Right of Redemption and the Amended Section 13(8), SARFAESI Act – Celir LLP v. Bafna Motors (Mumbai) (P) Ltd.: A case comment

On 21-9-2023, the Supreme Court of India (Chandrachud, C.J. and Pardiwala, J.), in Celir LLP v. Bafna Motors (Mumbai) (P) Ltd..¹ cleared the confusion surrounding the interpretation of the amended version of Section 13(8)² of the SARFAESI Act, 2002 (the SARFAESI Act). The observations of the Court in this case have far-reaching consequences for banks, borrowers, and auction purchasers.

Background of the statutory provisions involved

SARFAESI Act, 2002

To give some context, Section 13 of the SARFAESI Act deals with the enforcement of security interest. In the event a borrower fails to pay his dues even after a demand notice is served to him under sub-section (2), the lender is given the power, under sub-section (4), inter alia, to take possession of the asset offered to it as security i.e. the asset mortgaged by the borrower in favour of the lender and sell it off. The lender needs no intervention of any court or tribunal to conduct this exercise. He is free to take steps under sub-section (4) when the borrower fails to pay his dues as per the notice issued under sub-section (2).

Sub-section (8), as enacted originally in 2002, provided that in case the borrower paid the dues of the secured creditor or lender at any time before the date fixed for sale or transfer of the mortgaged asset, the lender shall neither sell or transfer such asset, nor shall it take any further step for selling or transferring such asset.

In 2016, sub-section (8) was amended to provide that when the borrower paid his dues 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 selling the mortgaged asset, the said asset could not be sold by the creditor, and in case the creditor has taken any step for transferring the asset, no further step shall be taken.

Section 17³ of the SARFAESI Act provides the mechanism for redressal against any grievance that may arise as a result of any measure taken under Section 13(4) of the SARFAESI Act. Thus, any person aggrieved by any measure under Section 13(4) may apply to the Debts Recovery Tribunal (DRT) seeking redressal of his grievance.

Section 35⁴ of the SARFAESI Act provides that the SARFAESI Act shall override all other laws that are inconsistent with it.

Transfer of Property Act, 1882

Section 60⁵ of the Transfer of Property Act (“the TP Act”) deals with the right of redemption of the mortgagor. To put it very simply, at any time after the principal money becomes due, the mortgagor/borrower has a right, on payment of the mortgage money i.e. his dues to the lender, to call upon the lender/mortgagee to release the mortgaged property in favour of the mortgagor/borrower. In other words, if the borrower pays his dues to the lender, the borrower has a right to take the mortgaged property back from the lender. However, this right is subject to the fact that it has not been extinguished by an act of the parties or by a decree of the courts.

Facts

Auction

The facts of the case are that the borrower defaulted on a credit facility granted by the bank. Following the default, the bank issued a demand notice under Section 13(2) of the SARFAESI Act, 2002. Despite this notice, the borrower failed to pay its dues and consequently, the bank took possession of the secured asset and proceeded to auction it. The total outstanding amount was about Rs 123 crores. The bank attempted eight auctions. However, none of them fructified.  Finally, when the bank published the auction notice for the ninth time, Celir LLP, the appellant before the Supreme Court participated in the auction proceeding and eventually came to be declared as the highest bidder by the bank; in other words, the sale was confirmed in favour of Celir LLP. Although the sale was confirmed in favour of Celir LLP, the bank stopped short of issuing a sale certificate under Rule 9(6)⁶ of the Security Interest (Enforcement) Rules, 2002 (the Rules). The bid amount of Celir LLP was Rs 105.05 crores. I shall now refer to Celir LLP as the auction purchaser.

Upon being declared the highest bidder, the auction-purchaser deposited 25% of the bid amount and paid the balance amount shortly thereafter.

Proceedings before the DRT

In these circumstances, the borrower, apprehending that it might lose the asset forever, filed a redemption application before the DRT for redeeming the mortgaged asset by offering to pay the outstanding amount in roughly about 2 months’ time. The DRT heard the redemption application and reserved the matter for orders. At the hearing, the application was opposed by the bank as well as the auction-purchaser.

Proceedings before the High Court

Whilst the parties were awaiting the decision of the DRT, the borrower filed a writ petition before the Bombay High Court under Article 226⁷ of the Constitution. The relief claimed in this petition was that the bank be directed to allow the borrower to redeem the mortgaged asset. The ground for claiming such relief was that the DRT might rule against the borrower and not allow it to redeem the secured asset. So as to secure the redemption, the borrower stated that it was willing to pay a sum of Rs 129 crores. 

