Source: Supreme Court

Why in News?

The bench of Chief Justice of India DY Chandrachud and Justice JB Pardiwala observed that the right of redemption is clearly restricted till the date of publication of the sale notice under the Section 13(8) of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI).

• The Supreme Court gave this observation in the matter of Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. And Ors.

Background

• The subject matter behind this appeal started when respondent borrowers borrowed 100 crore rupees from a bank.
• They used 65 crore rupees to pay off an existing Lease Rental Discounting Loan (LRD) and kept 35 crore rupees as a guarantee for simple mortgage by using a piece of land.
• But then, bank declared their loan account as Non-Performing Assest as the defaulted in the payment of loan.
• The bank asked them to pay 123.83 crore rupees, which includes the loan amount, interest, and other charges.
  • Since they could not pay, the bank decided to sell the land at an auction.
• After a few tries, the bank finally sold the land for 105 crore rupees, and the appellant bid the most and paid the total bid amount.
• While all of this was happening, the borrowers asked Debt Recovery Tribunal (DRT) for redemption of mortgage by paying 129 crore rupees.
• The borrowers prayed before the Telangana High Court to allow them the redemption of mortgage.
• Both the bank and the HC permitted the redemption subject to the payment of 129 crore rupees.
• However, the appellant, who won the land at the auction, aggrieved from the order of HC presented this appeal before the SC.

Court’s Observations

• The court held that “equity cannot supplant the law. Equity has to follow law, if the law is clear and unambiguous”.
• The SC further said that the High Court under Article 226 of the Constitution of India, 1950 could not have applied equitable considerations to overreach the outcome contemplated by the statutory auction process prescribed under the SARFAESI Act.
• The court also said that Section 13(8) under the SARFAESI Act is different from and overrides Section 60 of the Transfer of Property Act, 1882 which is general law related to the right to redeem.

Section 13 SARFAESI Act

• Purpose:
  • Section 13(8) of the SARFAESI Act empowers banks and financial institutions in India to take possession of a borrower's property, sell or lease it, and recover their dues in case of default.
  • Section 13(8) of the Act is often referred to as the "possession and sale" provision.
  • It outlines the procedure that lenders can follow to take possession of a secured asset and subsequently sell or lease it to recover their outstanding loans.
• Applicability:
  • Under Section 13 (8), if someone owes money to a secured creditor and they pay back the owed amount, along with any extra costs and fees, before the creditor announces they are going to sell the assets through public auction or through private treaties by way of lease, assignment or sale, then two things happen:
    • The creditor cannot sell or transfer the assets to someone else.
    • If the creditor had already started the process to sell or transfer the assets before the debt was paid off, they must stop and cannot continue with the sale or transfer.
  • However, once the process under Section 18 is over, the creditor cannot allow the redemption of that property.

Procedure under Section 13(8)

• Section 13(8) comes into play when a borrower defaults on their loan payments. It allows the lender to initiate the process of recovering the defaulted amount.
• Before taking any action under this section, the lender is required to issue a notice to the borrower.
  • This notice serves as a warning and provides the borrower with an opportunity to rectify the default within 60 days from the date of the notice.
• Under this period, the borrower can pay the defaulted amount and redeem his property.
• If the borrower fails to remedy the default within the stipulated 60-day period, the lender can proceed to take possession of the secured asset.
• Once possession is taken, the lender has the authority to sell or lease the asset to recover the outstanding amount.
  • The sale can be conducted through a public auction or a private treaty, depending on the circumstances and the terms of the loan agreement.
• If a borrower believes that the possession and sale of the asset were not conducted in compliance with the provisions of the Act, they can challenge the same in the DRT or a court of law.