The Hon'ble Supreme Court of India, in its judgment dated December 10, 2024, in Sanjay Sharma v. Kotak Mahindra Bank Ltd.,1 provided a significant interpretation of a right of redemption of the property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"). The Court examined the legal framework concerning the Amendment of 2016 to the SARFAESI Act, which stipulates that a right of redemption available to the Borrower would extinguish upon the publication of the sale notice under Rule 9(1) of the Security Interest (Enforcement) Rules, 2002 ("Enforcement Rules"). The judgment also analyzed the rights of an auction purchaser in a public auction conducted under the SARFAESI Act and reinforced the sanctity of such sales.
The case pertains to a secured asset comprising land, a building, and a basement ("Secured Asset") owned by Mrs. Champa Bhen Kundia ("the Borrower"). The Borrower had mortgaged the property to secure a loan from M/s Associated India Financial Services Pvt. Ltd. (AIFS), which was later assigned to Kotak Mahindra Bank ("the Assignee Bank" / "Respondent No. 1"). Upon default by the Borrower, the Assignee Bank invoked Section 13 of the SARFAESI Act and initiated recovery proceedings, culminating in the auction of the Secured Asset. The auction was won by Mr. Sanjay Sharma ("the Appellant"/ "Auction-Purchaser"), and a sale certificate was subsequently issued in his favor.
Subsequently, Mr. Raj Kumar ("Respondent No.2"), claiming rights over the basement of the Secured Asset through an unregistered sale agreement, challenged the auction along with other respondents who were asserting themselves as successors-in-interest to the Borrower. The Respondents thereafter moved applications before the Debt Recovery Tribunal ("DRT"), which conditionally upheld their right of redemption under Section 13(8) of the SARFAESI Act, provided they deposit the outstanding dues with interest. However, upon their failure to comply with the said direction, the auction sale was upheld. Aggrieved by the same, the Respondent No. 2 challenged the ruling before the Debt Recovery Appellate Tribunal ("DRAT"), which held that the right of redemption could not be exercised at the convenience of the borrower and upheld the auction sale. Respondent No. 2 further approached the Hon'ble High Court, which set aside the auction sale and permitted redemption of the mortgage subject to conditions. The Appellant, in turn, challenged this ruling before the Supreme Court.
The primary issue before the Supreme Court was whether Respondent No. 2, claiming ownership based on an unregistered sale agreement, retained a right of redemption post-issuance of the sale certificate by the Bank. The Court examined this claim under Section 54 of the Transfer of Property Act, 1882 ("TP Act"), which mandates that ownership of tangible immovable property valued at ₹100 or more can only be transferred through a registered instrument. Relying on its earlier decision in Babasaheb Dhondiba Kute v. Radhu Vithoba Barde,2 the Supreme Court held that an unregistered sale agreement does not confer ownership rights. Consequently, Respondent No. 2 had no legal claim over the Secured Asset, and the auction sale could not be invalidated on this ground.
The Court also examined the legislative intent behind Section 13(8) of the SARFAESI Act and its Amendment of 2016.3 Prior to the said amendment, the right of redemption existed until the sale or transfer of the Secured Asset. However, post the aforesaid amendment, the right of redemption is available only until the date of publication of the sale notice as stated under Rule 9(1) of Enforcement Rules. The Court categorically held that Respondent No.2's right of redemption was extinguished upon the publication of the sale notice, thereby upholding the validity of the auction sale.
Further, the Court reaffirmed that auctions conducted in accordance with the SARFAESI Act and its rules should not be interfered with unless there is demonstrable evidence of fraud, collusion, or material irregularity in the process. Relying on its precedents in V.S. Palanivel v. P. Sriram4 and Celir LLP v. Sumati Prasad Bafna & Ors.5, the Court emphasized that unless there are serious flaws in the conduct of the auction, courts must ensure the integrity of the auction process. This principle safeguards the confidence of auction purchasers, financial institutions, and stakeholders in the enforcement of security interests.
The Supreme Court set aside the High Court's order and upheld the validity of the auction sale. It directed the Assignee Bank to facilitate the handover of possession of the Secured Asset to the Appellant, thereby conclusively affirming the rights of auction purchasers. The judgment reaffirmed that the right of redemption available to the Borrower under Section 13(8) of the SARFAESI Act, post the Amendment of 2016, is extinguished upon the publication of the sale notice and does not extend beyond that point. It also reiterated that under Section 54 of the TP Act, an unregistered sale agreement does not transfer ownership, and any claim based on such documents is legally untenable. The Court further reinforced the sanctity of public auctions and held that unless there is clear and cogent evidence of fraud, collusion, or procedural irregularity, such auctions should not be interfered with.
By reiterating that the right of redemption extinguishes upon the publication of the sale notice, the Court has reinforced the principle that borrowers must act promptly and in compliance with the prescribed legal framework. Furthermore, through this judgment, the Court has streamlined the auction process under the SARFAESI Act, ensuring greater efficiency and reducing unnecessary legal hindrances. The judgment further enhances confidence in the auction process, safeguarding the rights of auction purchasers and protecting them from prolonged litigation and undue challenges to their acquired property rights.
Footnotes
1 SLP (C) No. 330/2017
2 (2024) 4 SCC 310
3 Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 01.09.2016, vide Notification No. SO2831(E) dated 01.09.2016.
4 2024 SCC OnLine SC 2413
5 2024 SCC OnLine SC 3727
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
