Section 13(8) of SARFAESI Act 2002

 

Section 13(8) of SARFAESI Act: SC settles conundrum on right of redemption of borrower

Introduction:

A division bench of the Hon’ble Supreme Court, comprising Hon’ble Chief Justice D.Y. Chandrachud and Justice J. B. Pardiwala in Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. and Ors[1] on September 21, 2023, held that a borrower only has right of mortgage redemption till the publication of auction notice under Section 13(8) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (“SARFAESI Act”). The Hon’ble Supreme Court analysed orders passed by various Hon’ble High Courts in interpreting the provisions of Section 13(8) of the SARFEASI Act, post the amendment in 2016 (“Amendment”) and the intent of the Amendment.

Factual Scenario:

Union Bank of India (“Bank”) had sanctioned credit facility to Bafna Motors (Mumbai) Private Limited (“Borrower”) in 2017 for INR 100 crore (“Loan”) against which a security in the form of a simple mortgage was created over a land parcel in Thane, Maharashtra (“Mortgaged Property”). The Borrower defaulted in repayment and accordingly its loan account was declared as a Non-Performing Asset. The Bank issued a demand notice under Section 13(2) of the SARFAESI Act for repayment of the Loan amount, along with the interest, costs, etc, i.e. INR 123.83 crore (“Outstanding Amount”) (“the Demand Notice”). Due to non-repayment of the Outstanding Amount, the Bank proceeded to take measures to take possession of the Mortgaged Property.

The Borrower challenged the Demand Notice before the Hon’ble Debt Recovery Tribunal (“DRT”). The Bank attempted to auction the Mortgaged Property eight times during 2022-23. On June 14, 2023, the Bank auctioned the Mortgaged Property for a reserve price of INR 105 crore. Celir LLP (“Purchaser”) participated in the auction and was declared as the successful bidder, and a sale confirmation letter was issued to the Purchaser by the Bank. The Purchaser also deposited 25% of the bid amount, which the Bank acknowledged.

The Borrower at this stage filed an interim application before the Hon’ble DRT for redemption of mortgage upon repayment of the Outstanding Amount (“IA”). The IA was opposed by the Bank and the Purchaser. The Purchaser had deposited the balance amount towards the Mortgaged Property, and the Bank was in receipt of the said amount (total Rs 105 crore). Upon hearing the arguments, the Hon’ble DRT reserved the IA for orders.

Pending the order of the Hon’ble DRT, the Borrower approached the Hon’ble High Court of Bombay (“High Court”) by way of a writ petition under Article 226 of the Constitution of India Act, 1950, to direct the Bank to permit it (Borrower) to redeem the Mortgaged Property. The Hon’ble High Court allowed the Borrower to redeem the Mortgaged Property upon payment of INR 25 crore on the same day and the balance amount within two weeks. Upon failure of the Borrower to abide by the directions of the Hon’ble High Court, the Mortgaged Property will be sold in favour of the Purchaser (“Impugned Order”). The Impugned Order was challenged by the Purchaser by way of a special leave petition before the Hon’ble Supreme Court.

Submissions before the Hon’ble Supreme Court

The Purchaser argued that the right of redemption of the mortgagor stands extinguished upon publication of auction notice as per amended Section 13(8) of the SARFAESI Act. Furthermore, once the sale is confirmed, the Bank is under a legal obligation to issue a sale certificate to the Purchaser.

Contrary to the above, the Borrower contended that Section 13(8) of the SARFAESI Act does not deal with right of redemption of mortgagor and in such circumstances, Section 60 of the Transfer of Property Act (“TPA”) would be applicable. Section 60 of the TPA has been interpreted to reserve the right of the mortgagor to redeem the property till the sale deed has been executed in favour of the third party.

Findings of the Hon’ble Supreme Court

• Provisions under TPA

The Hon’ble Supreme Court firstly dealt with the provisions of Section 60 of TPA and the borrower’s right to redeem the mortgaged property. The courts have interpreted Section 60 of the TPA to hold that the mortgagor’s right to redeem will be extinguished only after completion of sale by a registered deed.[2]

• Pre and Post Amendment to Section 13(8) of SARFEASI Act: Right of Mortgagor

Pre-Amendment

Prior to the amendment to Section 13(8) of SARFAESI Act, in the case of Mathew Varghese v M Amritha Kumar[3], the Hon’ble Supreme Court had applied the principles of Section 60 of the TPA and referred to Section 13(8) of SARFEASI Act (pre-amendment) and held that the borrower has full right to redeem the property by repaying the debt before the sale of such property. The Hon’ble Court while holding so, found no inconsistency between the unamended Section 13(8) of SARFAESI Act and the general right of redemption under Section 60 of the Act 1882.

