In the case of Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd., 2023 SCC OnLine SC 1209, borrowers defaulted in repaying the credit facility availed, consequently declaring the account as a Non-Performing Asset ("NPA'). The Bank took possession of the mortgaged land and proceeded with the auctions. Meanwhile, the borrowers preferred a Securitisation Application before the Debt Recovery Tribunal ("DRT") under Section 13(2) of the SARFAESI Act to quash the sale notice. Parallelly, the Appellant emerged as the highest bidder in the 9th auction, and a 'Sale Confirmation Letter' was sent to the Appellant.
While the case was pendente lite in DRT, the borrowers approached the High Court, requesting directions to allow the redemption of the mortgage on the secured asset upon payment of a total amount of ₹129 crores. Attracted by the higher offer than the appellant's, the bank expressed its willingness before the High Court to accept the borrowers' proposal.
The High Court ruled in favour of the borrowers and directed the bank to permit redemption of the mortgage, especially since the auction proceedings had concluded. The appellant then challenged the High Court's decision in the appeals.
Issues for Deliberation
The Supreme Court deliberated on the extent of the right to redemption under section 13(2) of the SARFESI Act.
Further, the Court ruled on the overriding effect of the right to redemption of the mortgage under Section 13(2) of the SARFESI Act and Section 60 of the Transfer of The Property Act of 1882 ("TOPA"). Lastly, the Court also upheld the sanctity of the public auction.
Analysis
Section 13(8) of the SARFESI Act provides the right to redeem the mortgage asset by the borrower and to dispose or deal with the mortgage asset by the Secured Creditor. Although as per Security Interest (Enforcement) Rules, 2002 ("2002 Rules"), Rules 8 and 9 provide for the procedure for selling immovable secured assets under Section 13 of the SARFAESI Act. It emphasised that an authorised bank official must issue a 30-day notice to the borrower before the sale, detailing the terms of the sale, which cannot occur before the notice period expires. This gives the borrower enough window to redeem the mortgage asset before the sale.
Further, the enactment of the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 ("2016 amendment") amended Section 13(8) of the SARFAESI Act. The Court highlighted that before the amendment of Section 13(8) of the SARFAESI Act, it consistently upheld the borrower's right to redeem the mortgage until the secured asset was conveyed through registration. At the same time, the amendment restricted the right to redemption until the publication of notice for the sale.
The Court held that Section 90 of the TOPA, 1882 also envisages the Borrower's right to redemption of the secured asset. Such right is only extinguished by the parties' act or by a Court's decree.
The Court highlighted the conflict between Section 13(8) of the SARFAESI Act and Section 60 of the TOPA, 1882, noting that the SARFAESI Act, being a special law, prevails over the general law under Section 35 of the SARFAESI Act. Consequently, the borrower's right of redemption is limited to the period before the publication of the auction notice, as per the amendment to Section 13(8).
Importantly, the Court emphasized the importance of safeguarding the sanctity of public auctions, citing Valji Khimji and Co. v. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. and other cases. It noted that misinterpreting the amended Section 13(8) of the SARFAESI Act could lead to disruptive practices, such as borrowers making multiple redemption offers, discouraging public participation in auctions, and undermining the auction process. To prevent this and uphold the objectives of the SARFAESI Act, the Court ruled that a borrower's failure to pay the full dues to the secured creditor before the publication of the auction notice results in the extinguishment of their right to redeem the mortgage from the date the auction notice is published, as per Rule 8 of the 2002 Rules.
Judgement and Interpretation
The Court held that the High Court was unjustified in exercising its writ jurisdiction under Article 226 of the Constitution, as the borrowers had already pursued an alternative remedy under Section 17 of the SARFAESI Act. It clarified that under Rule 9(2) of the Security Interest (Enforcement) Rules, 2002, once a sale was confirmed by the bank, the successful auction purchaser obtained a vested right to a sale certificate under Rule 9(6). Additionally, the borrower's right to redeem the secured asset was extinguished on the date of the auction notice's publication. Consequently, the bank could not withhold the issuance of a sale certificate under Rule 9(6) or engage in private arrangements with the borrower after the auction.
The Court ordered the bank to refund the ₹129 crore deposited by the borrowers as part of their attempt to redeem the mortgaged asset. Additionally, it directed the Appellant to pay ₹23.95 crore to the bank, following which the bank was instructed to issue the sale certificate in accordance with Rule 9(6) of the 2002 Rules.
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