Borrowers Who Fail to Settle Dues Before Auction Notice Lose Mortgage Redemption Right Under SARFAESI Act: SC


LI Network

Published on: 25 September 2023 at 12:55 IST

A Supreme Court bench consisting of CJI DY Chandrachud and Justice JB Pardiwala has ruled that borrowers who neglect to clear their outstanding dues before the auction notice cannot reclaim their mortgage.

The Court emphasized the statutory stance following the 2016 amendment to the SARFAESI Act, stating that after an auction concludes, borrowers voluntarily relinquish their right to redemption under Section 13(8) of the Act.

The Court expounded, “We believe that a borrower’s failure to tender the entire dues, including charges, interest, costs, etc., before the publication of the auction notice as mandated by Section 13(8) of the SARFAESI Act, would also suffice to constitute the extinguishment of the right of mortgage redemption by the parties’ actions, as per the proviso to Section 60 of the 1882 Act. Furthermore, in this case, the borrower did not claim the right of redemption either before or after the auction notice was published.

The borrowers only entered the picture after learning of the auction’s confirmation. In any event, once the Section 13(8) phase had concluded, and the auction had been finalized, it can be said that there was an intentional relinquishment of the right of redemption under Section 13(8), as the Bank had declared the appellant as the successful auction purchaser, having submitted the highest bid in accordance with the auction notice’s terms.”

The case revolved around appellants who challenged a Bombay High Court decision that allowed borrowers to redeem the mortgage of a secured asset even after the auction proceedings had concluded.

The guarantor failed to repay a bank loan of ₹123.83 crores provided as lease rental discounting credit. Consequently, the bank initiated the process of auctioning the secured assets of both the borrower and the guarantor under the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act). However, the auction process was not completed.

In the meantime, the borrowers filed a Securitisation Application with a Debts Recovery Tribunal (DRT) in Mumbai. They contested the demand notice issued to them under Section 13(2) of the SARFAESI Act and sought to cancel the sale notice.

Subsequently, the asset was auctioned. After this, the borrowers approached the High Court, seeking to redeem their mortgage. The High Court granted their request and allowed for the mortgage to be redeemed.

The Supreme Court made the following key determinations:

(i) The High Court was not justified in utilizing its writ jurisdiction under Article 226 of the Constitution, especially when the borrowers had already utilized the alternative remedy available to them under Section 17 of the SARFAESI Act.

(ii) The bank’s confirmation of the sale under Rule 9(2) of the Rules of 2002 vests the successful auction purchaser with the right to obtain a certificate of sale for the immovable property in accordance with Rule 9(6) of the SARFAESI.

(iii) The unamended Section 13(8) of the SARFAESI Act allowed the borrower to redeem the secured asset until the sale or transfer of the secured asset. In other words, the borrower’s right of redemption did not terminate on the auction sale date but remained in effect until the transfer was completed in favor of the auction purchaser, through the registration of the sale certificate and the delivery of possession of the secured asset. However, the amended provisions of Section 13(8) of the SARFAESI Act clearly state that the borrower’s right to redeem the secured asset is extinguished on the date of the publication of the notice for public auction under Rule 9(1) of the Rules of 2002. Thus, the borrower’s right of redemption under the current statutory regime is significantly limited and is available only until the date of the publication of the notice under Rule 9(1) of the Rules of 2002, not until the sale or transfer of the secured asset to the auction purchaser is completed.

(iv) After confirming the sale under Rule 9(2) of the Rules of 2002, the bank could not withhold the sale certificate under Rule 9(6) of the Rules of 2002 and enter into a private arrangement with a borrower.

(v) The High Court, acting under Article 226 of the Constitution, could not apply equitable considerations to circumvent the outcome anticipated by the statutory auction process established under the SARFAESI Act.

Therefore, the Supreme Court allowed the appeals.

Case Title: Celir LLP vs Bafna Motors (Mumbai) Pvt. Ltd. & Ors.

Also Read: Maintainability of Injunction suits in Sarfaesi Act – Law Insider India

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