Borrower’s Right of Redemption Extinguishes on Publication of Auction Notice

In a decision of the Supreme Court in Celir LLP v. Bafna Motors Mumbai Pvt Ltd and Ors. (2023 INSC 838) dated September 21, 2023, it was held that as per the amended provision of Section 13(8) of the SARFAESI Act, 2002, a borrower’s right to redeem the secured asset stands extinguished on the date of publication of the notice for public auction under Rule 9(1) of the SARFAESI Act, 2002.

In the instant case, the borrowers (Respondent 1) had availed of a loan from the bank (Respondent 3) on July 3, 2021 in lieu of which the bank sanctioned Lease Rental Discounting (LRD) credit facility to the tune of Rs. 100 Crore in favour of the borrower with Respondent 2 standing as guarantor. Out of the total loan amount sanctioned, Rs. 65 Crore was adjusted against the then existing LRD facility granted by the previous bank. For the balance amount of Rs. 35 crore a security in the form of a simple mortgage was created over a parcel of land. Due to the failure of the borrower and the guarantor to repay the outstanding amount of the loan, the bank decided to put the secured asset up for auction. The appellant was declared the highest bidder in the ninth auction for the sale of the secured asset after eight failed auction attempts. The respondent bank sent a Sale Confirmation Letter asking the appellant to deposit the balance of the bid amount which was duly complied with. In the meantime, the borrower had filed a redemption application before the Debt Recovery Tribunal (DRT) and subsequently also approached the High Court seeking permission to redeem the mortgage on the secured asset. The bank, which had earlier opposed the redemption before the DRT, accepted the same before the High Court which decided in favour of the borrowers. The bank also issued a No Dues Certificate to the borrowers and the sale of the secured asset was cancelled. Aggrieved by this, the appellant challenged the order of the High Court in the present appeal.

Theappellant argued that the High Court could not have entertained the writ petition brought by the borrowers since the auction proceedings had attained finality. They further submitted that as per the amended provisions of Section 13(8) of the SARFAESI Act, 2002, the right of the borrower to redeem the mortgage expired upon publication of the auction notice. The appellant submitted that the High Court failed to recognize that the bank had a legal obligation under Rules 9(2) and 9(6) of the Security Interest (Enforcement) Rules, 2002 to issue a Sale Certificate to the appellant and therefore could not have consented to the borrower’s plea of redemption before the High Court.

The respondents contended that the High Court rightly interpreted Section 13(8) of the SARFAESI Act, 2002 which deals with the Enforcement of Security Interest. The provision nowhere mentions the right to redemption. In such a situation, it was argued that Section 60 of the Transfer of Property Act, 1882 must be relied upon which reserved the right of the mortgagor to redeem the property until it was conveyed or transferred to a third party.

Taking these submissions into consideration, the Apex Court observed that prior to its amendment, Section 13(8) of the SARFAESI Act, 2002 allowed for the right of redemption to exist until any time before the date fixed for the sale or transfer of the secured asset. However, the amendment to the provision clearly restricts the right to redemption until the date of publication of the auction notice. Further, the court noted that the SARFAESI Act, 2002 is a special law of recovery, while the Transfer of Property Act, 1882, which contains the right of redemption, is a general law. Considering the objective of the Legislature in enacting the SARFAESI Act, 2002 to facilitate the speedy disposal of recovery proceedings, Section 60 of the Transfer of Property Act, 1882 must be read in a manner that furthers this objective.

Noting that the genesis of this case lay in the illegitimate conduct of the bank, the court held that the right of redemption of the borrowers lapsed under Section 13(8) of the SARFAESI Act, 2002. The Court held that the bank, like any other litigant, is duty bound to follow the provisions of the law. The bank i.e., the secured creditor acts as the authorized officer appointed under Section 13(2) of the SARFAESI Act, 2002 and thus cannot act in a manner that keeps a sword hanging on the neck of the auction purchaser.