Recently, vide judgment dated 23 December 2021, the Punjab and Haryana High Court (High Court) in the case of M/s Pal Alloys & Metal India Private Limited and others v. Allahabad Bank and others1 , has held that section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) (as amended by ‘Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016’ (Amendment Act), with effect from 1 September 2016), merely restricts the secured creditor from effecting any further transfer or assignment of the secured asset, and does not extinguish the mortgagor’s right of redemption even upon the acceptance of the highest bid by an auction purchaser, which right would continue till issuance of sale certificate in favour of the purchaser. 

BACKGROUND

The first petitioner, M/s Pal Alloys & Metal India Private Limited (Borrower) had availed loans from the first respondent, Allahabad Bank (Bank). The repayment of the loan was secured by a mortgage in favor of the Bank over a residential property (Secured Asset). The second and third petitioners were guarantors to the loan. Due to default in repayment of the loan, the Bank initiated action for enforcement of security interest under the SARFAESI Act. 

As the Bank was facing difficulty in taking physical possession of the Secured Asset despite an order under section 14 of the SARFAESI Act, the Bank filed a writ petition before the High Court2 seeking directions against the Borrower to hand over physical possession. In these proceedings, the Borrower undertook to make payment of the outstanding loan amount in tranches. However, the Bank issued a sale notice dated 22 February 2019 for an auction sale of the Secured Asset, fixing 28 March 2019 as the date of the auction. At a hearing before the High Court on 25 February 2019 two demand drafts of INR 25 lakhs were handed over to the counsel appearing for the Bank and the petitioners undertook to deposit the balance amount of INR 70 lakhs by 15 March 2019. Although the petitioners attempted to pay the balance amount to the Bank belatedly on 15 April 2019, it was not accepted by the Bank. 

Thereafter, the petitionersfiled the present writ petition challenging the sale notice dated 22 February 2019. On 29 March 2019, the petitioners deposited INR 1.75 crores in a no-lien account for repayment of the outstanding amount and duly informed the Bank. However, on 28 March 2019 the auction was held and the second and third respondents emerged as the highest bidders for a bid of INR 3.12 crores. Pursuant to the deposit of 25% of the bid amount by the second and third respondents, the Bank issued a letter dated 29 March 2019 confirming that the second and third respondents had been declared as the highest bidder (Successful Bidders) and directed them to pay the balance amount. It was also mentioned in the said letter that the sale is subject to the outcome of the present writ petition wherein the auction of the Secured Asset has been challenged.

SUBMISSIONS BEFORE THE HIGH COURT 

  •  Submissions of petitioners (mortgagors): 
    • The petitioners had already deposited INR 1.7 crores in a no lien account on 29 March 2019 despite which the Bank is intending to sell the Secured Asset which will cause irreparable loss and injury to the petitioners.
    • The right of redemption for the purposes of section 13(8) of the SARFAESI Act had already been exercised by the petitioners as several part payments had already been made and the petitioners had undertaken to make payment of the balance amount. 
  • Submissions of Bank (mortgagee): 
    • Pursuant to the amendment to section 13(8) of the SARFAESI Act, the right of redemption is available only before issuance of sale notice and not thereafter. 
    • The sale of the Secured Asset in favour of the Successful Bidders stood confirmed on 29 March 2019 when they were declared as the highest bidders, and therefore the writ petition has become infructuous.
    • A one-time settlement proposal made by the Borrower had previously been accepted in terms of which the Borrower failed to make payment.
  • Submissions of Successful Bidders (auction purchasers): 
    • Second and third respondents have emerged as the highest bidders and auction purchasers.
    • Entire bid amount has been deposited on 1 June 2019, but sale certificate has not been issued and possession has not been handed over. 

FINDINGS AND OBSERVATIONS (JUDGMENT) 

  • General law on right of a mortgagor to redeem a mortgage:

As per section 60 of the Transfer of Property Act, 1882 (TOPA), the mortgagor has the right to redeem the mortgage at any time after the principal amount becomes due, by making payment of the outstanding debt provided that the right has not have been extinguished by the act of parties or by decree of court.

  •  Right to redeem mortgage will survive till conveyance of property

The High Court relied upon, the decision of the Supreme Court in the case of Narandas Karsondas v. S.A. Kamtam3 (Narandas) wherein it was held that the mere existence of a contract for sale does not extinguish the mortgagor’s right of equity redemption, which right is extinguished only upon conveyance of the property by a registered deed. 

The High Court also relied on the decision of the Supreme Court in Gajraj Jain v. State of Bihar (Gajraj Jain), 4 where although the down payment was made by the auction purchaser in an auction sale under the State Financial Corporation Act, the Supreme Court still held that the mortgagor had the right of redemption since conveyance was not executed, and there is no deviation from the general principle on redemption of mortgage even in cases of special statutes. 

With respect to the rights of an auction purchaser, the High Court relied on the decision of the Supreme Court in M/s L.K. Trust vs. EDC Ltd., and others (2011) 6 SCC 780 wherein it was held that a mortgagor cannot be said to have lost the right of redemption merely because the property was put to auction, as there is no equity or right in the property created merely by becoming an auction purchaser. 

  • Section 13(8) of the SARFAESI Act does not curtail the mortgagor’s right of redemption

In interpreting the scope of section 13(8) of the SARFAESI Act, the High Court relied on the Report of the Joint Committee on Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016’ (Report), and observed that the intent and purpose, was only to restrict the secured creditor from selling/transferring the secured asset in the event the right of redemption is exercised by the mortgagor. 

The High Court also confirmed and approved the interpretation of section 13(8) of the SARFAESI Act in the judgment of the Telangana and Andhra Pradesh High Court in M/s Concern Readymix v. Authorised Officer, Corporation Bank and others5 , which relied on the decision of the Supreme Court in Mathew Varghese v. M. Amritha Kumar and others6 to hold that the mortgagor’s right of redemption is not lost immediately upon acceptance of highest bid made by any purchaser. 

Based on the reasoning stated above, the High Court held that:  

  •  Section 13(8) of the SARFAESI Act, as amended is only prohibition on the secured creditor from further transferring the asset; 
  • Section 13(8) of the SARFAESI Act, as amended is only a prohibition on the secured creditor from further transferring the secured asset when the right to redeem mortgage has already been exercised; 
  • There is no restriction on the equity right to redeem the mortgage available to the mortgagor; 
  • Right of redemption is not lost merely because an auction bid has been accepted; and 
  • The mortgagor can exercise the right to redeem the mortgage until conveyance of the property by issuance of sale certificate. 

CONCLUSION  

It is important to note that in the instant case the petitioners at various occasions had offered to repay the entire debt to the Bank, and the Bank issued the Sale Notice without considering and accepting/ rejecting the offer of the petitioners. On account of the petitioners’ challenge to the validity of the Sale Notice, the Bank confirmed the second and third respondents as the highest bidders subject to the outcome of the writ petition before the High Court. Owing to interim orders of the High Court, the sale certificate could not be issued. 

The High Court further observed that had the Bank responded to petitioners’ offer and the petitioners adhered to the timelines, no third-party interest by confirmation of highest bidder would have been created in favour of the Successful Bidders. In the event the petitioners did not make payment as per their offer,the High Court noted that then the Bank could have then accepted the bid of the Successful Bidders and the High Court would not have shown indulgence to the mortgagor petitioners. 

However, as the sale confirmation in favour of the auction purchasers was subject to the outcome of the writ petition, the High Court held that the auction purchaser could not claim prejudice. The Bank was directed to refund the bid amount with interest.