The financial sector is one of the key and critical part in any developing economy. It is important that the legal framework relating to commercial transactions keeps pace with the evolving commercial practices, financial and banking sectors.
India, at the cusp of growth, looked to increase and improve its economy by boosting local and international trade and commerce. It became necessary to implement legal reforms particularly in the Banking sector which empowered the Banks to secure their assets by seizing and auctioning off the security against the loan.
In 1993, Parliament passed the Recovery of Debts Due to Banks & Financial Institutions Act. The claims of the banks and financial institutions involving Rupees Ten lakhs and above, were brought within the fold of the said RDDB & FI Act 1993 for adjudication by the Debts Recovery Tribunals [DRT]. However, the functioning of the DRTs was adversely affected because of various impediments. For instance, proceedings under DRT came to be stayed automatically if the borrower made a reference to ‘Board for Industrial and Financial Reconstruction’ (BIFR) created under article 4 of Sick Industries Companies Act, 1985 [SICA].
The Narasimham Committee and the Andhyarjuna Committee were formed to recommend changes to the banking and financial sector to strengthen and so as to make the banking sector internationally competitive.
The aforementioned Committees inter alia, recommended enacting laws for speedy recovery of the debts due to the banks and financial institutions without reference to courts / tribunals to speed up the adjudication process. It also suggested enacting laws to confer powers of possession and sale of moveable and immoveable properties, without the intervention of court and with proper safeguards, on the banks.
Based on the recommendations, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (for short, ‘the SARFAESI Act’) was enacted.
The SARFAESI Act, 2002 empowered the banks to ‘seize’ and auction mortgaged assets.
Section 13 (8) of the SARFAESI Act, as originally enacted, stated as under: -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, and no further step shall be taken by him for transfer or sale of that secured asset.”
As the original enactment, under the SARFAESI Act, did not mention the right of redemption by the borrower, Section 60 of the Transfer of Property Act, 1882 (for short, ‘the Act 1882’), was applied, whenever required. Sec 60 of the Act, 1882 is a general law in respect of mortgages.
Section 60 of the Transfer of Property Act, 1882 states:
“At any time after the principal amount has become due, the mortgagor has a right, on payment or tender, of the mortgage money, to require the mortgagee :
(a) to deliver to the mortgagor the mortgage deed and all documents relating to the mortgaged property which are in possession or power of the mortgagee,
(b) where the mortgagee is in possession of the mortgaged property, to deliver possession thereof back to the mortgagor, and
(c) at the cost of the mortgagor either to retransfer the mortgaged property to him or to such third person as he may direct, or to execute and to have registered an acknowledgement in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished. “
Section 60 of the Act 1882 was interpreted by the Courts, to mean that the borrower/mortgagor reserved the right to redeem the property till the property is conveyed /transferred to a third party. It is only after registration of transfer deed that the property is deemed to be conveyed and the borrowers/mortgagor's right of redemption is extinguished.
If the sale deed in favour of the third party was not executed and registered and the mortgagor paid the principal amount due to the creditor/mortgagee, the creditor/mortgagee was obliged to handover the title deed and the possession of the mortgaged property to the mortgagor, even if the creditor/mortgagee had, in pursuance of his rights to recover his outstanding [a] received monies towards the mortgaged property or [b] auctioned the property following due process of law;
This was upheld by the Supreme Court in the matter of Narandas Karsondas v. S.A. Kamtam, [(1977) 3 SCC 247] and several other judgements.
The nature of Sec 13  radically changed in 2016, when the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“2016 Amendment”) 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”.
The amended Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, [ SARFAESI Act] read as follows:
“13. Enforcement of security interest. –
(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor 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,—
(i) the secured assets shall not be transferred by way of lease, assignment or sale by the secured creditor; and (ii) in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.”
As per the amended provisions of Section 13(8) of the SARFAESI Act the right of the borrower to redeem the secured asset stood extinguished on the very date of publication of the notice for public auction under Rule 9(1) of the Rules of 2002. However, as per Rule 8(6) of the Rules of 2002, the thirty-day notice period mentioned therein to enable the borrower to redeem his property, remained unaltered.
Therefore, after the amendment of Section 13(8) of the SARFAESI Act, the borrower retained his right of redemption for a period of only 30 days. The right of redemption stood terminated immediately upon publication of the sale notice under Rule 9(1) of the Rules of 2002.