During the course of the hearing at the High Court, the bank, which at the DRT opposed the plea for redemption, changed its stance and agreed to the mortgage being redeemed by the borrower. As per the Supreme Court, the reason for such a change in stance by the bank appears to be the fact that the bank was lured by the significantly higher sum that the borrower was offering (129 crores) as compared to what the auction-purchaser was offering (105.05 crores). The auction purchaser too got itself impleaded in the writ petition before the High Court and opposed the attempt of the borrower to redeem. 

The High Court, upon an agreement between the bank and the borrower whereby the bank granted time to the borrower to repay the outstanding dues by 31-8-2023, allowed the writ petition; thus, paving the way for the borrower to redeem the secured asset.⁸ The High Court directed that upon payment of the outstanding dues, the original title deeds of the secured asset be returned to the borrower. The High Court also directed that, in case the borrower failed to pay the dues as directed, the sale of the secured asset be confirmed in favour of the auction-purchaser.

Aggrieved by the High Court’s decision, the auction purchaser approached the Supreme Court. During the pendency of the appeal before the Supreme Court, the borrower tendered the balance amount of Rs 104 crores as per the direction of the High Court.

Contentions of the parties before the Supreme Court

Auction-purchaser

Before the Supreme Court, the auction purchaser, inter alia, contended that the High Court could not have entertained the writ petition when the borrower had an effective remedy under Section 17 of the SARFAESI Act. Further, the auction-purchaser contended that following the 2016 Amendment⁹ to Section 13(8) of the SARFAESI Act, the right to redeem was extinguished upon publication of the auction notice. Furthermore, it was also pointed out that on a combined reading of Rules 9(2) and (6) of the Rules, which deal with the confirmation of the sale in favour of the highest bidder and the issuance of sale certificate upon compliance of the terms of payment by such bidder, it emerges that the auction-purchaser has a vested right to the secured asset once the sale was confirmed in its favour.

The auction purchaser even stated that it was willing to pay an additional sum of Rs 23.95 crores so as to meet outstanding dues entirely; effectively, the auction purchaser was willing to match the figure that the borrower had paid.

Borrower

In response to the above, the borrower, inter alia, contended that the appeal before the Supreme Court was infructuous as the borrower had paid the balance amount as per the directions of the High Court and the bank also had issued a no-dues certificate. According to the borrower, the only issue that remained was that of refund of the money paid by the auction purchaser, and this issue was something that was between the bank and the auction purchaser.

The borrower also contended that the SARFAESI Act had nothing to do with the right of redemption and the same should be governed in accordance with Section 60 of the Transfer of Property Act, 1882. The borrower placed reliance on a number of cases, including the decisions of the Telangana High Court in Concern Readymix v. Corporation Bank¹⁰, the decision of the Punjab and Haryana High Court in Pal Alloys & Metal India (P) Ltd. v. Allahabad Bank¹¹, and another decision of the Telangana High Court in Amme Srisailam v. Union Bank of India.¹² These High Court decisions held that the amended Section 13(8) of the SARFAESI Act merely restricted the right of the mortgagee to deal with the property and did not take away the right of redemption available to the mortgagor upon publication of the auction notice. According to these decisions, the right of redemption was available until the execution of the conveyance deed.

Ruling of the Supreme Court

The Supreme Court, after a comprehensive analysis, held that in view of the amendment to Section 13(8) of the SARFAESI Act, the right of redemption of the mortgagor would stand extinguished upon publication of the auction notice. Thus, if the borrower failed to tender his dues to the lender before the publication of the auction notice, its right to redeem would stand extinguished. The Supreme Court specifically rejected the views of the High Courts in Concern Readymix¹³, Pal Alloys¹⁴ and Amme Srisailam¹⁵ that, notwithstanding the amendment to Section 13(8), the right of redemption would be available till the time the sale of the asset is completed. While rejecting the views in these cases, the Supreme Court upheld the views of the Hyderabad High Court in Sri Sai Annadhatha Polymers v. Canara Bank¹⁶ and the Telangana High Court in K.V.V. Prasad Rao Gupta v. SBI¹⁷, which held that the right of redemption stood extinguished upon the publication of the auction notice as per the amended Section 13(8).

