Clog on redemption of mortgage after publication of sale notice – SC reiterates word of law u/s 13(8)

– Team Resolution | resolution@vinodkothari.com

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( ‘SARFAESI Act’) provides methods that can be undertaken by a secured creditor to recover its dues in case of a default.

Section 13 of the SARFAESI Act being an important section contains provisions relating to ‘Enforcement of Security Interest’. Sub-section (2) and (4) of section 13 describes the manner and timeline within which the creditor can enforce its rights to recover the dues against a Non-Performing Asset (‘NPA’). While, on one hand, the creditor has a right to sell the secured asset; in juxtaposition is the right of the borrower to have the property released on repayment of dues. These rights are in conflict with each other and therefore, there is a need to have clarity around the point of time at which the borrower would lose the right of redemption and the lender’s right of sale becomes absolute.

At this stage, section 13(8) of the SARFAESI Act comes into picture. The present provision of section 13(8) states that where any default has been made by the borrower in terms of repayment of the dues, the amount outstanding if repaid by the borrower at any time before the date of publication of auction notice by the creditor, such a creditor shall not have any further right to transfer or to take any other step in relation to transfer of such secured asset. On a contrary, the earlier provision stated that the right of the borrower to redeem the mortgaged property shall be available till the date fixed for sale or transfer.

The provision of section 13(8) has often been debated upon wherein, several High Courts have held different views. However, a recent ruling of the Hon’ble Supreme Court in the matter of Celir Llp v Bafna Motors (Mumbai) Pvt. Ltd.^[1] , has clarified the position and scope of section 13(8) before and after the amendment.

Brief of the case

In the case of Celir LLP v Bafna Motors (Mumbai) Pvt. Ltd., an appeal was filed before the Supreme Court against the order of the Bombay High Court, wherein the appellant being an auction purchaser contended that the High Court erred in allowing the writ petition filed by the borrower, thereby allowing the borrower to exercised its right to redeem the mortgaged property under section 13(8) of the SARFAESI Act after the confirmation of auction sale in favour of the appellant and issue of ‘Sale Confirmation Letter’. The respondent borrower submitted that as per the provisions of section 60 of Transfer of Property Act, 1882 (‘1882 Act’/’TPA, 1882’), it has a right to redeem the property till the execution of conveyance or issue of sale certificate.

The Supreme Court in its considered view, held that section 13(8) of the SARFAESI Act clearly states that the borrower has a right to redeem the mortgaged property till the date of publication of auction notice by the secured creditor under Rule 9(1) of Security Interest (Enforcement) Rules, 2002.

The Apex Court explained that, the SARFAESI Act being a special law has an overriding effect over all other general laws which includes Transfer of Property Act, 1882. Thus, any inconsistency between section 13(8) of this SARFAESI Act and section 60 of the 1882 Act, will be dealt with in terms of section 35 of this SARFAESI Act, giving an overriding effect to the provisions of SARFAESI Act.

The Court thus unequivocally held that as per the present Section 13(8) of the SARFAESI Act, the right of redemption of a secured asset, stands extinguished on and from the very date of publication of public auction notice for sale of the secured asset. Such an interpretation of the present Section 13(8) of the SARFAESI Act is necessary so as to protect the legal sanctity of an auction process and to draw a clear line demarking the very point where a borrower is told ‘no more and no further’ and is precluded from hastily exercising its right of redemption from anywhere at the very end of the process and thereby set the entire auction process at naught. If permitted to do so, all auctions under the SARFAESI Act would be meaningless and simply rendered otiose. The very object of section 13 and the overall scheme of the SARFAESI Act of enabling the secured creditors from recovering the dues in a timely manner without intervention of the courts would be simply defeated.

