The Supreme Court has held that a borrower cannot redeem the mortgaged property put for public auction by the bank by only paying the reserve price for the auction or even the highest bid amount. Under Section 13(8) of the the Securitisation and Reconstruction of of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), the transfer of the mortgaged property in public auction can be stalled only when the entire dues along with all cost, charges and expenses are paid to the Bank before the date fixed for such transfer, the Court held.
“Even by paying the highest bid amount the borrower cannot be discharged of its liability of the outstanding due to be paid to the bank. Even if the mortgaged property was sold off to a third party at a price lower than the outstanding dues, the remaining amount had to be paid by the borrower”, the Court observed. “Unless the borrower was ready to deposit the entire outstanding amount along with costs and expenses, the DRT could not have stalled the auction by directing it to pay only the reserve price”, the Court observed.
The Apex Court noted that the handover of possession and original title deed of the mortgaged property cannot be obtained by the borrower from the bank, until and unless the entire liability outstanding against them is discharged by the borrower. A Bench comprising Justices M.R. Shah and Sanjiv Khanna allowed an appeal filed by the Bank of Baroda assailing the order of the Division Bench of the Rajasthan, High Court, which had directed the bank to release the mortgaged property and to hand over possession and original title deeds to a borrower on payment of partial dues.
Factual Background
Bank of Baroda granted a term loan of Rs 100 lakhs and cash credit limit of Rs. 95 lakhs to M/s. Karwa Trading Company (“borrower”) against two properties – an industrial plot and a residential property. The borrower failed to repay and on 31.10.2012, its account became NPA.
Thereafter, the borrower was served with a notice under Section 13(2) of the SARFAESI Act for a sum of Rs. 1,85,37,218.80. Constructive possession of the moveable property was taken and the bank issued a notice under Section 13(4) of the SARFAESI Act.
Eventually, on 25.11.2013, the bank took possession of the residential property mortgaged with it. A sale notice was issued on 16.12.2013 for public auction of the property and the reserve price was fixed at Rs. 48.65 lakhs. The auction was challenged by the borrower under Section 17 of the SARFAESI Act before DRT, Jaipur, which passed an interim order directing the borrower to deposit Rs. 20 lakhs by the day of auction and balance payment of Rs. 28.65 lakhs by 27.01.2014. If such a deposit is made, the bank was directed to deliver possession to the borrower. The borrower made the payment as directed. The interim order was challenged by the bank before the DRAT. It argued that if the borrower was interested he could redeem the property by paying the due of Rs. 2 crores or atleast pay Rs 71 lakhs, which is the highest bid in the public auction. The DRAT dismissed the appeal, which was challenged before the Single Judge of Rajasthan High Court.
It set aside the orders of DRT as well as DRAT holding them to be be contrary to Section 13(8) of the SARFAESI Act. The borrower was successful in the appeal before the Division Bench and the bank was directed to release the residential property and handover title deeds upon the borrower depositing Rs. 17 lakhs.
Analysis by the Supreme Court
The Court noted that the borrower had not deposited the entire amount of the dues which it was supposed to under Section 13(8) in order to prevent the bank from transferring the mortgaged property. It was observed that the Division Bench was aware that the borrower had offered Rs. 71 lakhs as a purchaser and not for redeeming the property. Therefore, the order passed by the Division Bench was in contravention of Section 13(8) of the SARFAESI Act. The Court was of the view that by paying Rs. 71 lakhs the borrower could not have been discharged of its liability which was at least Rs. 1,85,37,218.80. Even if the bank auctioned the property to a third party for Rs.71 lakhs, the borrower was duty bound to pay off the outstanding dues. It was also noted that the DRT could not have directed the borrower to make partial payment and take possession when Section 13(8) clearly required the dues to be paid in full in order to stall the transfer of concerned property in the auction process.
Now, while the DRT hears the application challenging the auction, the Court kept it open for the bank to proceed with the auction proceedings. It further observed that the concerned property being residential property if the borrower is already in possession, it shall not be disturbed till the auction is finalised. However, upon finalisation of the auction the borrower is to hand over the peaceful and vacant possession. It directed that in the meanwhile, the borrower shall not transfer possession or title of the concerned property and the title deed of the property is to be by the bank.
Case Name: Bank of Baroda v. M/s. Karwa Trading Company And Anr.
Case No. and Date: Civil Appeal No 363 of 2022 | 10 Feb 2022
Corum: Justices M.R. Shah and Sanjiv Khanna