Decoding Mortgage Redemption in Banking

Meaning of redemption

The right of redemption pertains to the mortgagor’s right to reclaim its property from the possession of the mortgagee. This means that upon settling the mortgaged debt, the mortgagor has the right to regain ownership of the property, which has been held as security by the mortgagee. In essence, redemption involves recovering the mortgaged property through the payment of the outstanding debt. This right is established by statute and grants the mortgagor the privilege to have their property returned to them without incurring any additional charges upon fulfilling their obligations. The above right flows from the principle; “once a mortgage always a mortgage” which signifies that the mortgagee always has the status of a mortgagee and does not transition into an owner. A mortgage deed cannot be turned into a sale deed by clever use of language as the same is contrary to the law.

Under normal mortgage transaction, the redemption and related subjects are governed by the provisions of the Transfer of Property Act, 1882 (TPA)¹ but when the mortgagee is a bank or non-banking financial company (NBFC) the transaction also attracts the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)². Here, the problem arises regarding the extent of the right to redemption i.e. until when the mortgagor’s right to redemption exists or continues as both the enactments prescribe different timelines for the same.

Redemption timeline under TPA and SARFAESI Act

Section 60³ of the TPA provides the general statutory right of the mortgagor to redeem the mortgaged property which essentially says that the mortgagor has the right to redeem the mortgaged property at any time after the principal amount becomes due, by making payment of the outstanding debt provided that the right has not have been extinguished by the act of parties or by decree of court.

The Supreme Court in Narandas Karsondas v. S.A. Kamtam⁴ while interpreting Section 60 of the TPA held that a mere contract of sale does not extinguish the right of redemption. The Court further observed that:

37. … that only on execution of conveyance, ownership passes from one party to another it cannot be held that the mortgagor lost the right of redemption just because the property was put to auction. The mortgagor has a right to redeem unless the sale of the property was complete by registration in accordance with the provisions of the Registration Act⁵.

Sub-section (8) of Section 13⁶ of the SARFAESI Act, as originally enacted (pre-amendment of 2016), stated as under:

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.…

However, later on 1-9-2016, the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (the 2016 Amendment)⁷ was enacted which inter alia amended sub-section (8) of Section 13 of the SARFAESI Act, and substituted the words “any time before the date fixed for sale or transfer” of the original provision with “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”.

In a nutshell, the combined reading of this heading infers that prior to the SARFAESI amendment of 2016 both the TPA and SARFAESI Act provisions were on similar lines, that is, the right to redemption of mortgage can be exercised until the actual sale of the property but post-amendment the right to redemption could only be exercised until the publication of auction notice. This contravention between the two Central legislations gave rise to a rather confusing position in the banking transaction that is whether the borrower-mortgagor has the right to redemption till the actual sale of property or only till the publication of auction notice by the bank or NBFC. The above question was finally answered by the Supreme Court in Celir LLP v. Bafna Motors (Mumbai) (P) Ltd.⁸

Celir LLP v. Bafna Motors (Mumbai)(P) Ltd.

In this case, the respondent borrower challenged the auction of the mortgaged property by the bank to the appellant auction-purchaser in the High Court. The borrower, through a writ petition, sought redemption of the mortgage under Section 60 of the TPA, asserting that the actual sale had not yet occurred, and they were prepared to offer a sum exceeding the highest bid. This arrangement was subsequently approved by the bank and sanctioned by the High Court.

Aggrieved by these developments, the purchaser brought forth this appeal before the Supreme Court, arguing that, since the bank has already confirmed the sale as the highest bidder, the borrower has forfeited their right to redemption at this stage.

The issue before the Supreme Court was that — Whether the right of redemption of mortgage stood extinguished upon publication of notice of auction. Or in other words till what point of time the right of redemption of mortgage can be exercised by the borrower in respect of secured assets under the SARFAESI Act?

The Supreme Court observed that the pre-amendment Section 13(8) was consistent with the established jurisprudence regarding a mortgagor’s right of redemption under the TPA Act. According to this jurisprudence, a mortgagor’s right of redemption ceases only upon the completion of an actual sale.

However, subsequent to the 2016 amendment to the SARFAESI Act, the Court noted a shift in the legal landscape. Under the amended provisions, the right of a borrower to redeem a secured asset is now extinguished on the very date of the publication of the notice for public auction under the Rules.

The Court held that failure on the part of the borrower in tendering the entire dues before the publication of the auction notice as per Section 13(8) of the SARFAESI Act constituted an “extinguishment of right of redemption of mortgage”.

The Supreme Court while delivering the judgment laid emphasis on the sanctity of auction and observed that⁹:

86.… it is the duty of the courts to zealously protect the sanctity of any auction conducted. The courts ought to be loath in interfering with auctions, otherwise it would frustrate the very object and purpose behind auctions and deter public confidence and participation in the same.

In Surinder Pal Singh v. Vijaya Bank¹⁰ the sale certificate was issued but before possession could be handed over to the auction purchaser the borrower paid the outstanding amounts on 5-5-2010, while applying for the redemption of the mortgaged property. The Supreme Court applied the unamended Section 13(8) of the SARFAESI Act, given the redemption was applied prior to the 2016 Amendment and held that the borrower’s right of redemption does not stand terminated till the transfer is completed by registration of sale certificate and delivery of possession of the mortgaged property. Although while balancing out the right and interests of the borrower and auction-purchaser the Court ordered the borrower to repay a reasonable amount to the appellant auction-purchaser.

Conclusion

The legal landscape surrounding the redemption of mortgages, as influenced by the provisions of both TPA and SARFAESI Act has undergone significant clarification through judicial interpretation. In effect, the right of redemption available to the borrower under the present statutory regime is drastically curtailed. The interpretation in Celir LLP v. Bafna Motors (Mumbai) (P) Ltd.¹¹ has established a clear timeline for the right of redemption in mortgage transactions involving financial institutions. This legal interpretation also highlights the significance of timely and comprehensive settlement by the borrower in light of the amended statutory framework.