P&H High Court on SARFAESI Act and the Right of Redemption

[Velpula Audityaa is an Advocate practicing before the Madras High Court and trial courts in Chennai. He can be contacted at [email protected]]

Recently, a division bench of the Punjab & Haryana High Court in Pal Alloys & Metal India Private Limited v. Allahabad Bank (2021 SCC OnLine P&H 2733) had an occasion to consider the effect of the 2016 amendment to section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). The Court discussed the pre and post-amendment position under the said provision, and clarified issues that arose subsequent to the amendment.

Section 13(8) of the SARFAESI Act

Section 13(8) of the SARFAESI Act restricts a secured creditor from disposing of a secured asset by barring the secured creditor from alienating the asset when the borrower exercises its right to redeem it by paying the entire dues to the secured creditor before a certain period. While the unamended section 13(8) provided such a right until any time “before the date of sale or transfer” of the secured asset by the secured creditor, the amended section 13(8) ostensibly curtailed the right only until any time “before the date of publication of auction notice” for the sale of the secured asset. The implications of such an amendment are severe. For instance, as the Supreme Court held in Canara Bank v. Amarender Reddy (2017) 4 SCC 735, it was open for banks to issue simultaneous ‘intention notices’ (notice to borrower of intention to sell property) and ‘auction notices’ (publication of auction in newspaper) to the borrower, whereby the auction notice itself could convey the intention to sell. It is needless to state that this judgment read in light of the amended section 13(8) would virtually render the right of redemption under section 13(8) nugatory, since a bank could simultaneously bring a property to auction and convey its intention – for the first time – to the borrower, of selling the secured asset. The borrower’s right of redemption would have already stood extinguished by virtue of the amended provision. It is, therefore, evident that section 13(8) was ripe for judicial consideration in all these aspects.

Facts of Pal Alloys v. Allahabad Bank

The borrower, Pal Alloys & Metal India Private Limited, was before the Punjab & Haryana High Court challenging the auction notice issued by Allahabad Bank. Earlier, a section 13(2) statutory notice was issued and possession of the mortgaged house was also sought to be taken by filing a section 14 petition before the Magistrate. Thereafter, the bank filed proceedings before the High Court to take possession of the premises. In these proceedings, the borrower undertook to pay back the amount, but the bank took possession of the premises despite the same. The borrower also made payments, partly clearing the dues, and undertook to pay the balance within a certain period. In the meanwhile, the bank issued the impugned auction notice bringing the mortgaged house to sale. Despite the part payments, the bank proceeded to conduct the auction and declared respondents 2 and 3, being the auction purchasers, to be the highest bidder. This led to the borrower filing a writ petition to quash the impugned auction notice issued by the bank.

Contentions of the Parties

The borrower contended that it had already exercised its right to redemption under section 13(8) of the SARFAESI Act while making part payments and, therefore, the bank could not sell the property as the borrower was ready to redeem the mortgage. The primary contention of the bank was that the borrower could not redeem the property which had been sold by the bank through a public auction, since the amended section 13(8) provided the said right only until before the issuance of auction notice, and not thereafter, and that only under the unamended section 13(8) did borrowers have right to redeem their property until the date of sale. As a result, the Court proceeded to determine the point as to the time until which the right of redemption of mortgage could be exercised by the mortgagor or borrower in light of the amended section 13(8) of the SARFAESI Act.

Analysis

Position under general law and unamended section 13(8)

The Court analyzed the general law governing the right of a mortgagor to redeem a mortgage, which was traceable to section 60 of the Transfer of Property Act, 1882 (“TP Act”). After discussing the jurisprudence related to it, the Court observed that the ‘equity of redemption’ could not be clogged even by a restrictive stipulation in a mortgage deed, and that the mortgagor’s right to redeem would survive until there has been a completion of sale by the mortgagee by a registered deed. After citing the decision in Gajraj Jain v. State of Bihar, the Court noted that even while dealing with sale of secured assets under special statutes like the State Financial Corporations Act, 1951, there was no deviation from the principle that a mortgagor’s right to redeem existed until the execution of conveyance.

