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Achieving Harmony in Mortgage Redemption: SARFAESI vs. Transfer of Property Act

The author is Divya Upadhyay, a third year student at National University of Advanced Legal Studies, Kochi.


In the recent case of Celir LLP vs Bafna Motors (Mumbai) Pvt. Ltd.& Ors, the Supreme Court ruled that, in accordance with the SARFAESI Act’s amendment, the borrower’s right to redeem the mortgage is forfeited on the day the auction notice is published if he does not give the secured creditor the full amount of his outstanding debts before that date.

The case at hand revolves around a borrower who initially secured a credit facility of Rs. 100 crores from a bank by pledging their property as collateral. As the borrowers found themselves unable to repay the loan, the bank invoked the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), triggering a series of auctions in pursuit of debt recovery. In a subsequent auction, a third party – the auctioneer emerged as the highest bidder, offering Rs. 105.05 crore. Subsequently, the borrowers filed a writ petition before the Bombay High Court, proposing to pay Rs. 129 crores to redeem the mortgage, to which the bank consented. The High Court granted the borrowers this opportunity, stipulating that they must pay Rs. 25 crores immediately and the remaining Rs. 104 crores by August 31, 2023. Upon successfully meeting this financial obligation, the borrowers received a No Dues Certificate, signalling the end of their debt-related obligations. Moreover, they entered into an agreement to transfer leasehold rights to a third party. This, however, prompted an appeal from the auctioneer against the High Court’s decision, leading to the Supreme Court’s ruling in Celir LLP vs Bafna Motors (Mumbai) Pvt. Ltd.& Ors.

The objective of this article encompasses an analysis of the Supreme Court's decision in Celir LLP vs Bafna Motors, highlighting perceived errors, and proposing a harmonious framework for interpreting the SARFAESI Act and the Transfer of Property Act (“TPA”) to safeguard borrower redemption rights in mortgage cases.

Bombay High Court: Upholding the Equity of Redemption

The Bombay High Court in Bafna Motors (Mumbai) (P) Ltd. v. Union Bank of India, allowed the borrowers to redeem their mortgage on the successful payment of their dues to the respondent bank. The court’s argument hinges primarily on the principle that an auction purchaser does not have the legal standing to impede the redemption process, particularly when both the borrowers and the respondent bank have reached an agreement for redemption. The court highlights the crucial aspect that an auction purchaser does not possess a concrete legal right until a registered sale certificate is issued in their favour.

This is pursuant to the 2014 Supreme Court judgement in Mathew Varghese v. M. Amritha Kumar. In this case, the Supreme Court upheld the significance of the equity of redemption and ruled that a mere contract for sale does not extinguish this right. This principle applies both to traditional mortgage scenarios under Section 60 of the TPA and to the sale of secured assets under the SARFAESI Act. The court argues that the SARFAESI Act and its rules provide a degree of autonomy to secured creditors in selling assets without court intervention. However, it emphasizes that the borrower still holds the right to redeem the property by settling all dues before the sale’s scheduled date.

In a significant clarification, the court maintains that the right of redemption is not extinguished, even if a notice of sale is issued as per Section 13(8) of the SARFAESI Act. Section 13(8) reads as follows:

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.

While acknowledging that the legal landscape has evolved, the court interprets the amended Section 13(8) as not preventing a secured creditor from allowing the borrower to redeem the mortgage after the notice’s publication.

Supreme Court: The Dominance of SARFAESI Act

The court’s ruling is centred on the interpretation of the SARFAESI Act and its impact on the right of redemption of mortgage under the TPA.

The court begins by addressing the failure of the borrower to pay the entire dues, including charges, interest, and costs, before the publication of the auction notice, as mandated by Section 13(8) of the SARFAESI Act. It argues that this failure can be seen as the extinguishment of the right of redemption of the mortgage under Section 60 of the TPA. The court relies on the principle that when a borrower fails to fulfil the payment obligations under the SARFAESI Act before the auction, their right of redemption is effectively relinquished.

