Experts CornerShardul Amarchand Mangaldas


The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was enacted with the objective to enable banks and financial institutions to realise long-term assets, to improve recovery of debts and reduce non-performing assets by taking possession and selling such assets, in the manner and as per the procedure as provided therein and read with the Security Interest (Enforcement) Rules, 2002 (Rules).


The SARFAESI read with the Rules, meticulously sets out the step-by-step procedure which is to be adhered to by the banks/financial institutions i.e. the secured creditors, for taking possession and ultimately effecting the transfer of a non-performing asset. Non-adherence to any single procedural step or even non-compliance of a time period stipulated therein by the secured creditor, has lead to a plethora of litigation.


A third-party purchaser, being interested in acquiring the secured asset must primarily ensure that the secured creditor has taken all the necessary steps and checked all the boxes as spelt out under the SARFAESI read with the Rules, prior to acquisition of the secured asset.


Sale on “As is where is basis”

The sale of secured assets under SARFAESI in most cases takes place on “as is where is basis” which means that the purchaser would be acquiring the asset with all its existing rights, obligations and liabilities. Auction notices which are issued by the secured creditors usually state that “the property is free from all encumbrances known to the secured creditor” and thereby shifting the onus onto the purchaser to make its own independent enquiry. However, the Bombay High Court, Nagpur Bench, in its recent judgment dated 18-2-2021 in Medineutrina (P) Ltd. v. District Industries Centre[1] held that, when a property is sold on “as is where is basis”, though it would be upon the purchaser to make reasonable enquiries about the encumbrances affecting the property, the mere mention of “as is where is basis” or any such phrase should not absolve the secured creditor of its obligation to make proper enquiries about other dues/encumbrances affecting the property, to obtain information about which the secured creditor has the means and which information should be disclosed in the auction notice so that the purchaser can make a conscious decision and not raise a plea of not having been informed. Insofar as encumbrances on account of statutory/government/municipal/ revenue dues are concerned, the responsibility of obtaining the details thereof is of the secured creditor. In spite of the aforesaid directions laid down in the judgment, the Court further held that an encumbrance affecting the secured asset, prior to the issuance of the auction notice, would be the liability of the purchaser in order to obtain a clear and marketable title to the property having purchased the same on “as is where is basis”.


Even though the aforesaid judgment directs secured creditors to make a disclosure of statutory encumbrances in the auction notice, it is still to be seen if the directions laid down therein will become a reality and will protect a third-party purchaser who is acquiring the secured asset on “as is where is basis”. It is prudent for the purchaser to make its own independent enquiry with respect to outstanding dues and encumbrances affecting the property, so as to factor in such cost as such additional cost will not form part of the consideration payable to the secured creditor for acquisition of the asset. As per Section 31-B of SARFAESI [as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016], any debt due to a secured creditor by sale of assets over which security interest is created, shall take priority over any debt due to the Central Government, State Government or local authority. Accordingly, any other dues/encumbrances affecting the property, will have to be cleared in addition to the consideration payable to the secured creditor so as to enable the purchaser to obtain a clear and marketable title to the secured asset.


Borrowers right to foreclose and redeem the mortgage

As per Section 60 of the Transfer of Property Act, 1882, the mortgagor/borrower has a right to redeem the mortgage on payment of the entire mortgage money to the secured creditor. It has been the contention of borrowers that the right of redemption only stands extinguished on the date of registration of the sale certificate in favour of the purchaser. This point on redemption has been analysed by the Supreme Court of India in its judgment dated 20-8-2019 in Shakeena v. Bank of India[2] wherein it was held that the borrower has a right of redemption only before the time the mortgage is foreclosed or the estate is sold. It was further held that issuance of a sale certificate as per Rule 9(7) of the Rules is a complete and absolute sale for the purpose of SARFAESI and the sale certificate need not be registered, as Section 17(2)(xii) of the Registration Act, 1908 provides that a sale certificate issued by a Civil or Revenue Officer in respect of property sold in a public auction does not require registration. Accordingly, the right to redemption stands obliterated from the date of issuance of the sale certificate as registration of the sale certificate is not mandatory.


Borrowers right to prevent transfer of secured assets

In addition to what is stated hereinabove and as per the amended Section 13(8) of the SARFAESI which has come into force with effect from 1-9-2016,  which amended section states that, where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by the secured creditor are tendered by the borrower to the secured creditor prior to the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer of the secured asset, the secured asset shall not be transferred by the secured creditor. The Supreme Court of India in its judgment dated 10-2-2014 in Mathew Varghese v. M. Amritha Kumar[3] held that by virtue of the provisions of Section 13(8) of the SARFAESI, any sale or transfer of a secured asset cannot take place without duly informing the borrower of the time and date of such sale or transfer in order to enable the borrower to tender the dues of the secured creditor and any such sale or transfer effected without complying with the said statutory requirement would be a constitutional violation and nullify the ultimate sale.



