The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for the sake of brevity, called the SARFAESI Act, is a statute providing Banks and Financial institutions the authority to recover from their Non-Performing Assets (NPAs) by enforcing the security interest which they hold in the assets of their secured borrowers .
The statute U/s.13(8) of SARFAESI Act clearly specifies the borrower's right to redeem their property, both before the amendment date and after the amendment date i.e.01.09.2016.
Section 13(8) of SARFAESI Act Prior to Amendment:
If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.
Section 13(8) of SARFAESI Act Post Amendment:
Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor 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,- (i) the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and (ii) in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.
Therefore the primary necessity cast on the Borrower as per Section 13(8) of SARFAESI Act is that the Borrower is bound to pay all the dues of the secured creditor together with all costs, charges and expenses incurred by him depending upon the nature of application of Section 13(8) of SARFAESI Act either before amendment or after amendment.
The Law laid down in Shakeena Vs Bank of India: (2021) 12 SCC imposes a stringent condition that the dues to the secured creditor together with all costs, charges and expenses incurred by him shall be tendered to the Secured Creditor in order to Invoke the Right of Redemption. The Hon’ble Apex Court In Shakeena Vs Bank of India, while primarily dealing with the unamended provision of Section 13(8) of the SARFAESI Act, also made certain pertinent observations in respect of the amended provision of Section 13(8), which are being reproduced hereunder: -
"15 : ……. it noted that on 01.09.2016 amendment to Section 13(8) of the 2002 Act came into force as a result of which the dues of the secured creditor together with all costs, charges and expenses incurred by him are required to be tendered to the secured creditor 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”…...
“30 A fortiorari, it must follow that the appellants have failed to exercise their right of redemption in the manner known to law, much less until the registration of the sale certificate on 18.09.2007. In that view of the matter no relief can be granted to the appellants, assuming that the appellants are right in contending that as per the applicable provision at the relevant time [unamended Section 13(8) of the 2002 Act], they could have exercised their right of redemption until the registration of the sale certificate - which, indisputably, has already happened on 18.09.2007. Therefore, it is not possible to countenance the plea of the appellants to reopen the entire auction process. This is more so because, the narrative of the appellants that they had made a valid tender towards the subject loan accounts before registration of the sale certificate, has been found to be tenuous. Thus understood, their right of redemption in any case stood obliterated on 18.09.2007. Further, the amended Section 13(8) of the 2002 Act which has come into force w.e.f 01.09.2016, will now stare at the face of the appellants. As per the amended provision, stringent condition has been stipulated that the tender of dues to the secured creditor together with all costs, charges and expenses incurred by him shall be at any time before the "date of publication of notice" for public auction or inviting quotations or tender from public or private deed for transfer by way of lease assessment or sale of the secured assets. ..."
The Law laid down in Cellar LLP Vs Bafna Motors) Pvt Ltd & Others (2024) 2 SCC 1 in Para: 77.5 states : “ That the secured creditor, borrower as well as the auction purchaser under the SARFAESI Act are equally bound by the provisions of the enactment including Section 13(8). The secured creditor cannot act dehors the Section 13(8). An interpretation that declares secured creditor not bound by Section 13(8) makes it a bull in the China house and it leaves the entire process at the whims and fancies of the secured creditor. The auction purchaser is the most important actor of the enactment and it is on him the success of the enactment resides. Thus, any interpretation which discourages the auction purchaser to participate has a direct bearing on the implementation of the enactment and recovery of public dues and the same has to be avoided. The only caveat being that after the success of the auction bid the auction purchaser is required to comply with all the rules.”
Borrower is precluded from exercising the right of redemption else the SARFAESI Act would be rendered meaningless and Otiose:
The Supreme Court in Cellar LLP Vs Bafna Motors) Pvt Ltd & Others (2024) 2 SCC 1 in Para 87 observes “ 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. If permitted to do so then all auctions under the SARFAESI Act would be meaningless and simply rendered otiose and the very object of Section 13 and the overall scheme of the SARFAESI Act of enabling the banks from recovering its dues in a timely manner without intervention of the courts would be simply defeated ” .