Position of law

Section 13(8), as amended by The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“2016 Amendment”), reads as:

[(8)“Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered 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 the secured assets,—

(i) the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and

(ii) 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 subsection, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.”]^[2]

However, before the amendment, the section stood as follows –

“13. Enforcement of security interest.– (8) 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 asset.”^[3]

As is evident, distinction between the present and earlier provision of section 13(8) is that before amendment, the facility of repayment of the entire dues along with the costs, charges and expenses, was available to the debtor/borrower “at any time before the date fixed for the sale or transfer”. But after the amendment, the facility is available “till the time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty”. Another distinction is that the earlier provision of sub-section (8) did not provide for the contingency when the dues are tendered by the borrower before the date of completion of the sale or lease but after the issue of notice. But the present subsection (8) takes care of the contingency where steps have already been taken by the secured creditor for the transfer of the secured asset, before the payment was made.

The provisions of section 13(8) of the SARFAESI Act is to be read along with Rule 8(6) and 9(1) of the Securitisation Interest (Enforcement) Rules, 2002.

Rule 8(6) reads as:

“(6) The authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5): Provided that if the sale of such secured asset is being affected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public 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) reads as:

“9. Time of sale, issues of sale certificate and delivery of possession, etc.—

(1) No sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower.”

From a bare reading of rule 8(6), it can be interpreted that a secured creditor is required to give at least 30 days’ notice to the borrower before proceeding with the sale of secured immovable property. It further mentions that in case of sale through public auction, the secured creditor shall give a public notice in 2 newspapers.

Rule 9(1) states that no sale of immovable property shall take place unless a clear 30 days’ notice, as mentioned in rule 8(6) is issued to the public.

Significant here is to note that both the above mentioned notices are different from one another as the notice under rule 8(6) is to be issue to the borrower, giving him 30 days time to exercise the right of redemption whereas the notice issue under section 9(1) is issued to the general public to inform them about the proposed auction.

Judicial pronouncements

The judicial pronouncements shall have to be read in such a context so as to understand whether the judgment in the case of Celir LLP v Bafna Motors (Mumbai) Pvt. Ltd. was pronounced considering the present or the earlier provision of section 13(8).

Before amendment, there were several rulings wherein it was held that it is possible to redeem till sale is concluded. In the case Mathew Varghese v M Amritha Kumar^[4], the Supreme Court made reference to the Narandas Karsondas v SA Kamtam^[5] and applied principles of section 60 of the 1882 Act in relation to the sale of secured assets under the SARFAESI Act and held section 13(8) stipulates that the borrower or the debtor has the full right to redeem the property by discharging the debt before the sale of such property. Further, the court also held that:

“Having regard to such a valuable right of a debtor having been embedded in this sub- section, it will have to be stated in uncontroverted terms that the said provision has been engrafted in the SARFAESI Act primarily with a view to protect the rights of a borrower, inasmuch as, such an ownership right is a Constitutional Right protected under Article 300A of the Constitution, which mandates that no person shall be deprived of his property save by authority of law.”

In the context of amended provisions of subsection (8), certain High Courts continued with the stance as above. In the case of Concern Readymix v Corporation Bank^[6], the Telangana High Court held that section 13(8) merely prohibits the mortgagee from proceeding with the transfer of the secured assets by way of lease, assignment or sale. Thus, A restriction on the right of the mortgagee is not the same as the equity of redemption, which will continue to exist until the execution of conveyance. This decision was relied upon in Amme Srisailam v Union Bank of India^[7] and Pal Alloys and Metal India Private Limited & Ors. v Allahabad Bank & Ors.

Again, the Punjab and Haryana High Court while rendering its decision in Pal Alloys and Metal India Private Limited & Ors. v. Allahabad Bank & Ors.^[8], looked into the Report of the Joint Committee on 2016 Amendment and the decision in Concern Readymix (supra), and concluded that as per Section 13(8) of the SARFAESI Act, the right of redemption of mortgage would continue till the execution of conveyance or issuance of sale certificate. It was held that the provision merely prohibits the right of the secured creditor from proceeding further with the transfer of the secured asset if the dues are paid any time before issuance of sale notice for public auction.

