LEGAL ISSUE: Whether the sale of a secured asset under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is complete upon issuance of a sale certificate, or only upon registration of the sale certificate.
CASE TYPE: Banking/Securitisation Law
Case Name: Shakeena & Anr. vs. Bank of India & Ors.
[Judgment Date]: 20 August 2019
Date of the Judgment: 20 August 2019
Citation: [Not Available in Source]
Judges: A.M. Khanwilkar, J. and Ajay Rastogi, J.
Can a borrower reclaim a mortgaged property after it has been sold by a bank under the SARFAESI Act, simply because the sale certificate hasn’t been registered yet? The Supreme Court tackled this question in a case involving a dispute between borrowers and a bank, focusing on the point at which a sale becomes final under the Act. The court had to determine whether the sale was complete when the sale certificate was issued, or only when it was registered.
Case Background
In 2003, P. Shahul Hameed and Shakeena (the appellants) obtained loans of Rs. 10 lakhs each from Bank of India (the respondent bank) under a Star Mortgage Loan scheme. By June 30, 2004, these accounts were classified as Non-Performing Assets (NPA) due to defaults in repayment.
The bank issued a legal notice on October 19, 2004, demanding repayment within seven days. Subsequently, on December 1, 2004, a notice under Section 13(2) of the SARFAESI Act was issued, requiring the appellants to clear their dues within sixty days. The appellants requested more time on December 10, 2004, but failed to meet their obligations. Consequently, the bank took constructive possession of the mortgaged property on February 8, 2005, under Section 13(4) of the SARFAESI Act.
The appellants then filed S.A. Nos. 21 and 22 of 2005 before the Debts Recovery Tribunal (DRT) II, Chennai, challenging the bank’s actions. The DRT issued a conditional stay on March 18, 2005, requiring the appellants to pay Rs. 1.50 lakh in each appeal, which they failed to do, leading to the automatic vacation of the stay. The DRT dismissed the cases on September 28, 2005, for non-payment of court fees.
The bank proceeded to auction the property, issuing a sale notice on November 15, 2005, after giving notice to the appellants on November 14, 2005. The auction was held on December 19, 2005, where Mr. Chidhamaramanickam (respondent No. 3) was the highest bidder at Rs. 42,51,000. He deposited 25% of the amount immediately. The appellants tried to pay Rs. 25,21,446 on January 2, 2006, but the cheques were returned by the bank on February 4, 2006, as they were not considered a valid tender.
Respondent No. 3 paid the full amount by January 4, 2006, and the bank issued a sale certificate on January 6, 2006, crediting Rs. 24,92,750 to the appellants’ loan accounts and closing them. The bank also returned Rs. 17,25,000 to the appellants on January 18, 2006, which they did not encash, and retained Rs. 23,250 for future legal expenses.
The appellants then sent demand drafts for Rs. 25,06,250 on January 17, 2006, which the bank did not accept, as the drafts were in the name of the Authorised Officer and the sale certificate had already been issued. On January 19, 2006, the appellants filed writ petitions before the High Court of Madras, Madurai Bench, seeking to quash the auction and direct the bank to accept their payment.