According to the Court, the amended Section 13(8) does not merely restrict the right of the secured creditor to deal with the property. It also takes away the right of redemption of the borrower upon publication of the auction notice. Prior to the amendment, the borrower was given time to clear his dues until the date fixed for sale, and if did clear his dues by then, the secured creditor could not go ahead with the sale. This was consistent with the interpretation given by the Courts to Section 60 of the TP Act that the right of redemption was available till the completion of the sale by a registered deed. However, after the amendment, the law specifically restricted the time within which the borrower could clear his dues so as to prevent the secured creditor from taking any steps. Thus, post the amendment, if a borrower wished to redeem his asset, he had to do so before the lender publishes the auction notice under Section 13(8). Section 60 of the TP Act has no application in a post-amendment scenario as it is inconsistent with the provisions of Section 13(8) of the SARFAESI Act, and Section 35 of the SARFAESI Act makes it clear that the provisions of the SARFAESI Act would prevail over other laws in the event of a conflict.

Further, the Court also held that the High Court was wrong to have exercised jurisdiction under Article 226 of the Constitution when the borrower had an effective remedy under Section 17 of the SARFAESI Act.

Furthermore, the Supreme Court made some scathing observations with respect to the conduct of the bank and held that the bank ought to have issued the sale certificate in favour of the auction purchaser when the sale had been confirmed in favour of the auction-purchaser and it had paid the entire amount to the bank for purchasing the asset. The Court held that once the bank confirmed the sale in favour of the auction-purchaser, it could not have entered into a private arrangement with the borrower. The Court also condemned the bank for having changed its stance before the High Court and allowing the borrower to redeem the mortgaged asset by taking the money offered by the borrower. Furthermore, the Court also made pertinent observations on public auctions and the need to keep them sacrosanct and held that the auction process cannot be interfered with except under very limited circumstances.

The Supreme Court set aside the order of the Bombay High Court and directed the bank to refund the amount deposited by the borrower. The Court also directed the auction purchaser to pay the additional amount of Rs 23.95 crores.

Views of the author

This decision assumes great significance for multiple reasons.

Firstly, it clears the confusion surrounding the interpretation of the amended version of Section 13(8) of the SARFAESI Act and holds that it extinguishes the right of redemption of the borrower in the event he fails to repay his dues and redeem the asset before publication of the auction notice. This interpretation not only does justice to the language used in the statute, but also furthers the object of the SARFAESI Act, which is to ensure that the lender is able to enforce his security interest as quickly as possible with minimal intervention of the courts.

If the window for redemption is allowed to remain open until the execution of the sale deed, there is always a chance that an unscrupulous borrower, upon learning of the auction process, might try to stall the auction process by resorting to some dilatory tactic or other. This would delay the process considerably and defeat the very purpose of the SARFAESI Act. This case itself is an example of how the enforcement process can considerably be delayed when the borrower is allowed the chance to redeem his asset until the execution of the sale.

The takeaway for borrowers from this case is that they must remain cautious and if they intend to redeem their asset, they must pay their dues well in time, or at the least, pay it before the lender proceeds to issue an auction notice under Section 13.

Secondly, the Court’s interpretation of Section 13(8) protects the rights of the auction-purchaser. Now an auction-purchaser can freely participate in an auction process without being worried of the borrower coming in and taking away the secured asset before the conclusion of the sale. An auction purchaser participates in the auction process with the intention that he might, in the near future, own the property that is being auctioned. If there is a possibility that during the auction process, or even after the conclusion of the process, the borrower can simply fly-in take the asset back, there remains no sanctity to the auction process. Public confidence in the auction process under the SARFAESI Act would erode and the purpose for which the SARFEASI Act was enacted would stand defeated. In fact, as can been seen from the judgment, all these concerns weighed on the mind of the Supreme Court whilst interpreting Section 13(8).

Thirdly, by reiterating that the High Courts should refrain from entertaining writ petitions under Article 226 when remedies are available under the SARFAESI Act, the Supreme Court sent a message not only to the High Courts but also to borrowers; however, with respect, I am of the view that the message does not come out as strongly as it should have.

