Defaulting borrowers cannot thwart auction process of mortgaged properties by repaying dues any time: SC

A defaulting borrower cannot be allowed to thwart the auction of his mortgaged properties by creditor financial institutions by repaying dues “any time”, the Supreme Court ruled on Thursday.

The top court held that such a borrower cannot seek redemption of his mortgaged property if he fails to repay the dues to financial institutions before publication of auction notice under a law governing recovery of Non-Performing Assets (NPAs).

Highlighting the sanctity of the auction process, a bench of Chief Justice DY Chandrachud and Justice JB Pardiwala said, “It is the duty of the courts to zealously protect the sanctity of any auction conducted. The courts ought to be loath in interfering with auctions, otherwise it would frustrate the very object and purpose behind auctions and deter public confidence and participation in the same.”

It was dealing with a provision of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Section 13 (8) of the Act provides that a borrower can claim back his mortgaged property from FIs “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” on payment of entire dues.

Justice Pardiwala, who penned the 111-page verdict said, “We hold that as per the amended Section 13(8) of the SARFAESI Act, once the borrower fails to tender the entire amount of dues with all cost & charges to the secured creditor before the publication of auction notice, his right of redemption of mortgage shall stand extinguished/waived on the date of publication of the auction notice in the newspaper in accordance with Rule 8 of the Rules of 2002.”

The verdict came on an appeal of Celir LLP challenging a Bombay High Court order.

The High Court had allowed another firm Bafna Motors (Mumbai) Pvt Ltd to redeem its mortgaged property on payment of dues to the bank.

Allowing the appeal, the top court said the auction purchaser was “left high and dry” by the respondent borrower firm and others as they were permitted to redeem the mortgage of the secured asset, more particularly after the auction proceedings attained finality.

The bench said, “To read it (section 13(8)) otherwise in a strict manner as to only stipulating a restriction upon the secured creditor and not on the borrower’s right of redemption would lead to a very chilling effect, where no auction conducted under the SARFAESI Act would have any form of sanctity, and in such a situation no person would be willing to come forward and participate in any auction due to the fear and apprehension that despite being declared a successful bidder, the borrower could still at any time come and redeem the mortgage and thereby thwart the very auction process.”

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Terming such a scenario where a borrower can redeem the mortgage at any time as “more worrisome”, the bench said, the general public who participate in such auctions are often neither aware nor informed by the secured creditors conducting the auctions that as long as the sale certificate is not issued, they will not have a right in the said asset and that the borrower whose asset is being auctioned could sweep-in and redeem the mortgage any time.

“Thus, it is necessary to interpret the amended Section 13(8) of the SARFAESI Act in such a manner where a legal sanctity is attached to an auction process and a bright line is drawn where a mischievous borrower is told ‘no more and no further’ and precluded from hastily exercising its right of redemption from nowhere at the very end of the process and thereby set the entire auction process at naught,” the bench said.

The top court set aside the Bombay High Court verdict, saying it was not justified in exercising its writ jurisdiction, particularly when the borrowers had already availed the alternative remedy available to them under the SARFAESI Act.

It directed the Union Bank of India to refund Rs 129 crore, the entire amount deposited by the borrowers for redemption of mortgage of the secured asset, at the earliest.

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