This was upheld by the Supreme Court in the matter of Celir LLP as Appellant Versus Bafna Motors Pvt. Ltd. & Ors. (Mumbai) as Respondent(S) [2023 SCC OnLine SC 1209] when it observed :
“Thus, in the light of clear inconsistency between Section 13(8) of the SARFAESI Act and Section 60 of the Act 1882 the former special enactment overrides the latter general enactment in light of Section 35 of the SARFAESI Act. Thus, the right of redemption of mortgage is available to the borrower under the SARFAESI Act only till the publication of auction notice and not thereafter, in light of the amended Section 13(8).”
The Court observed that the SARFAESI Act is a special law containing an overriding clause vis-à-vis the Section 60 of the Act 1882, which is a general law. The SARFAESI Act is in alignment with the objects and reasons of the legislature and if the general law is allowed to govern, it would defeat the very object and purpose of the enactment.
In stark contrast, the process of auction by a secured creditor was rendered futile when the unamended Sec 13  of the SARFAESI Act was applied.
In a case before the Supreme Court, the court relied upon the unamended Section 13(8) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, [ SARFAESI Act] and upheld the right of the borrower to redeem the secured asset till the sale or transfer of such secured asset.
In the matter of Surinder Pal Singh [Appellant] v/s Vijaya Bank & ors., [Respondents][2023 SCC OnLine SC 1402] the Appellant was the auction purchaser in sale proceedings effected under the aegis of the Debts Recovery Tribunal and had deposited the entire auction money whereafter the sale was confirmed, and the sale certificate was issued, however the transfer was not registered. In the meanwhile, the Borrowers deposited the entire amount outstanding as demanded in the Notice issued under SARFAESI Act and redeemed the mortgage.
The Appellant/Auction purchaser, who was aggrieved, approached the Debt Recovery Appellate Tribunal, who ruled in favour of the Borrowers and allowed the Borrower to redeem the mortgaged property.
The Appellant then filed a Writ Petition [2017 SCC OnLine P&H 6043 : PLR (2017) 188 P&H 773] when the High Court relying upon the unamended Sec 13 of the SARFAESI Act dismissed the petition and ruled that in a situation where a borrower pays the amount demanded in the Notice sent under SARFEASI Act, the secured creditor is barred from proceeding with the transfer of the secured assets.
The Appellant then approached the Supreme Court.
The Supreme Court heard the matter, when both parties relied upon the ruling in the matter of Celir LLP V/s Bafna Motors (Mumbai) Pvt. Ltd. and Others [2023 SCC OnLine SC 1209], albeit on different paragraphs.
Given the facts and circumstances of the case before them and relying upon the Celir LLP [supra] case, the Supreme Court held that the provisions of the unamended Section 13(8) of the SARFAESI Act would apply to the Surinder Pal Singh [supra] case and the right of the borrower to redeem the secured asset could not be terminated till the sale certificate was registered and the possession of the secured asset was handed over to the auction purchaser.
In the Surinder Pal Singh [supra] case, the auction purchaser had paid for the mortgaged property circa year 2010 and had been litigating for his right since. The matter was laid to rest finally only after the Supreme Court order dated 17th October 2023, where the right of the borrower to redeem the mortgage was upheld.
This case highlighted the position of the auction purchaser prior to the amendment and underlined the necessity and importance of the same.
In Celir LLP [supra], the Supreme Court rightly recognised the auction purchaser as the most important factor of the SARFAESI Act. The court observed that the success of the enactment rests on the confidence that the common man vests in the system and steps forward to purchase the repossessed asset.
For the common man to participate in auctions held by the secured creditors, it is imperative that the auctions carried out under SARFAESI must have protection and sanctity of the law, without fear or apprehension that despite being declared a successful bidder, the auction could still be negated if the borrower was allowed to come forward to redeem the mortgage.
Such a scenario was counter-productive to the process of recovery for banks. The amendment of the Section 13(8) of the SARFAESI Act preserved the sanctity and the legal protection attached to an auction process. This amendment also precluded any mischievous borrower from exercising its right of redemption at the very end of the process and thereby wipe out the entire auction process at his whim and fancy and the very object of Section 13 and the overall scheme of the SARFAESI Act of enabling the banks from recovering its dues in a timely manner without intervention of the courts would be simply defeated.