Yesterday, the Supreme Court held that the borrower's right to redeem a mortgage under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will be extinguished once the bank publishes an auction notice for the sale of the secured asset.

The bench, consisting of Chief Justice of India DY Chandrachud and Justice JB Pardiwala, emphasized the importance of preserving the integrity of the auction process under the SARFAESI Act and affirmed that banks are duty-bound to adhere to the provisions of the law, just like any other litigants.

Case Brief- 

The issue in this case arose when borrowers obtained a credit facility of Rs. 100 crore from the bank. They used Rs. 65 crore to pay off an existing LRD facility and created a simple mortgage over a piece of land as security for the remaining Rs. 35 crore. However, the borrowers defaulted on the loan, leading to the loan being declared a Non-Performing Asset (NPA). The bank issued a demand notice under Section 13(2) of the SARFAESI Act, demanding repayment of the principal amount along with interest, costs, and charges, totaling Rs. 123.83 crore. Since the borrower couldn't repay, the bank decided to auction the secured asset.

After multiple unsuccessful attempts, the bank finally sold the asset for Rs. 105 crore, with the appellant being the highest bidder and depositing the bid amount. Meanwhile, the borrowers filed a redemption application before DRT-I, and while waiting for the DRT's decision, they also approached the High Court, seeking permission to redeem the mortgage on the secured asset. Before the High Court, the borrowers expressed their willingness to pay Rs. 129 crore to redeem the mortgage, which the bank accepted. The High Court allowed the borrowers to redeem the mortgage upon payment.

Subsequently, the appellant, who had won the auction, appealed to the Supreme Court against the High Court's order.

The Supreme Court ruled that the borrower's failure to tender the entire amount due before the publication of the auction notice, as mandated by Section 13(8) of the SARFAESI Act, resulted in the "extinguishment of the right of redemption of the mortgage" (as stated in paragraph 63 of the judgment). The Court clarified that once the Section 13(8) stage had concluded and the auction was finalized, the borrower no longer retained any right of redemption under Section 13(8).

Justice Pardiwala, authoring the judgment, explained:

"The right of redemption is clearly restricted until the date of publication of the sale notice under the SARFAESI Act, whereas this right continues under Section 60 of the Transfer of Property Act 1882 until the execution of the conveyance of the mortgaged property."

The court added–

"Such a scenario is all the more worrisome, because the general public who participate in such auctions are often neither aware nor informed by the secured creditors conducting the auctions, that as long as the sale certificate is not issued, they will not have a right in the said asset and that the borrower whose asset is being auctioned could sweep-in and redeem the mortgage any time, and thereby thwart their rights and the very auction process."

Case Title: Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. And Ors 

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