With regards to the right of redemption as provided under the unamended section 13(8), the Court noted that while the plain language of the unamended provision suggested that the right of redemption subsisted only if the full dues were paid by the date fixed for sale, the Supreme Court had expressly negatived the same in the seminal judgment of Mathew Varghese v. M. Amritha Kumar. In Mathew Varghese, the Supreme Court clarified that the principles laid down in relation to section 60 of the TP Act applied to transactions under the SARFAESI Act – a special statute – as well. Thus, the High Court concluded that under the unamended provision, it was a settled position that the right to redeem did not get extinguished even on the date fixed for sale (despite the clear wordings of sec. 13(8)), and only expired once the sale was registered in favour of the auction purchaser.

Amended section 13(8)

The Court examined the Lok Sabha Joint Committee Report which proposed the amendments to the SARFAESI Act, and observed that the amendment to section 13(8) was only with respect to when to stop the secured creditor from selling or transferring the secured asset, and not when to stop the borrower or mortgagor from exercising their right of redemption. The Court further noted that the Report did not indicate that the Committee even considered section 60 of the TP Act which provided the general law pertaining to the right of redemption of a mortgagor vis-à-vis the provisions of the SARFAESI Act, nor did it indicate that it sought to change the time by which a mortgagor would have to exercise their right to redeem the property. The Report did not even include the present wordings of the amended provision in any of its earlier drafts or discussion, but finally recommended the present wordings.

The Court finally held that it was clear that the legislature did not intend to deal with a mortgagor’s right to redeem when they amended section 13(8), and that the amendment did not modify the existing law which continued even when the unamended section 13(8) was in force. The Court also noted that the AP & Telangana (erstwhile) High Court discussed a similar point in M/s. Concern Readymix v. Authorized Officer (2018). The Court further went on to distinguish the Supreme Court decision of Shakeena v. Bank of India (2019) wherein the Court mentioned in passing that the amended section 13(8) prescribed stringent conditions and restricted the right until “before the publication of notice”, and concluded that such an observation was not an expression of opinion that the general law of redemption would not apply to the amended section 13(8). The Court, thus, held that: (a) the amended section 13(8) was merely a prohibition on the secured creditor; (b) payment by the borrower of the amount specified under section 13(8) restricts the secured creditor from exercising any rights under the SARFAESI Act; and (c) extinction of the right of redemption comes much later, and is not lost immediately upon the highest bid made by the purchaser in an auction.

Conclusion

It is pertinent to note that the same Bench of the P&H High Court had a similar, terse discussion on section 13(8) in a slightly earlier decision passed in Hoshiarpur Roller Flour Mill Pvt. Ltd. v. Punjab National Bank, but the present decision has more extensively elaborated on the point at hand. This decision comes as a relief to borrowers since a plain reading of the amended section 13(8) severely curtails the rights of borrowers in terms of redeeming their assets. As noted by the Court in Pal Alloys, the Joint Committee which suggested the amendment to section 13(8) did not provide any rationale as to why the time limit was reduced from any time “before the date of sale or transfer” of the secured asset until any time “before the date of publication of auction notice” for sale of the secured asset, with, in fact, such wordings not forming a part of its earlier drafts or discussion. With the present decision, the provision has come to be reasonably interpreted, but it remains to be seen if the decision is appealed further to interpret the object and plain meaning of the amended section 13(8), especially in light of the Shakeena decision, though the observations in it could be considered to be mere obiter.

Velpula Audityaa

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1 comment

  • Dear Sir.,
    I have seen your article in IndiaCorpLaw related to the P & H High Court on
    SARFAESI Act and redemption. It’s an eye opener to all kinds of people who struggle with Octopus hands of strong men in India, particularly ARC’s.

    Certainly, you would praise any one of the common people surviving by your article.
    God bless you …

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