NEW DELHI: On Monday, the Supreme Court ruled that borrowers cannot reclaim property post-publication of an auction notice, as purchasers gain indefeasible rights once a sale certificate is granted by creditor banks and financial institutions under the SARFAESI Act.
A bench comprised of Justices J B Pardiwala and R Mahadevan expressed concern about ambiguities in Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), which was enacted in 2002 for the protection of banks and financial institutions, noting that these ambiguities have led to prolonged litigations.
The Court clarified that the 2016 amendment to Section 13(8) of the SARFAESI Act, which terminates a borrower’s redemption rights upon publication of an auction notice, applies retroactively to loans obtained prior to the amendment if the default occurred after September 1, 2016.
In the 140-page judgment, Justice Pardiwala urged the Ministry of Finance to review these provisions and implement necessary changes before it becomes too late.
The bench lamented that after nearly twenty-three years of the SARFAESI Act’s existence, procedural issues, such as those at hand, remain unresolved.
The bench identified a “glaring anomaly” concerning Section 13(8) of the SARFAESI Act and Rules 8 and 9 of the SARFAESI Rules, stating the conflicts have created significant complications for secured creditors and auction purchasers.
The Court directed that a copy of its verdict be sent to all high courts, as well as the principal secretaries of the Ministry of Finance and the Ministry of Law & Justice.
Addressing the amended provision, the bench emphasized that it “extinguishes” a borrower’s right to redeem the asset if they fail to repay their dues before the auction notice is published.
The bench noted the SARFAESI Rules do not stipulate any unique notice of sale required from the secured creditor for the transfer of the secured asset through lease, assignment, or sale.
The SARFAESI Act aims to expedite recovery procedures for large debts tied to non-performing assets (NPAs).
The judgment emphasizes that the Act’s purpose is to address existing loans and that interpreting it to apply only to future debts would undermine its foundational objectives of reducing NPAs.
The Court rejected the argument that borrowers’ redemption rights should align with the loan’s acquisition date, deeming it completely misguided.
It also clarified that any third-party rights established over the secured asset would be rendered invalid under this ruling.
By reaffirming the rights of auction purchasers under the SARFAESI Act, the Court allowed the appeals from M. Rajendran & Ors., overturning a previous Madras High Court decision that had nullified the auction of a mortgaged property belonging to M/s KPK Oils and Proteins India Pvt. Ltd.
The Supreme Court underscored that the High Court misstepped by intervening against the Debt Recovery Tribunal’s conclusions and reinforced that borrowers’ rights to redeem a mortgaged property cease upon the issuance of an auction notice under Section 13(8) of the SARFAESI Act.
