The securitization and reconstruction of financial assets and enforcement of security interests act 2002, this act empowers banks and other financial institutions to auction any commercial or residential property against which the borrower has taken loan if he fails to repay the loan amount. SARFAESI provides banks with an option to reduce their non-performing assets (NPA’s) through methods of recovery and reconstruction. It empowers the banks to directly go for auction without going to court first. The court order only comes into question when the property in question is misrepresented or fraudulent. This option is only available in the cases of secured loans and in the case of unsecured loans the bank needs to get a court order beforehand.

APPLICABILITY OF THE ACT

The preamble of the act shows the intended manifestations of the legislature  of reducing the Non-performing assets of the banks and financial institutions and improving the health of the banks and non-banking financial institutions  by regulating the securitization and reconstruction of financial  assets and enforcing the security interest and providing for central database of security interest created on security rights .The SARFAESI act done apply on loans which are not backed by any collateral which are unsecured loans which includes Personal loans, Credit card debt, Educational loans, Agricultural loans and loans below the amount of 1 lakh rupees are also not covered under the ambit of SARFAESI act .

AUCTION UNDER SARFAESI ACT

Under the ambit of SARFAESI act the banks and financial institutions have power to take possession over the collateral property provided by the borrower and the banks or financial institution can sell it to recover the loan amount or can decide to auction it the bank or financial institution can do it by itself or through a designated auction authority.  It is a process to recover the Non – performing Asset of the bank and reduce their bad loans.  Under section 13(2) of the act the bank can issue a demand notice to the default borrower to discharge his dues in the next 60 days from the receipt of the notice.  The borrower has the right to object to this notice within 15 days from the receipt. This timeline was made clear by the supreme court in the case of Mardia Chemicals Ltd. v. Union of India 08/04/2004 which later led to an amendment in sec 13 of the act.

When the period of 60 days is over and still no discharge of liability is done by borrower , then  the bank or the financial institution can take possession of  the property provided as collateral by the borrower  under the power given in section 13(4) of the said act which states that :

In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:—

a. take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

b. take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:

Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt;]

c. appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

c. require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

THE EXCEPTION OF SECTION 13(4)

The SARFAESI auction rules make it a mandate for the banks and the financial institution who are the SECURED CREDITORS to issue a sale notice in case the auction of the secured asset is done by inviting the  tenders from public  or by way of public auction .

But this auction can be stopped if the amount of the dues along with all the costs, charges and  penalties incurred by him are paid to the secured creditor before the publication of the notice for sale  as stated under section 13(8) of the SARFAESI.

The supreme court in the latest decision of 2023   in this Supreme court took the intention of redemption of the borrower in consideration as loan pending on behalf of Bafna motors (mumbai) pvt.ltd.  was of the amount 100 crores and this loan later became an NPA by the bank with dues amounting to approximately 123 crore . After many attempts the bank found a successful  bidder who was paying 105 crores for the mortgaged property  in the form of Celir LLP. As the borrower preferred the redemption he went on with a writ in the Bombay high court . The Bombay high court proceeded with the right of redemption of the borrower by paying the amount of 129 crores and if the borrower would be unable to do so the sale could continue as it was happening naturally .

Aggrieved by this decision the Celir LLP [ Auction Purchaser] approached the supreme court.

ANALYSIS BY SUPREME COURT

Does the right to redemption under sec 60 of the transfer of property act  of 1882 would exist in the presence of section 13(8)  of the SARFAESI ?

Supreme Court stated that the latest amendment in the act as section 13(8)  has changed the effect of the right to redemption under sec 60 of the transfer of property act. As soon as the notice for auction is issued by the bank the right gets extinguished. The Act was not intended to increase the amount that a creditor may recover through the enforcement of its security interest, but rather to safeguard the security interests of creditors. In this sense, the most key players for the Act’s programme to work effectively are the auction buyers. Auction buyers would be left in the hands of secured creditors’ whims and fancy if the HC’s pragmatic approach were to be accepted. This was definitely not acceptable.

DECISION BY SUPREME COURT

The Auction Purchaser was to get a sale certificate in accordance with Rule 9 of the Security Interest (Enforcement) Rules, 2002, contingent upon depositing the outstanding amounts that it was required to pay. And the amount by the borrower in furtherance of his redemption as per the order of the high court is to be refunded to him immediately.

CONCLUSION

Seeking the right of redemption under section 60 of the transfer of property act as a way of getting the mortgaged property back even after the sale of the property has happened by the bank empowered by the section 13(4) of the SARFAESI act is not possible.

As  amended under the section 13(8) of the SARFAESI  which sets a time limit for the borrower to pay the amount due along with all the costs and charges incurred upon him before the publication of notice of auction by the bank.