SC: DRT cannot order for release of property merely on deposit of reserve price from borrower

"Bank of Baroda vs. Karwa Trading Company and Anr"
Supreme Court of India
Date: 10 /02/2022

Hon'ble Supreme Court in its judgment dated 10/02/2022 clarified that banks cannot be restrained from selling the mortgaged property by holding public auction and realize the outstanding dues, unless the borrower pays entire amount outstanding along with the cost and expenses of auction.

BRIEF FACTS

1. Civil Appeal no. 363 of 2022, decided on 10 February 2022

Appellant bank granted the borrower (respondent) term loan for 1Cr. and cash credit limit for 95 Lakh against security of two mortgaged properties, first being an industrial plot admeasuring 500 square meters and second a residential property admeasuring 198 sq mts.

2. Borrower committed default in payments and his account was declared as NPA dated 31/10/2012.

3. Demand notice was duly served dated 07/01/2013, symbolic possession was taken over dated 22/08/2013 and actual possession was taken over with police assistance dated 25/11/2013.

4. In accordance with the Security Interest (Enforcement) Rules, 2002, bank called for valuation of the residential property that turned to be Rs. 48.65 Lakh. Auction notice was issued and Rs. 48.65 Lakh was set as reserve price for the auction which was to be held on 20/01/2014.

5. Borrower filed a Securitization Application under Section 17 of Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI Act) before Debt Recovery Tribunal (DRT), Jaipur and prayed for an interim relief for restoration of the possession.

6. The tribunal vide interim order dated 17/01/2014 asked the borrower to deposit the reserve price set for the auction i.e. Rs. 48.65 Lakh and allowed bank to take bids but stayed issuance of Sale Certificate to the successful bidder.

7. Highest bid came up for Rs. 71 Lakh, but since the sale of property was subjected to stay order of DRT, bidder later refused to deposit the amount and participate in litigation.

8. Aggrieved from the interim order passed by DRT, Jaipur, Bank approached the appellate tribunal arguing that order of restoration of possession and passing of title documents back to the borrower on payment of merely a sum of Rs. 48.65 Lakh where the outstanding liability stands Rs 2 Crore is unjust and the order is liable to be set aside. Even the bids received are higher than the reserve price. Borrower should redeem the property as per provisions of Section 13(8) SARFAESI Act 2002 by payment of the entire "mortgaged money" along with cost & expenses incurred to bank and not the "reserve price"/ "current valuation of property".

9. The Appellate Tribunal however dismissed the appeal.

10. Bank then filed a writ petition before Rajasthan High Court and the same was heard by Single Judge Bench vide order dated 12/01/2017 Hon'ble High Court overturned the decisions of DRT Jaipur and Appellate Tribunal quoting that the interim order is in violation of section 13(8) SARFAESI, 2002 and the same is liable to be quashed. There is no provision in the Act (SARFAESI 2002) for release of title documents and restoration of possession of the property merely on payment of reserve price which is not sufficient to satisfy the mortgage money along with cost and expenses incurred by bank in recovery proceedings as mentioned under Section 13(8) of the Act.

11. The Borrowers aggrieved from the said judgment preferred an intra-court appeal before the Hon'ble Divisional Bench Rajasthan High Court. It was argued that the borrower had deposited the reserve price before 27/01/2014 and the alleged highest bidder has failed to deposit the earnest money as well as they've failed to appear before Appellate Tribunal when were called, it
puts a question mark upon their genuineness. That is why, the borrower himself should be considered as a qualified bidder. No provision in Security Interest (Enforcement) Rules, 2002 prohibit the borrower himself from purchasing the property in capacity of an auction purchaser.

12. The Hon'ble Bench vide judgment dated 20/09/2017 held that since the bids were ranging from Rs. 61.50 Lakh to Rs. 71 Lakh, thus following the principle of equity the borrower is directed to further deposit Rs. 17 Lakhs making the amount in total Rs. 65.65 Lakhs against release of the property and issuance of sale certificate in accordance with Rule 8 and 9 of Security Interest (Enforcement) Rules, 2002.

13. The Bank thereafter filed an appeal before Hon'ble Supreme Court and argued that the divisional bench failed to consider that the bids received were in the year 2013-14, as time has passed, there is an increase in amount of outstanding liability of the borrower as well as the amount property can fetch from fresh auction. Also the outstanding liability is much more than Rs 71 Lakh thus order passed by divisional bench directing the bank to release the property on payment of Rs. 65.65 Lakh is contrary to sub-section (8) of Section 13 of SARFAESI Act, 2002

14. The Apex Court decided the following issues:

i) whether stay orders on issuance of sale certificate passed by DRT by directing borrower to merely deposit reserve price of auction sale is contrary to provisions of SARFAESI Act or nor? and

ii) whether possession as well as original title documents may be released in favour of Borrower (in capacity of Auction Purchaser)?

15. The Hon'ble Supreme Court observed that even after payment of Rs. 65.65 Lakh, the borrower has not discharged the entire liability and balance of the outstanding dues still exists. Therefore Divisional Bench has erred in directing the bank to release the property on payment of Rs. 65.65 Lakhs only. If allowed, then there'd be gross violation of Section 13(8) SARFAESI Act, 2002 which provides for redemption of mortgage.