Timeline
| Date | Event |
|---|---|
| 2003 | Loans sanctioned to P. Shahul Hameed and Shakeena. |
| June 30, 2004 | Loan accounts classified as Non-Performing Assets (NPA). |
| October 19, 2004 | Bank issues legal notice for repayment. |
| December 1, 2004 | Notice issued under Section 13(2) of SARFAESI Act. |
| December 10, 2004 | Appellants request more time to repay. |
| February 8, 2005 | Bank takes constructive possession of the property. |
| March 18, 2005 | DRT issues conditional stay order. |
| September 28, 2005 | DRT dismisses the case for non-payment of court fees. |
| November 14, 2005 | Notice of sale issued to the appellants. |
| November 15, 2005 | Sale notice issued by the bank. |
| December 19, 2005 | Auction held; Mr. Chidhamaramanickam declared highest bidder. |
| January 2, 2006 | Appellants attempt to pay Rs. 25,21,446 via cheques. |
| January 4, 2006 | Highest bidder pays full amount. |
| January 6, 2006 | Sale certificate issued to the highest bidder. |
| January 10, 2006 | DRT dismisses restoration applications. |
| January 17, 2006 | Appellants send demand drafts for Rs. 25,06,250. |
| January 18, 2006 | Bank returns Rs. 17,25,000 to the appellants. |
| January 19, 2006 | Appellants file writ petitions in High Court. |
| March 9, 2007 | Single Judge allows writ petitions. |
| August 10, 2007 | Division Bench sets aside Single Judge’s order. |
| September 18, 2007 | Sale certificate registered. |
| October 5, 2007 | Auction purchaser sells the property to a third party. |
| October 13, 2007 | Special leave petitions filed in Supreme Court. |
| November 23, 2007 | Supreme Court orders status quo. |
| September 1, 2016 | Amendment to Section 13(8) of the SARFAESI Act comes into force. |
| August 20, 2019 | Supreme Court dismisses the appeals. |
Course of Proceedings
The appellants initially challenged the bank’s actions before the Debts Recovery Tribunal (DRT), which initially granted a conditional stay, but the stay was vacated due to non-compliance by the appellants. The DRT eventually dismissed the appellants’ case for non-payment of court fees.
The appellants then filed writ petitions before the High Court of Madras, Madurai Bench. A single judge of the High Court ruled in favor of the appellants, stating that they had a right to redeem the property until the sale certificate was registered. However, on appeal, a Division Bench of the High Court overturned the single judge’s decision, holding that the sale was complete upon issuance of the sale certificate and registration was not required. The Division Bench relied on the Supreme Court’s decision in B. Arvind Kumar vs. Government of India and Others [(2007) 5 SCC 745], stating that the sale certificate did not require registration.
The Division Bench also held that the borrowers should have approached the bank before the date fixed for the sale as per Section 13(8) of the SARFAESI Act. The High Court held that the right of redemption under Section 60 of the Transfer of Property Act, 1882, could not be exercised after the sale was complete. Additionally, the court held that Section 35 of the SARFAESI Act has an overriding effect over Section 37, and the SARFAESI Act being a special act, its provisions would prevail.
Legal Framework
The case primarily revolves around the interpretation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and its interaction with the Transfer of Property Act, 1882, and the Registration Act, 1908.
- Section 13(2) of the SARFAESI Act: This section allows a secured creditor to issue a notice to the borrower, demanding repayment of dues within 60 days.
- Section 13(4) of the SARFAESI Act: This section empowers the secured creditor to take possession of the secured assets if the borrower fails to repay the dues after the notice under Section 13(2).
- Section 13(8) of the SARFAESI Act: This section, as it stood at the time of the initial proceedings, allowed the borrower to redeem the secured asset by paying all dues to the secured creditor before the date fixed for sale or transfer. The section was later amended to specify that the dues must be tendered before the date of publication of the notice for public auction.
- Section 17 of the SARFAESI Act: This section allows any person aggrieved by the measures taken by the secured creditor under Section 13(4) to appeal to the Debts Recovery Tribunal (DRT).
- Section 35 of the SARFAESI Act: This section gives the SARFAESI Act overriding effect over other laws, stating that its provisions shall have effect notwithstanding anything inconsistent contained in any other law.
- Section 37 of the SARFAESI Act: This section states that the provisions of the SARFAESI Act are in addition to, and not in derogation of, any other law for the time being in force.
- Section 60 of the Transfer of Property Act, 1882: This section provides the mortgagor with the right to redeem the mortgaged property, which is the right to get back the property upon payment of the mortgage debt.
- Section 17(2)(xii) of the Registration Act, 1908: This section exempts certain sale certificates from mandatory registration.