The court emphasizes the SARFAESI Act’s unique status as a special law designed for expeditious recovery of debts by banks and financial institutions without court intervention. It highlights that the amended Section 13(8) of the SARFAESI Act expressly restricts the right of redemption until the publication of the auction notice, distinguishing it from the TPA, where the right of redemption continues until the execution of a conveyance of the mortgaged property. This distinction signifies that the SARFAESI Act overrides the TPA, with respect to the right of redemption.

The court also referred to Mathew Varghese v. M. Amritha Kumar, which had interpreted the unamended Section 13(8) of the SARFAESI Act and Section 60 of the TPA. It notes that the 2016 Amendment to the SARFAESI Act has fundamentally altered the substratum of the previous verdict. In the Mathew Varghese case, the court had harmonized the SARFAESI Act and the TPA, suggesting that both could be applicable. The court argues that the amended Section 13(8) of the SARFAESI Act, which includes the phrase “before the date of publication notice for public auction or inviting quotations or tender from public or private treaty,” creates an inconsistency between the two laws. In light of this inconsistency, the SARFAESI Act, being a special enactment, prevails over the general Act, TPA, in accordance with Section 35 of the SARFAESI Act.

However, the Supreme Court omits the analysis of the Report of the Joint Committee on Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 which has observed that the intent and purpose of SARFAESI, was only to restrict the secured creditor from selling or transferring the secured asset in the event the right of redemption is exercised by the mortgagor.

Harmonious Construction: Achieving Equitable Outcomes in Mortgage Redemption and Debt Recovery

The Supreme Court’s judgment, while interpreting the SARFAESI Act and the TPA, did not provide a truly harmonious construction of these two statutes. Instead, the Court’s approach leaned towards a narrow interpretation that favoured the SARFAESI Act and undermined the balanced application of both statutes, especially in cases involving mortgage redemption and debt recovery. A construction cannot be deemed harmonious if it completely rejects the applicability of a provision or piece of legislation. To construct a harmonious interpretation, we can draw from the arguments presented in both judgments.

A harmonious construction would begin by emphasizing the preservation of the equity of redemption as a fundamental principle of mortgage law. Both the SARFAESI Act and the TPA should be interpreted to ensure that the right of the mortgagor to redeem the property remains intact until there is a registered sale certificate or conveyance. This approach aligns with the essence of the SARFAESI Act, which aims to recover debts efficiently while still allowing borrowers the opportunity to redeem their properties under the safeguards of the TPA.

It’s essential to recognize the SARFAESI Act’s unique status as a special law designed for expeditious debt recovery. However, this acknowledgment should not result in the exclusion of the TPA’s provisions regarding redemption. Instead, a harmonious construction would prioritize the SARFAESI Act for governing the pre-auction phase of debt recovery, such as the issuance of auction notices and initial procedures. The TPA would then come into play in the post-auction and post-sale phases, preserving the borrower’s redemption rights after the auction.

One of the points of contention is the SARFAESI Act’s Section 13(8), which the Supreme Court’s judgment argued effectively extinguishes the right of redemption before the publication of auction notices. A harmonious interpretation would consider the SARFAESI’s non obstante clause, which allows both acts to coexist. The non obstante clause in Section 13 exclusively excludes Sections 69 and 69A of the TPA. As a result, it is reasonable to construe the legislative intent as solely excluding Sections 69 and 69A of the TPA, without impinging upon the applicability of Section 60 of the same TPA. In this view, the mortgagor’s right of redemption could persist until a sale certificate or conveyance is executed. The publication of auction notices under the SARFAESI Act would be seen as a procedural step rather than an absolute extinguishment of the redemption right.

A harmonious construction aims to strike a balance between these interests, ensuring that borrowers retain the opportunity to redeem the property until a sale certificate is issued, all while respecting the principles of the TPA. This approach recognizes that the SARFAESI Act facilitates swift debt recovery but should not unduly curtail the borrower’s right of redemption. It seeks to harmonize the coexistence of these statutes to achieve fair and just outcomes in mortgage redemption and debt recovery cases.

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