16. The Hon'ble Supreme Court thus directed the bank to adjust the amount already deposited by the borrower in pursuance of order passed by DRT, DRAT and Divisional bench of the High Court with existing liability and recover rest of the amount by initiating auction sale in accordance with section 13(4) of SARFAESI Act, 2002 read with Security Interest (Enforcement) Rules, 2002.

17. In order to restore the possession of properties taken over by the bank and get the original title documents back, loan defaulters leave no stone unturned. It is observed that in cases where the amount of outstanding liabilities exceed the current valuation of asset mortgaged, borrower in order to restore the possession instead of redeeming the property in accordance with Section 13(8) SARFAESI Act, 2002 i.e. by paying back entire liabilities along with expenses incurred by bank, tends secure stay orders from Debt Recovery Tribunals by depositing reserve price of the auction sale.

18. The banks on the other hand are unable to fetch fair value of the property as higher bidders are reluctant to deposit money on a property subjected to litigation. The borrowers then argue to be treated as auction purchasers and claim restoration of possession of the property and issuance of fresh Sale Certificate in their favour, ultimately resulting in release of property at distressed value.

19. In said judgment, the apex court overturned the decision dated 20/09/2017 passed by divisional bench of the Hon'ble Rajasthan High Court allowing the borrower to be treated as a qualified bidder as reserve price Rs. 48.65 Lakh was paid by him at the time of auction.

20. It is to be noted that bank received four other bids ranging from Rs. 61.50 lakh to Rs. 71 lakh but considering that the property was under pending litigation, and DRT already stayed issuance of Sale Certificate, bidders were reluctant to move forward and deposit earnest money with the bank.

CONCLUSION

The general law for redemption of mortgage is well recognized under section 60 Transfer of Property Act, 1882. It encompasses a right of mortgager to redeem his mortgaged property by paying back "mortgaged money" at any time before the sale is complete. To clarify the meaning of "mortgage money" we should refer to section 58(a) of Transfer of Property Act that states "mortgage money" includes principal money along with interest. Under SARFAESI, it is recognized under section 13(8) of the Act.
In present case, the borrower has tried to benefit from a lacuna by paying distressed value of the property instead of "mortgaged money" and secure the possession and original title documents of the property in question. For an instance, if borrower was allowed to do so, it'd have frustrated the core object of SARFAESI Act, 2002 i.e. minimizing interference of courts or tribunals. Every borrower would have got the property released by merely paying the distressed valuation of property instead of whole debt. Banks ultimately would have to approach the tribunals for further recovery of amount.

From above it is clear that if Secured Creditor receive all outstanding dues ( including interest ,penal charges) cost , expenses tendered by Secured Creditor from the borrower before the relevant date of sale of mortgaged asset, then Secured Creditor will not taken any step to sale the asset. In the above case the borrower is himself the bidder of property held for auction.

DISCLAIMER: The case law presented is only for sharing information and knowledge with the readers. The views are personal and shall not be considered as professional advice. In case of necessity do consult with professionals.

References

Section 13 in The Securitisation And Reconstruction Of Financial Assets and Enforcement Of Security Interest Act, 2002

13. Enforcement of security interest.-

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882 ), any security interest created in favour of any secured creditor may be enforced, without the int rvention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as on- performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to e ercise all or any of the rights under sub- section (4).

(3) The notice referred to in sub- section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non- payment of secured debts by the borrower.

(4) In case the borrower fails to discharge his liability in full within the period specified in sub- section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub- section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

(6) Any transfer of secured asset after taking possession thereof or take over of management under sub- section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.

(7) Where any action has been taken against a borrower under the provisions of sub- section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in ischarge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

(8) 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 secure asset.

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub- section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three- fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956 ):

Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub- section (1) of section 529 of the Companies Act, 1956 (1 of 1956 ), may retain the sale proceeds of his secured assets after depositing the workmen' s dues with the liquidator in accordance with the provisions of section 529A of that Act:
Provided also that liquidator referred to in the second proviso shall intimate the secured creditor the workmen' s dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956 ) and in case such workmen' s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimate dues with the liquidator:

Provided also that in case the secured creditor deposits the estimated amount of workmen' s dues, such creditor shall be liable to pay the balance of the workmen' s dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen' s dues, if any.

Explanation.- For the purposes of this sub- section,-

(a) "record date"means the date agreed upon by the secured creditors representing not less than three- fourth in value of the amount outstanding on such date;
(b) "amount outstanding"shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

(11) Without prejudice to the rights conferred on the secured creditor under or by this section, secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measured specifies in clause (a) to (d) of sub- section (4) in relation to the secured assets under this Act.

(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

(13) No borrower shall, after receipt of notice referred to in sub- section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written con ent of the secured creditor.

Section 17 in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

17. Right to appeal.—

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application along with such fee, as may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five(45) days from the date on which such measures had been taken:

Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.

Explanation.—For the removal of doubts it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub section (1) of section 17.

Explanation.—For the removal of doubts it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub section (1) of section 17."

(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.

(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the secured assets to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub section (4) of section 13 taken by the secured assets as invalid and restore the possession of the secured assets to the borrower or restore the management of the secured assets to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub section (4) of section 13.

(4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub section (4) of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub section (4) of section l3 to recover his secured debt.

(5) Any application made under sub section (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application:
Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery Tribunal, shall not exceed four months from the date of making of such application made under sub section (1).

(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as specified in sub section (5), any party to the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.

(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made thereunder.