Sanctity of Public Auction:
The Apex Court in Valji Khimji & Co Vs Hindustan Nitro Product Gujarat Ltd (Official Liqudator) (2008) 9 SCC 299 held that once an auction is confirmed the same can be interfered on very limited grounds as otherwise no auction would ever be complete, with the following relevant observations, being reproduced hereunder:
"11. It may be noted that the auction-sale was done after adequate publicity in well-known newspapers. Hence, if any one wanted to make a bid in the auction he should have participated in the said auction and made his bid. Moreover, even after the auction the sale was confirmed by the High Court only on 30.07.2003, and any objection to the sale could have been filed prior to that date. However, in our opinion, entertaining objections after the sale is confirmed should not ordinarily be allowed, except on very limited grounds like fraud, otherwise no auction-sale will ever be complete”
The Supreme Court in K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple & Ors. in (2022) 5 SCC 710, held that repeated interferences with public auction would frustrate the sanctity and purpose of holding auctions. The relevant observations made in it are given below: -
"14. Once the appellant was found to be the highest bidder in a public auction in which 45 persons had participated and thereafter when the sale was confirmed in his favour and even the sale deed was executed, unless and until it was found that there was any material irregularity and/or illegality in holding the public auction and/or auction-sale was vitiated by any fraud or collusion, it is not open to set aside the auction or sale in favour of a highest bidder on the basis of some representations made by third parties, who did not even participate in the auction proceedings and did not make any offer.
“16. It is also required to be noted that the sale was confirmed in favour of the appellant by the Commissioner, Endowments Department after obtaining the report of the Assistant Commissioner. Therefore, we are of the opinion that in the aforesaid facts and circumstances of the case, the High Court ought not to have ordered re-auction of the land in question after a period of 23 years of confirmation of the sale and execution of the sale deed in favour of the auction-purchaser by observing that the value of the property might have been much more, otherwise, the object and purpose of holding the public auction and the sanctity of the public auction will be frustrated. Unless there is concrete material and it is established that there was any fraud and/or collusion or the land in question was sold at a throwaway price, the sale pursuant to the public auction cannot be set aside at the instance of strangers to the auction proceeding
“17. The sale pursuant to the public auction can be set aside in an eventuality where it is found on the basis of material on record that the property had been sold away at a throwaway price and / or on a wholly inadequate consideration because of the fraud and/or collusion and/or after any material irregularity and / or illegality is found in conducing/holding the public auction. After the public auction is held and the highest bid is received and the property is sold in a public auction in favour of a highest bidder, such a sale cannot be set aside on the basis of some offer made by third parties subsequently and that too when they did not participate in the auction proceedings and made any offer and/or the offer is made only for the sake of making it and without any serious intent. In the present case, as observed hereinabove, though Shri Jagat Kumar immediately after finalising the auction stated that he is ready and willing to pay a higher price, however, subsequently, he backed out. If the auction-sale pursuant to the public auction is set aside on the basis of such frivolous and irresponsible representations made by such persons then the sanctity of a public auction would be frustrated and the rights of a genuine bidder would be adversely affected."
The Supreme Court in Eva Agro Feeds Private Limited v. Punjab National Bank & Anr. reported in (2023) 10 SCC 189 , held as follows: -
"79. ... mere expectation of the Liquidator that a still higher price may be obtained can be no good ground to cancel an otherwise valid auction and go for another round of auction. Such a cause of action would not only lead to incurring of avoidable expenses but also erode credibility of the auction process itself. That apart, post auction it is not open to the Liquidator to act on third party communication and cancel an auction, unless it is found that fraud or collusion had vitiated the auction. The necessary corollary that follows therefrom is that there can be no absolute or unfettered discretion on the part of the Liquidator to cancel an auction which is otherwise valid. As it is in an administrative framework governed by the rule of law there can be no absolute or unfettered discretion of the Liquidator. Further, upon a thorough analysis of all the provisions concerning the Liquidator it is evident that the Liquidator is vested with a host of duties, functions and powers to oversee the liquidation process in which he is not to act in any adversarial manner while ensuring that the auction process is carried out in accordance with law and to the benefit of all the stakeholders. Merely because the Liquidator has the discretion of carrying out multiple auction it does not necessarily imply that he would abandon or cancel a valid auction fetching a reasonable price and opt for another round of auction process with the expectation of a better price. Tribunal had rightly held that there were no objective materials before the Liquidator to cancel the auction process and to opt for another round of auction."
The Supreme Court in Cellar LLP Vs Bafna Motors) Pvt Ltd & Others (2024) 2 SCC 1 in Para 91 observes : “ Thus, what is discernible from above is that, 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 “.
Para: 92:. Any other interpretation of the amended Section 13(8) will lead to a situation where multiple redemption offers would be encouraged by a mischievous borrower, the members of the public would be dissuaded and discouraged from in participating in the auction process and the overall sanctity of the auction process would be frustrated thereby defeating the very purpose of the SARFAESI Act. Thus, it is in the larger public interest to maintain the sanctity of the auction process under the SARFAESI Act “.
