Borrower cannot redeem mortgaged property after auction notice: SC

Under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), a borrower can redeem his mortgaged property only till the publication of an auction notice by the creditor bank. On the date the bank publishes an auction notice to sell the property in the open market to recover loses, the borrower loses the right to redeem the property, the Supreme Court (SC) has ruled.

If defaulting borrowers were allowed to redeem even after this period, it would lead to “a very chilling effect”, the top court said, adding that “no auction conducted under the SARFAESI Act would have any form of sanctity.

“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,” a Bench of Chief Justice DY Chandrachud and Justice JB Pardiwala said.

The SC emphasised that it was the duty of the courts to zealously protect the sanctity of any auction. “The courts ought to be loath to interfere with auctions, otherwise it would frustrate the very object and purpose behind auctions and deter public confidence and participation in the same,” it added.

To offer financial institutions a cushion in case of defaults, the government in 2002 introduced the SARFAESI Act. The law enables banks to gain control of mortgaged properties in case the borrower defaults on repayments. This law provides banks with a mechanism to reduce their non-performing assets.

Under the unamended Section 13(8) of the SARFAESI Act, the right of the borrower to redeem the secured asset was available till the sale or transfer of such secured asset. It means that the borrower’s right of redemption did not end on the date of the auction sale of the secured asset itself and remained alive till the transfer was completed in favour of the auction purchaser by registration of the sale certificate and delivery of possession of the secured asset.

“However, the amended provisions of Section 13(8) of the SARFAESI Act, make it clear that the right of the borrower to redeem the secured asset stands extinguished on the very date of publication of the notice for public auction under Rule 9(1) of the Rules of 2002. In effect, the right of redemption available to the borrower under the present statutory regime is drastically curtailed and would be available only till the date of publication of the notice under Rule 9(1) of the Rules of 2002, and not till the completion of the sale or transfer of the secured asset in favour of the auction purchaser,” the apex court said while pronouncing its order in the Celir LLP vs Bafna Motors Mumbai and ors case.

The petition in the apex court was moved against a Bombay High Court order that allowed the borrowers to redeem a property even though the auction proceedings had been completed.