SUPREME COURT'S LANDMARK RULING ON MORTGAGE REDEMPTION RIGHTS UNDER SARFAESI ACT

INTRODUCTION

In a watershed moment on September 21, 2023, the Supreme Court of India rendered a pivotal judgment that carries profound implications for borrowers, financial institutions, and auction participants alike. This ruling pertains to the borrower's entitlement to redeem a mortgage under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Delivered by the bench of Chief Justice of India DY Chandrachud and Justice JB Pardiwala, this judgment not only clarifies the borrower's right to redeem a mortgage but also underscores the pivotal role of the auction process within the SARFAESI Act's framework.

BACKGROUND

The genesis of this case lies in a scenario where borrowers had availed a substantial credit facility of Rs. 100 crore from a bank. To offset a portion of this debt, approximately Rs. 65 crore was utilized to settle an existing Lease Rental Discounting (LRD) facility. However, the remaining balance of Rs. 35 crore was secured through a simple mortgage against a piece of real estate. Unfortunately, the borrowers failed to meet their repayment obligations, culminating in the categorization of their loan account as a Non-Performing Asset (NPA). In response, the bank initiated a demand notice under Section 13(2) of the SARFAESI Act, seeking repayment of the principal, interest, costs, and additional charges, tallying to a substantial Rs. 123.83 crore.

THE AUCTION PROCESS

With the borrowers unable to satisfy these demands, the bank, pursuant to the SARFAESI Act's provisions, initiated the auction of the secured asset. Notably, it took nine attempts before the bank successfully concluded the sale, with a winning bid of Rs. 105 crore. The highest bidder, referred to as the appellant, promptly deposited the full bid amount. During this tumultuous period, the borrowers initiated a redemption application before the Debts Recovery Tribunal (DRT). Simultaneously, they sought recourse in the High Court, seeking permission to redeem the mortgage.

THE SUPREME COURT'S VERDICT

The Supreme Court's ruling brings several critical elements into focus:

1. Redemption Rights Clarified: The Court determined that the borrower's right to redeem a mortgage extinguishes once the bank publishes an auction notice for the sale of the secured asset. Crucially, this finding aligns with the amended Section 13(8) of the SARFAESI Act, which significantly restricts the borrower's right of redemption.

2. Impact of Legislative Amendment: After a legislative amendment in 2016, Section 13(8) now expressly stipulates that the borrower's right to redeem a secured asset is annulled on the date of auction notice publication. This legislative change supersedes the general rule under Section 60 of the Transfer of Property Act, 1882, which allowed redemption until the property's conveyance.

3. Preservation of Auction Sanctity:  The Supreme Court emphasized the imperative to preserve the sanctity of the auction process enshrined in the SARFAESI Act. Allowing borrowers to redeem the mortgage post-auction would undermine public confidence in these auctions and thwart the core objective of the Act – facilitating swift recovery of dues by banks.

4. Bank's Legal Obligations: The judgment did not mince words in its criticism of the bank's conduct. It emphasized that the bank must adhere to the provisions of the law, just like any other litigant. The Court underscored that the complexity of the case was exacerbated by the bank's inconsistent actions and decisions.

CONCLUSION

In summary, the Supreme Court's ruling has firmly established that the right to redeem a mortgage under the SARFAESI Act remains available exclusively until the publication of the auction notice. The pivotal 2016 amendment to the Act drastically curtailed this right, aligning it with the specific provisions of the SARFAESI Act, thereby superseding the broader provisions of the Transfer of Property Act, 1882. This landmark judgment underscores the paramount importance of safeguarding the integrity of the auction process and mandating that banks adhere to the law in the same manner as any other litigant.

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

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