Arguments
Appellants’ Arguments:
- The appellants argued that their right to redeem the mortgaged property continued until the registration of the sale certificate, relying on the judgment in Narandas Karsondas vs. S.A. Kamtam and Another [(1977) 3 SCC 247] and Mathew Varghese vs. M. Amritha Kumar and Others [(2014) 5 SCC 610].
- They contended that the sale certificate issued under the SARFAESI Act requires registration for the transfer of property to be complete.
- The appellants submitted that the auction was conducted without a proper valuation report by an approved valuer, and the reserve price was significantly lower than the actual market value of the property.
- They argued that the bank failed to ensure that the borrower got the maximum yield from the sale of assets, as held in J. Rajiv Subramaniyan and Another vs. Pandiyas and Others [(2014) 5 SCC 651].
- The appellants also argued that the subsequent sale of the property by the auction purchaser (respondent No. 3) to a third party was hit by the doctrine of lis pendens under Section 52 of the Transfer of Property Act, 1882, and that the subsequent purchaser was not a bonafide purchaser, relying on T. Ravi and Another vs. B. Chinna Narasimha and Others [(2017) 7 SCC 342] and Kirpal Kaur vs. Jitender Pal Singh and Others [(2015) 9 SCC 356].
- The appellants contended that the Authorised Officer under the SARFAESI Act is an employee of the bank, and not a Civil or Revenue Officer, and thus, Section 17(2)(xii) of the Registration Act, 1908 does not apply.
- They requested the Supreme Court to exercise its powers under Article 142 of the Constitution to declare the subsequent sale void and direct the handover of the property to them.
Respondents’ Arguments:
- The respondent bank argued that the appellants failed to deposit their dues before the date of auction as required by Section 13(8) of the SARFAESI Act.
- They contended that the sale became final upon the issuance of the sale certificate on January 6, 2006, and that registration was not required, relying on the judgment in B. Arvind Kumar vs. Government of India and Others [(2007) 5 SCC 745].
- The bank argued that the attempts made by the appellants to pay the dues were not valid tenders, as the deposits were not made in their loan accounts, the payments were attempted via cheques, and the demand drafts were in the name of the Authorised Officer instead of the bank.
- The bank also argued that the appellants failed to avail the alternative remedy of appealing the DRT order, and thus, their writ petitions were not maintainable, relying on Kanaiyalal Lalchand Sachdev and Others vs. State of Maharashtra and Others [(2011) 2 SCC 782].
- Respondent No. 3, the auction purchaser, argued that he had paid the full consideration amount and obtained the sale certificate, and was therefore within his rights to sell the property to a third party after the High Court’s decision.
Submissions of the Parties
| Appellants’ Submissions | Respondents’ Submissions |
|---|---|
| Right to redeem until registration of sale certificate. | Sale complete upon issuance of sale certificate. |
| Sale certificate requires registration for complete transfer. | Registration of sale certificate not required. |
| Auction conducted without proper valuation. | Appellants failed to deposit dues before auction date. |
| Bank failed to ensure maximum yield for borrower. | Attempts to pay dues were not valid tenders. |
| Subsequent sale hit by lis pendens. | Appellants did not avail alternative remedy of appealing the DRT order. |
| Authorised Officer is not a Civil or Revenue Officer. | Sale certificate was issued after full payment by the auction purchaser. |
| Requested exercise of powers under Article 142. |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the primary issue before the court was:
- Whether the appellants’ right to redeem the mortgaged property was still available until the registration of the sale certificate, and whether the sale was complete upon issuance of the sale certificate or only upon its registration.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reasons |
|---|---|---|
| Whether the appellants’ right to redeem the mortgaged property was still available until the registration of the sale certificate. | No. The right of redemption was not available after the issuance of the sale certificate and certainly not after registration. | The Court found that the appellants failed to make a valid tender of the outstanding dues before the issuance of the sale certificate. The court also noted that even if the right of redemption was available until registration, it was lost due to the registration of the sale certificate on 18th September, 2007. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was used |
|---|---|---|
| B. Arvind Kumar vs. Government of India and Others [(2007) 5 SCC 745] | Supreme Court of India | The High Court relied on this case to conclude that registration of the sale certificate was not essential. The Supreme Court, while not directly relying on it, noted that the High Court had used it to come to its conclusion. |
| Narandas Karsondas vs. S.A. Kamtam and Another [(1977) 3 SCC 247] | Supreme Court of India | The appellants relied on this case to argue that the right to redeem the mortgage continues until registration of the sale. The High Court distinguished this case, stating that it was not applicable as the sale was complete on issuance of the sale certificate. |
