Borrowers can’t redeem property after publication of auction notice under SARFAESI: SC

New Delhi, Sep 22 (PTI) The Supreme Court on Monday held borrowers cannot redeem property after publication of auction notice as purchasers acquire indefeasible rights once sale certificate is issued by creditor banks and financial institutions under the SARFAESI Act.

A bench of Justices J B Pardiwala and R Mahadevan rued the fact that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) was enacted in 2002 to protect banks and financial, but certain ambiguities in its Section 13(8) and a few rules had prolonged litigations.

The top court also held that the 2016 amendment to Section 13(8) of the SARFAESI Act, which extinguishes a borrower's right of redemption once the secured creditor publishes an auction notice, will apply even to loans taken before the amendment came into force if the default occurred after September 1, 2016.

Writing 140-page judgement, Justice Pardiwala said, “We humbly urge the Ministry of Finance to take a serious look at these provisions and bring about necessary changes, before it is too late in the day.” The bench went on, “It has been almost twenty-three years since the SARFAESI Act has remained in force. It is indeed very sad to note that even after these many years procedural issues such as the one involved in the case at hand, have continued to plague the legislation.” The bench noted it came across “glaring anomaly” in respect of Section 13(8) of the SARAFESI Act and Rule(s) 8 and 9 of the SARFAESI Rules.

“We are, however, at our wit’s end to note how the ill-wording of Section 13(8) of the SARFAESI Act has resulted in a glaring inconsistency between the aforesaid provision and the SARFAESI Rules framed in lieu thereof. It is unfortunate that the ambiguities within the statutory provisions of the SARFAESI Act and Rules thereunder have left the interests of secured creditors and auction purchasers high and dry. The interpretative deadlock between the provision and the rules has single handedly resulted in a huge mess...,” it said.

The top court directed a copy of its verdict to be shared with all high courts besides the principal secretaries of the Ministry of Finance and the Ministry of Law & Justice.

Referring to amended provision, the bench said, it "extinguishes" the right of redemption of the borrower in the event he fails to repay his dues and redeem the asset before publication of the auction notice.

It said SARFAESI Rules do not speak of any distinct notice of sale that is required to be issued by the secured creditor for the transfer of the secured asset by way of lease, assignment or sale.

It said SARFAESI Act was brought into force with the object of providing expeditious procedures for recovery of large debts in NPAs.

“The SARFAESI Act intends to provide a remedy in respect of preexisting loans and the interpretation that it would apply only to future debts would defeat the very purpose of that law, which was to reduce non-performing assets,” it said.

The contention of borrowers that their right of redemption has to necessarily be construed in accordance with the date of when the loan was obtained is completely misconceived, it said.

It also made clear that if any third party rights have been created over the secured asset, the same would be non-est in view of this judgment.

Reinforcing the rights of auction purchasers under the SARFAESI Act, it allowed the appeals of one M. Rajendran & Ors and setting aside a Madras High Court order that had earlier quashed the auction of a mortgaged property belonging to M/s KPK Oils and Proteins India Pvt. Ltd.

It held that the high court erred in interfering with the Debt Recovery Tribunal’s findings, and emphasised that the borrowers’ right to redeem a mortgaged property stands extinguished once an auction notice is issued under Section 13(8) of the SARFAESI Act. PTI SJK SJK AMK AMK