A contrary view was taken in K.V.V. Prasad Rao Gupta v. State Bank of India^[9], wherein  the High Court of Telangana reported in and relied on the decision of the Andhra Pradesh High Court in the case of Sri. Sai Annadhatha Polymers & Anr. v. Canara Bank^[10], the court observed in para 21 as under:

“21. Thus from the above judgments it is clear that under Rule 8(6) of the Rules of 2002, the petitioners are entitled for a thirty day notice period enabling them to clear the loan and to redeem the property as envisaged under Section 13(8) of the SARFAESI Act, and that if they fail to repay the amount within the stipulated period, after expiry of said period of 30 days, the secured creditor is entitled to issue publication of sale notice under Rule 9(1), and  that on publication of such notice, the right of the borrower to redeem the property stands extinguished.”

Thus, the Andhra Pradesh High Court upheld the present provision of the SARFAESI Act that allows the right of redemption till the date of issue or publication of the auction notice and no further.

The Apex Court, in Celir Llp (Supra), held the rulings in Pal Alloys and Metal India Private Limited to be contrary to the provision of amended section 13(8) and upheld the ruling in Sri Sai Annadhata (supra), and while deciding the instant case clarified that-

“only stipulating a restriction upon the secured creditor and not on the borrower’s right of redemption would lead to a very chilling effect, where no auction conducted under the SARFAESI Act would have any form of sanctity, and in such a situation no person would be willing to come forward and participate in any auction due to the fear and apprehension that despite being declared a successful bidder, the borrower could still at any time come and redeem the mortgage and thereby thwart the very auction process.”

Concluding thoughts

The legislative intent behind the amendment of Section 13(8) of the SARFAESI Act supposedly was an attempt to distinguish and consciously depart it from section 60 of the Transfer of Property Act, 1882. The intent behind the SARFAESI Act as a whole was to empower secured creditors to take possession of the securities and to sell them without the intervention of the court. It was a step towards ensuring speedy and timely recourse to the secured creditors.

The SARFAESI Act is a special enactment enacted for the expeditious recovery by secured creditors. Section 13(8) of the SARFAESI Act is a departure from the general right of redemption.  In an attempt to pave a way for the provisions of any other Act, the object and purpose of SARFAESI Act will be defeated and hence it is necessary to ensure harmony in application of the provisions of law as any discrepancy in the process will lead the making the provisions of SARFAESI Act vague and ineffective. In addition to protecting the rights of the secured creditors, the enactment also needs to safeguard the rights of the bidders and purchaser in order to encourage them to participate in the auction process of a mortgaged property.

While this judgment in the matter of Celir LLP v Bafna Motors (Mumbai) Pvt. Ltd. provides much needed clarity with respect to the right of redemption of mortgaged assets and the timeline which the mortgagor has for exercising the right of redemption, there are several practical considerations under section 13(8) on which there is little clarity. For instance, what happens to the right of the mortgagor in case the public auction is rendered unsuccessful – whether the right of redemption of the mortgagor would revive before each subsequent auction, or is it a “do or die” scenario?

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^[1]  2023 SCC OnLine SC 1209, decided on 21-09-2023

^[2] Subs. by the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), section 11(ii), for subsection (8) (w.e.f. 1-9-2016) vide SO 2381 (E), dated 1 September 2016.

^[3]  Rationale for such an amendment however has not been explained or elaborated in the Report of the Joint Committee on the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 which was released on 22 July 2016. The report, specifically in paragraph 24, merely mentions the provisions of the present and earlier provisions.

^[4]   AIR 2015 SC 50 : (2014) 5 SCC 610

^[5]   AIR 1977 SC 774 : (1977) 3 SCC 247

^[6]   2018 SCC OnLine Hyd 783

^[7]   W.P. No. 11435 of 2021 decided on 17.08.2022

^[8]   2021 SCC OnLine P&H 2733

^[9] 2021 SCC OnLine TS 328

^[10]  2018 SCC OnLine Hyd 178