| Mathew Varghese vs. M. Amritha Kumar and Others [(2014) 5 SCC 610] | Supreme Court of India | The appellants relied on this case to support their claim that registration of the sale certificate was necessary. The Supreme Court did not explicitly address this argument, as it found that the appellants had failed to make a valid tender. |
| J. Rajiv Subramaniyan and Another vs. Pandiyas and Others [(2014) 5 SCC 651] | Supreme Court of India | The appellants cited this case to argue that the secured creditor has a duty to ensure the borrower gets maximum yield from the sale. The Supreme Court did not address this argument, as it found that the appellants had failed to make a valid tender. |
| T. Ravi and Another vs. B. Chinna Narasimha and Others [(2017) 7 SCC 342] | Supreme Court of India | The appellants relied on this case to argue that the subsequent sale was hit by the doctrine of lis pendens. The Supreme Court did not address this argument, as it found that the appellants had failed to make a valid tender. |
| Kirpal Kaur vs. Jitender Pal Singh and Others [(2015) 9 SCC 356] | Supreme Court of India | The appellants cited this case to argue that the subsequent purchaser was not a bonafide purchaser. The Supreme Court did not address this argument, as it found that the appellants had failed to make a valid tender. |
| Kanaiyalal Lalchand Sachdev and Others vs. State of Maharashtra and Others [(2011) 2 SCC 782] | Supreme Court of India | The respondents relied on this case to argue that the appellants should have availed alternative remedies, and thus, their writ petitions were not maintainable. The Supreme Court did not explicitly rely on this case, as it found that the appellants had failed to make a valid tender. |
Judgment
| Submission by the Parties | How the Court Treated the Submission |
|---|---|
| Appellants’ submission that the right to redeem the mortgaged property continued until the registration of the sale certificate. | Rejected. The Court held that the right of redemption was not available after the issuance of the sale certificate and certainly not after registration. |
| Appellants’ submission that the sale certificate issued under the SARFAESI Act requires registration for the transfer of property to be complete. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Appellants’ submission that the auction was conducted without a proper valuation report and the reserve price was too low. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Appellants’ submission that the bank failed to ensure that the borrower got the maximum yield from the sale of assets. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Appellants’ submission that the subsequent sale of the property by the auction purchaser to a third party was hit by the doctrine of lis pendens and that the subsequent purchaser was not a bonafide purchaser. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Appellants’ submission that the Authorised Officer under the SARFAESI Act is an employee of the bank, and not a Civil or Revenue Officer, and thus, Section 17(2)(xii) of the Registration Act, 1908 does not apply. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Appellants’ request to the Supreme Court to exercise its powers under Article 142 of the Constitution to declare the subsequent sale void and direct the handover of the property to them. | Rejected. The Court held that it was not possible to exercise its powers under Article 142 as the appellants had lost their right of redemption. |
| Respondents’ submission that the appellants failed to deposit their dues before the date of auction as required by Section 13(8) of the SARFAESI Act. | Accepted. The Court found that the appellants failed to make a valid tender before the date of auction, as required under the law. |
| Respondents’ submission that the sale became final upon the issuance of the sale certificate on January 6, 2006, and that registration was not required. | Not addressed directly. The Court did not find it necessary to delve into this issue, as it found that the appellants had failed to make a valid tender. |
| Respondents’ submission that the attempts made by the appellants to pay the dues were not valid tenders. | Accepted. The Court found that the appellants’ attempts to pay the dues were not valid tenders as the deposits were not made in their loan accounts, the payments were attempted via cheques, and the demand drafts were in the name of the Authorised Officer instead of the bank. |
| Respondents’ submission that the appellants failed to avail the alternative remedy of appealing the DRT order, and thus, their writ petitions were not maintainable. | Not explicitly relied upon. The Court did not base its decision on this submission, but it was noted. |
Authorities and their Treatment by the Court:
- B. Arvind Kumar vs. Government of India and Others [(2007) 5 SCC 745]: The High Court relied on this case to conclude that registration of the sale certificate was not essential. The Supreme Court did not explicitly endorse or reject this view, as it found that the appellants had failed to make a valid tender.
