The Supreme Court, in a significant ruling, has held that a borrower’s right to redeem a mortgaged property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is extinguished on the date a valid notice of sale is published. A bench of Justices J.B. Pardiwala and R. Mahadevan clarified that the 2016 amendment to Section 13(8) of the Act, which curtails this right, applies to all ‘alive claims’ irrespective of when the loan was initially availed.
The Court set aside a judgment of the Madras High Court that had quashed a validly conducted auction and allowed the borrowers to redeem their property after the sale certificate had already been issued to the successful auction purchasers. The judgment provides critical clarity on the interplay between Section 13(8) and the associated procedural rules, while also calling on the government to address persistent ambiguities in the law.
Background of the Case
The case originated from credit facilities availed by M/s KPK Oils and Proteins India Pvt. Ltd. (‘the borrowers’) from a bank in January 2016, secured by an equitable mortgage over several properties. Due to repayment defaults, the loan account was classified as a Non-Performing Asset (NPA) on December 31, 2019.
Following the classification, the bank initiated recovery proceedings under the SARFAESI Act. A demand notice under Section 13(2) was issued on February 12, 2020, followed by a possession notice under Section 13(4) on October 28, 2020. Subsequently, the bank issued an Auction Sale Notice on January 22, 2021, which was published in newspapers on January 24, 2021.
M. Rajendran and others (‘the auction purchasers’) participated in the auction held on February 26, 2021, and were declared the successful bidders. They deposited the full sale consideration of Rs. 1,25,60,000, and the bank issued a Sale Certificate in their favour on March 22, 2021.
The borrowers challenged the proceedings before the Debts Recovery Tribunal (DRT), but their applications were dismissed on January 19, 2023. Bypassing the statutory appellate remedy, the borrowers filed a writ petition before the Madras High Court, which, in its impugned order, quashed the Sale Certificate and permitted the borrowers to redeem the property. The High Court reasoned that the right of redemption is not lost “on the fall of the hammer” and entertained the writ petition due to “extraordinary circumstances.” This decision was challenged by the auction purchasers before the Supreme Court.
Arguments of the Parties
The auction purchasers argued that the High Court had committed an error, contending that the issue was squarely covered by the Supreme Court’s recent decision in Celir LLP v. Bafna Motors (Mumbai) Private Ltd., which interpreted the amended Section 13(8) of the SARFAESI Act.
The borrowers countered that the Bafna Motors decision was not applicable to their case. They submitted that since the loan was obtained on January 6, 2016, before the amendment to Section 13(8) came into effect on September 1, 2016, the unamended provision should apply, which provided a more extended period for redemption. They argued that the amended section could not be applied retrospectively.
Supreme Court’s Analysis and Decision
The Supreme Court undertook a detailed analysis of the legislative history of the SARFAESI Act, the evolution of the right of redemption, and the precise impact of the 2016 amendment.
Right of Redemption: Pre and Post-2016 Amendment
The Court first examined the legal position before the 2016 amendment. The unamended Section 13(8) allowed the borrower to tender the dues “at any time before the date fixed for sale or transfer.” Relying on its earlier decision in Mathew Varghese v. M. Amritha Kumar, the Court noted that this was interpreted in line with Section 60 of the Transfer of Property Act, 1882, meaning the right of redemption survived until the sale was completed through a registered instrument.
However, the 2016 amendment replaced this phrase with “at any time before the date of publication of notice for public auction or inviting quotations or tender…” The Court affirmed its ruling in Bafna Motors, stating, “the right of the borrower to redeem the secured asset stands extinguished thereunder on the very date of publication of the notice for public auction.” This drastically curtails the redemption period, and as a special law, the SARFAESI Act overrides the general provisions of the Transfer of Property Act.
Clarification on ‘Publication of Notice’
Addressing a key procedural ambiguity, the Court clarified what constitutes the “publication of notice” that extinguishes the redemption right. It rejected the notion that Rules 8 and 9 of the SARFAESI Rules require two separate notices with a 30-day gap each.
The bench held that the Rules envision a “single composite intended ‘notice of sale’.” The various requirements—serving the notice on the borrower, publishing it in newspapers, affixing it to the property, and uploading it to a website—are all different modes of effectuating this single notice.
The Court defined “publication” for the purpose of Section 13(8) as follows:
“The word ‘publication’ used in Section 13(8) of the SARFAESI Act, has to be understood to mean and include the service, publication in newspaper, and the affixation and uploading of the ‘notice of sale’, as may be required under the SARFAESI Rules.”
The right of redemption is extinguished once a valid notice, complying with all applicable procedural requirements, is published.
Retrospective Application of the Amendment
The Court firmly rejected the borrowers’ main argument regarding the retrospective application of the amended law. It held that the SARFAESI Act is a “remedial statute” intended to apply to pre-existing loans and all “alive claims.” The crucial factor is not the date the loan was sanctioned but the date the cause of action for enforcing the security interest arose.
In this case, the loan was classified as NPA in 2019 and the auction notice was published in 2021, long after the 2016 amendment came into force. The Court stated:
“Any contractual terms of arrangement in respect of loan facility obtained will have no bearing or significance in respect of application of the statutory provision of the SARFAESI Act and the rules thereunder.”
Since the claim was alive and the enforcement proceedings were initiated after the amendment, the amended, more stringent provision of Section 13(8) was applicable.
Final Conclusion
The Supreme Court allowed the appeals, setting aside the Madras High Court’s judgment and upholding the validity of the sale certificate issued to the auction purchasers. The Court also issued a stern warning that any third-party rights created over the secured asset by the borrower would be “non-est” and that it would take the “strictest of actions” against any obstruction in handing over possession to the auction purchasers.
In a concluding note, the bench expressed concern over the “glaring anomaly” and “ill-wording of Section 13(8),” which has led to an “interpretative deadlock” and a flood of litigation. It urged the Ministry of Finance and the Ministry of Law & Justice to review the provisions and introduce necessary amendments to remove the ambiguities.