Amendment

Pre-amendment, the borrower could repay the dues, along with the interest and charges at any time before the date fixed for sale or transfer. However, post Amendment, redemption is available before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty.

Judgements post-Amendment

Hon’ble Supreme Court considered the conflicting orders passed by various courts in interpreting the provisions of Section 13(8) in relation to right of redemption by the borrower:

• The High Court of Andhra Pradesh High Court in Sri. Sai Annadhatha Polymers & Anr. v. Canara Bank rep. by its Branch Manager, Mandanapalle,[4] which was referred to byTelangana High Court in K.V.V. Prasad Rao Gupta v. State Bank of India[5], held that the amended provisions of Section 13(8) brought in a radical change in relation with the right of the borrower to redeem the secured asset. Post-amendment, it would stand extinguished thereunder on the very date of publication of the notice for public auction.

• However, in a conflicting judgement, the Telangana High Court in Concern Readymix[6] relied upon Section 60 of TPA and provisions of the SARFAESI Act and held that Section 13(8) only restricts the right of the secured creditor and not the borrower’s right of redemption, which will continue to exist until the execution of the conveyance. A similar view was taken by the Punjab & Haryana High Court in Pal Alloys and Metal India Private Limited & Ors. v. Allahabad Bank & Ors[7], and the court also referred to the Report of the Joint Committee on the 2016 Amendment and noted that it nowhere states that there was an intention to bring about a change with regard to the time of redemption of the mortgage. The Telangana High Court again in Amme Srisailam[8] followed the same interpretation.

• Additionally, the Supreme Court in Shakeena and Anr. v. Bank of India and Ors. ^[9], while dealing with unamended provisions mentioned that as a result of amended Section 13(8), stringent condition had been stipulated, according to which the tender of dues to the secured creditor, together with all costs, charges and expenses incurred by him, shall be at any time before the “date of publication of notice” for public auction. In S. Karthik[10], the Hon’ble Supreme Court once again noted that under Section 13(8), the mortgagor, i.e. the borrower, retains full right to redeem the property by tendering all dues to the secured creditor at any time before the date fixed for sale or transfer. The Hon’ble Supreme Court also took note of the previous decisions of the apex court that dealt with Section 60 of the TPA for interpretation of right of redemption.

Analysis

Based on the observations of the various courts, the Hon’ble Supreme Court noted that the amended Section 13(8) of the SARFAESI Act allows the right of redemption only till the date of publication of notice, which is a departure from the general right of redemption under the general law and therefore is inconsistent with Section 60 of TPA. In such a situation of inconsistency, the SARFAESI Act being a special one, would override the general law. The Hon’ble Supreme Court also took note of Section 35 and Section 37 of the SARFEASI Act and held that Section 35 of the SARFEASI Act will have an overriding effect, notwithstanding anything which is inconsistent with any other law. Further, the Hon’ble Supreme Court held that the laws that are mentioned in Section 37 of SARFEASI Act i.e., laws which deal with securities or occupy the same field as the SARFAESI Act, would be applicable in addition to it and not in derogation to any other law.

The objects and reasons for the Amendment of the SARFEASI Act was to facilitate expeditious disposal of recovery applications. Taking the same into consideration, the Hon’ble Supreme Court noted that an interpretation which furthers the said object and reasons should be preferred and adopted. If the general law is allowed to govern, it will defeat the very object and purpose of the amended Section 13(8).

The Hon’ble Supreme Court concluded that the judgement passed in Sri Sai Annadhatha Polymers, as well as in K. V. V. Prasad Rao Gupta stipulate the correct position of law and overruled the judgements of the High Courts in Amme Srisailam, Concern Readymix, and Pal Alloys.

The Hon’ble Supreme Court lastly considered the sanctity of public auctions and noted that reading Section 13(8) in any other manner would lead to a worrisome situation as the successful bidder would continue to remain apprehensive till a valid sale certificate is issued.

Conclusion

The judgement by the Hon’ble Supreme Court will streamline the auction process and will encourage potential bidders to participate in the auction process. This will also safeguard the rights of the auction purchaser against any last minute disruptions caused by mischievous borrowers who wish to disrupt the auction process. The said judgment further strengthens the objective of the SARFAESI Act for speedy disposal and recovery by creditors.

While the judgement is going to be beneficial for secured lenders under the SARFAESI Act, it fails to include other creditors or lenders, who do not fall under the SARFEASI regime, and right of redemption of the borrowers thereto. To answer this, necessary amendments need to be made to the proviso of Section 60 of the TPA and streamline it with the process set out under the SARFEASI Act.