemption and the amended Section 13(8) merely prohibits the secured creditor from proceeding further with the transfer of the secured asset by way of lease, assignment and sale⁶. In view of Sections 35 and 37 of the SARFAESI Act, it is evident that the situation contemplated under Section 13(8) of the SARFAESI Act does not exclude application of Section 60 of the Transfer of Property Act, 1882⁷.

Analysis of the Judgment

Borrower's right of redemption stands extinguished upon publication of the auction notice

Prior to the amendment of Section 13(8) of the SARFAESI Act, the said Section read as "If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditorat 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 asset". With the amendment of the SARFAESI Act in 2016, the words "at any time before the date fixed before the date fixed for sale or transfer" was substituted for the words "at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty".

While referring to the Mathew Varghese judgment⁸, upon which the Respondent has relied upon, the Supreme Court noted that before the amendment of Section 13(8) of the SARFAESI Act, both Acts were complimentary to each other with respect to the borrower's right to redemption as the words "before the date fixed for sale or transfer" in the unamended Section 13(8), means and connotes the date of conveyance of the secured asset by a registered instrument, which is the extinguishment of right of redemption under the TP Act. Therefore, as per the unamended Section 13(8) of the SARFAESI Act, Section 60 of the TP Act would apply even in respect of the SARFAESI Act.

After the amendment of Section 13(8) of the SARFAESI Act, the borrowers have been granted liberty to redeem the mortgage only until the date of publication of notice for public auction and not anytime before the date fixed for sale or transfer. The amendment is now inconsistent with the provisions of Section 60 of the TP Act, which grants liberty to the borrowers to redeem the mortgage till the execution of conveyance of the mortgage property. However, the recently amended Section 13(8) of the SARFAESI Act will prevail over Section 60 of the TP Act in light of Section 35 of the SARFAESI Act, as a consequence, the decision in Mathew Varghese⁵ is partially legislatively overruled.

While referring to the judgments passed by the Telangana High Court^6,7, the Supreme Court held that a reading of Section 13(8) in a strict manner as to stipulating a restriction upon the secured creditor and not on the borrowers' right of redemption, would lead to a situation where no auction conducted under SARFAESI Act would have any form of sanctity.

In light of the amendment of Section 13(8) of the SARFAESI Act, the Supreme Court took note of the judgment of the Andhra Pradesh High Court⁹ which held that the right of the 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) of the Rules.

In essence, the Supreme Court held that, as per the amended Section 13(8) of the SARFAESI Act, in the event the borrower fails to pay the outstanding amount to the secured creditor before the publication of auction notice, his right of redemption of mortgage shall stand extinguished on the date of publication of the auction notice in the newspaper in accordance with Rule 8 of the Rules.

Conclusion

While the Supreme Court has held that the right of the borrower to redeem the secured asset stands extinguished on the very date of publication of the notice for public auction under Rule 9(1) of the Rules, the judgment is silent on the right of a borrower to redeem the secured asset in the event the auction of the secured asset fails. If the auction fails, the secured creditor is once again required to give a public notice in terms of Rule 9(1) of the Rules and cannot rely upon the public notice given for the auction which failed. Therefore, the logical interpretation would be that if an auction fails, the borrower once again has a right to redeem the secured asset till the date of the publication of the public notice for a subsequent auction.

Footnotes

1. Celir LLP vs. Bafna Motors (Mumbai) Pvt. Ltd. and Ors., Civil Appeal Nos. 5542-5543 of 2023

2. Interim Application No. 2339 of 2023 in S.A. No. 46 of 2022

3. Writ Petition No. 9523 of 2023

4. Narandas Karsondas v. S.A. Kamtam and Another, 1977 (3) SCC 247,

5. Mathew Varghese v. M. Amritha Kumar and Ors., (2014) 5 SCC 610

6. Concern Readymix, rep. by its Proprietor, Smt. Y. Sunitha v. Authorised Officer, Corporation Bank and Anr., 2018 SCC OnLine Hyd 783

7. Amme Srisailam v. Union Bank of India, Regional Office, Guntur, rep. by its Region Head & Deputy General Manager, Andhra Pradesh & Ors., W.P. No. 11435 of 2021

8. Paragraph 39

9. Sri. Sai Annadhatha Polymers & Anr. v. Canara Bank rep. by its Branch Manager, Mandanapalle 2018 SCC OnLine Hyd 178.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.