Para: 93: In view of the aforesaid discussion, 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 “.
Para 105: Bank is duty bound to follow the provisions of the law as any other litigant. It is to be noted that the Bank i.e., the secured creditor acts under the SARFAESI Act through the authorised officer who is appointed under Section 13(2). Thus, the authorised officer and the Bank cannot act in a manner so as to keep the sword hanging on the neck of the auction purchaser. The law treats everyone equally and that includes the Bank and its officers. The said enactments were enacted for speedy recovery and for benefitting the public at large and does not give any license to the Bank officers to act de hors the scheme of the law or the binding verdicts “.
There can be no justification to set aside the Auction Purchase on account of Escalation of prices. The Supreme Court in Sadashiv Prasad Singh Vs Harender Singh, (2015) 5 SCC 574 observed :
22. “Since it was nobody's case that Sadashiv Prasad Sinha, the highest bidder at the auction conducted on 28-8-2008, had purchased the property in question at a price lesser than the then prevailing market price, there was no justification whatsoever to set aside the auction purchase made by him on account of escalation of prices thereafter. The High Court in ignoring the vested right of the appellant in the property in question, after his auction bid was accepted and confirmed, subjected him to grave injustice by depriving him to property which he had genuinely and legitimately purchased at a public auction. In our considered view, not only did the Division Bench of the High Court in the matter ignore the sound, legal and clear principles laid down by this Court in respect of a third-party auction-purchaser, the High Court also clearly overlooked the equitable rights vested in the auction-purchaser during the pendency of a lis. The High Court also clearly overlooked the equitable rights vested in the auction-purchaser while disposing of the matter."
The Apex Court in Cellar LLP Vs Bafna Motors) Pvt Ltd & Others (2024) 2 SCC 1 observed as follows:
Para 110.2: “The confirmation of sale by the Bank under Rule 9(2) of the Rules of 2002 invests the successful auction purchaser with a vested right to obtain a certificate of sale of the immovable property in form given in appendix (V) to the Rules i.e., in accordance with Rule 9(6) of the Security Interest (Enforcement) Rules 2002 “.
Para :110.3: In accordance with 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. In other words, the borrower's right of redemption did not stand terminated 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 thereunder 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.
Conclusion
The Supreme Court's observations on the SARFAESI Act underscores a strong emphasis on safeguarding the auction process and ensuring the effectiveness of the statutory framework designed for asset recovery by financial institutions. The recent interpretations on Section 13(8)SARFAESI reflects a clear intention to maintain the integrity and efficiency of public auctions conducted under this Act.
Key takeaways from the judicial rulings include:
Finality of Redemption Rights: The amendment to Section 13(8) SARFAESI that came into effect on September 1, 2016, significantly tightens the conditions under which a borrower can exercise the right of redemption. The Supreme Court has affirmed that the right of redemption must be exercised before the publication of the auction notice. This strict interpretation aims to prevent disruptions to the auction process and ensures that the borrower cannot delay or obstruct the proceedings by making last-minute redemption offers.
Sanctity of the Auction Process: The apex court has consistently emphasized that once an auction is confirmed, it should be interfered with only under exceptional circumstances, such as fraud or material irregularity. The courts are expected to protect the sanctity of the auction process, recognizing that repeated interferences or attempts to annul valid sales would undermine public confidence and the effectiveness of the SARFAESI Act.
Role of Auction Purchasers: Auction purchasers are crucial to the success of the SARFAESI Act’s recovery mechanism. The Supreme Court has highlighted that auction purchasers acquire vested rights upon confirmation of the sale and that these rights must be protected to encourage participation and investment in the auction process. The Court has underscored that any subsequent escalation in property prices does not justify setting aside a confirmed auction purchase, reinforcing the principle that the auction process must be respected and upheld.
Duty of Secured Creditors: Secured creditors are bound by the provisions of the SARFAESI Act and must act within the statutory framework. The Supreme Court has clarified that the secured creditor, including its officers, must adhere to the legal requirements and cannot arbitrarily alter or disrupt the auction process. The act of the creditor must align with the law to ensure fairness and transparency.
In summary, the judicial rulings serve as a strong reminder of the SARFAESI Act's purpose to facilitate efficient recovery of dues while respecting the legal rights of all parties involved. By reinforcing the need for timely redemption, protecting the auction process, and upholding the vested rights of auction purchasers, the Supreme Court's decisions aim to ensure that the SARFAESI Act remains a robust tool for asset recovery and financial discipline.