In light of what is stated hereinabove, acquisition of a secured asset under SARFAESI requires the purchaser to do thorough due diligence to ensure there are no outstanding dues and encumbrances affecting the property and to ensure strict compliance of the procedure along with the time periods as stipulated in SARFAESI read with the Rules. The thorough due diligence will enable the purchaser to obtain a clear and marketable title to the secured asset which is free from all encumbrances and by carrying out such due diligence, the purchaser will ultimately be saved from knocking on the doors of the court to enforce its right to the secured asset.


† Partner, Shardul Amarchand Mangaldas

†† Associate, Shardul Amarchand Mangaldas.

[1] 2021 SCC OnLine Bom 222.

[2] 2019 SCC OnLine SC 1059.

[3] (2014) 5 SCC 610.

Case BriefsHigh Courts

Karnataka High Court: B. M Shyam Prasad J dismissed the appeal being devoid of merits.

The facts of the case are such that the first respondent – the Karnataka State Financial Corporation filed a petition under Section 31 (1)(aa) and 32 of the State Financial Corporations Act, 1951 before VI Additional City Civil Judge, Bengaluru City, against the appellant and the second and third respondents invoking Bank Guarantee executed by them. Hence the petition was filed under Section 31 (1) (aa) and 32 of the State Financial Corporation Act, 1951 which was allowed, assailing this order another petition under Order IX Rule 13 of the Code of Civil Procedure, 1908 was filed which was dismissed ex parte as inspite of giving repeated reminders no one appeared before the Court. Aggrieved by the dismissal of the petition instant appeal was filed before XXXVII Additional City Civil and Sessions Judge, Bengaluru City.

Counsel for the appellants submitted that the first respondent had shown his address at Wilson Garden, Bengaluru for service of notice but he had sold the property way back in 1992 and shifted his residence and been a resident of this new place ever since. He further submitted that this is the reason why the appellant did not know about the petition and came to know only in the month of September 2008 when he visited Sub Registrars Office for verification of documents.

The Court observed that the question of the appellant being served at the address other than the address mentioned in the petition viz., address of the principal borrower and there was a complete cessation of all association with the principal borrower. It was further observed that when it is admitted that he was one of the directors of the principal borrower and he continued to be a director of the principal borrower as of the relevant date, the service of notice at the first instance at the principal borrower’s address could be reasonably inferred as due service of notice. Also, it would not be reasonable to infer that the appellant has no knowledge of the petition merely because the appellant contends that he shifted his residential address.

The court thus held that based on documents placed on record it is amply clear that there is no information available that the appellant informed the first respondent about his shifting of residence and his new address. Thus, there stands no reason for interference.

In view of the above, appeal was dismissed.[N. Nagaraja Reddy v. Karnataka State Financial Corporation, Miscellaneous First Appeal No. 1413 of 2013 (CPC), decided on 03-01-2021]

Arunima Bose, Editorial Assistant has put this story together

Case BriefsHigh Courts

Delhi High Court– While deciding a case wherein the issue involved was whether a person who is proposed to be classified as a wilful defaulter by a Bank / FI and who, in accordance with the Master Circular dated 01.07.2013 issued by the RBI, has availed of opportunity to be heard by Grievance Redressal Committee (GRC) of the said bank/FI to oppose such a proposal, has a right to be represented by an advocate in the said hearing, the division bench of G. Rohini CJ and R.S. Endlaw J held that the restriction placed by the GRC of the appellant banks to appearance of advocates on behalf of borrowers before it, not by any law but otherwise, cannot be sustained and is bad. The Court further observed that the opposition of the GRC of the appellant bank regarding appearance is based on an illogical presumption that the borrower’s advocate might delay the proceedings before it, which has no basis. The Court also pointed out that the members of GRC can always control and guide the proceedings before it and as per the exigencies limit the time of hearing.

In the instant case, the appellants had challenged the high court order which had allowed lawyers to represent the borrower in the proceedings before GRC to decide whether the borrower can be held wilful defaulters. In order to reach the decision the Court also dealt with the issue as to whether the GRC can be called a ‘Tribunal’ within the meaning of clause (ii) of Section 30 of the Advocates Act.

Relying on a catena of cases like, ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. (2010) 10 SCC 1 and Peerless General Finance & Investment Co. Limited v Reserve Bank of India (1992) 2 SCC 343, the Court stated that GRC satisfies the test of having been constituted by the State and thus can be held to be a Tribunal within the meaning of Section 30 of the Advocates Act. The advocates would have a right to practice before it and axiomatically the borrower before such GRC will have a right to engage and avail the services of an advocate. [Punjab National Bank v. Kingfisher Airlines Limited,  2015 SCC Online Del 14128, decided on 17.12.2015]