It must be remembered that the writ jurisdiction of the High Court was invoked by the borrower after approaching the DRT, participating in the proceedings therein, and then realising that there was a chance that an unfavourable ruling might fall from the DRT. With respect, it is stated that the High Court, by entertaining and allowing the writ petition not only gave an impetus to forum shopping, but also cast a shadow on the sanctity of proceedings under other laws like the SARFAESI Act. Litigants would be emboldened to approach the High Court, notwithstanding the invocation of the jurisdiction of another forum, if, at any point, they apprehended an unfavourable decision from such forum. The mere apprehension of an unfavourable ruling from one forum cannot be the ground for invoking the jurisdiction of the High Court under Article 226, unless, of course, there are other compelling circumstances such as the forum acting illegally or in violation of natural justice, etc. In this case, the borrower had no other compelling circumstance. It was heard by the DRT properly, and whilst awaiting the decision of the DRT, it approached the High Court apprehending an unfavourable order. In such a situation, the High Court ought to have dismissed the writ petition at the threshold and directed the borrower to await the decision of the DRT; this would have not only sent the message that one cannot pursue writ proceedings during the pendency of another proceeding in respect of the same subject-matter merely because an unfavourable decision was expected but also upheld the sanctity of the proceedings before the DRT. Equitable considerations such as the subsequent understanding between the bank and the borrower whereby the bank allowed the borrower to pay the dues should not have weighed in on the High Court while allowing the writ petition. The Supreme Court, while holding that the High Court was not justified in entertaining the writ petition, could have also elaborated on the dangers of entertaining a writ petition merely on the apprehension of an unfavourable decision, so as to drive home the point more forcefully. However, the Supreme Court does rightly point out that equity cannot prevail over the law when such law is unambiguous, and therefore, the High Court, by applying considerations of equity to override the SARFAESI Act, committed an error.

Nonetheless, the takeaway from this for borrowers is that they must be cautious and not pursue writ remedies merely because they are apprehending an unfavourable decision from the DRT or any other forum. It must be remembered that in the event of an unfavourable decision, appellate/writ remedies would always be available, depending on the factual situation.

Fourthly, the decision highlights that banks cannot act according to their whims and must follow the law. The Court rightly comes down heavily on the bank for entering into a private arrangement with the borrower after having confirmed the sale in favour of the auction-purchaser. The takeaway for banks from this decision is that they must respect the law and the auction process and issue a sale certificate in favour of the auction purchaser when the sale is confirmed in favour of such purchaser. Banks also must be cautious of the stand that they take before the courts and ensure that such stand is not only in line with the law, but also not self-contradictory.

With regard to the Court’s observation that the amended Section 13(8) is inconsistent with Section 60 of the TP Act, the author feels that the Court could have harmoniously interpreted both the sections. In fact, the Court’s own reasoning, at one point, indicates that both these sections could be construed harmoniously. Before declaring that Section 13(8) of the SARFAESI Act and Section 60 of the TP Act are inconsistent, the Court cites Embassy Hotels (P) Ltd. v. Gajaraj and Co.¹⁸ to state that the expression “by act of the parties” in Section 60 of the TP Act includes failure of the parties to settle the dispute and by their act allowing the mortgaged property to be sold in an auction. Applying this principle to the case at hand, the Court holds that the failure on the part of the borrower in tendering his dues before the publication of the auction notice as required by Section 13(8) would sufficiently constitute extinguishment of the right of redemption by “act of the parties” within the meaning of that expression under the proviso to Section 60 of the TP Act.

Thus, when the Court has held that failure by the borrower to pay the dues and redeem his asset before the publication of the auction notice amounts to an extinguishment “by act of the parties” within the meaning of the proviso to Section 60 of the TP Act, there is no real inconsistency between the amended Section 13(8) of the SARFAESI Act and Section 60 of the TP Act. When the extinguishment of the right of redemption occasioned by the failure of the borrower to make payment of his dues before publication of the auction notice as required under the amended Section 13(8) of the SARFAESI Act is read into the expression “by act of the parties” used in the proviso to Section 60 of the TP Act, the extinguishment of the right of redemption, in reality, occasions from Section 60 of the TP Act. An inconsistent situation would be when despite the right of redemption getting extinguished as a result of failing to pay under Section 13(8), the right continues to survive under Section 60 of the TP Act. In the present scenario, when the right to redeem does not survive under Section 60 of the TP Act as it has been extinguished by an act of the parties, which in turn springs from the failure to pay before publication of the auction notice as per Section 13(8), there is no inconsistency between the two sections. In fact, the extinguishment of the right to redeem itself flows from the combined reading of the two sections. Therefore, there is all the more reason for them to be construed harmoniously.

However, it can always be argued that the amended Section 13(8) carves out a specific exception to the right of redemption provided generally under Section 60 of the TP Act and must prevail in view of the primacy accorded to it by virtue of Section 35 of the SARFAESI Act. This is what the Court effectively does later on in the judgment. There is, in fact, no need to analyse whether the extinguishment occasioning by virtue of Section 13(8) falls within the expression “act of the parties” as appearing in Section 60 of the TP Act.

From a practical standpoint though, it makes no difference whether one considers Section 13(8) of the SARFAESI Act and Section 60 of the TP Act to be consistent with each other or not. In either case, the result that one invariably arrives at is this: no borrower can redeem his secured asset if he fails to pay his dues before the publication of the auction notice by the lender under Section 13 of the SARFAESI Act.