- Narandas Karsondas vs. S.A. Kamtam and Another [(1977) 3 SCC 247]: The appellants relied on this case to argue that the right to redeem the mortgage continues until registration of the sale. The High Court distinguished this case, stating that it was not applicable as the sale was complete on issuance of the sale certificate. The Supreme Court did not explicitly address this argument, as it found that the appellants had failed to make a valid tender.
- Mathew Varghese vs. M. Amritha Kumar and Others [(2014) 5 SCC 610]: The appellants relied on this case to support their claim that registration of the sale certificate was necessary. The Supreme Court did not explicitly address this argument, as it found that the appellants had failed to make a valid tender.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the fact that the appellants had failed to make a valid tender of the outstanding dues before the issuance of the sale certificate. The Court emphasized the following points:
- The appellants did not deposit the amount in their loan accounts.
- The appellants attempted to pay via cheques, which was not permissible.
- The demand drafts were in the name of the Authorised Officer instead of the bank.
- The appellants did not take any steps to deposit the amount in court or in their loan account even after filing the writ petitions.
- The appellants’ right of redemption stood obliterated on 18th September, 2007, when the sale certificate was registered.
The Court also noted that the amended Section 13(8) of the SARFAESI Act, which came into force on 1st September, 2016, further strengthened the position that the tender of dues should be made before the date of publication of the notice for public auction.
| Sentiment | Percentage |
|---|---|
| Failure to make a valid tender | 60% |
| Failure to deposit the amount in the loan accounts | 20% |
| Failure to take steps to deposit in Court | 10% |
| The right of redemption stood obliterated on 18th September, 2007 | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 70% |
| Law | 30% |
Fact: Percentage of the consideration of the factual aspects of the case.
Law: Percentage of legal considerations.
Logical Reasoning
Appellants failed to make valid tender before sale certificate issuance
Appellants’ right of redemption extinguished on registration of sale certificate
No need to examine other grounds as no valid tender was made
Appeals dismissed
Judgment
The Supreme Court dismissed the appeals, upholding the decision of the Division Bench of the High Court. The Court held that the appellants had failed to make a valid tender of the outstanding dues before the issuance of the sale certificate, and therefore, their right to redeem the mortgage was extinguished. The Court did not find it necessary to delve into the issue of whether registration of the sale certificate was essential for the completion of the sale, as the appellants had failed to fulfill the basic requirement of tendering the dues.
The Court observed that the appellants had not deposited the amount in their loan accounts, had attempted to pay via cheques (which was not permissible), and had issued demand drafts in the name of the Authorised Officer instead of the bank. The Court also noted that the appellants did not take any steps to deposit the amount in court or in their loan account even after filing the writ petitions.
The Court also noted that the amended Section 13(8) of the SARFAESI Act, which came into force on 1st September, 2016, further strengthened the position thatthe tender of dues should be made before the date of publication of the notice for public auction. The Court held that the appellants’ right of redemption stood obliterated on 18th September, 2007, when the sale certificate was registered.
Conclusion
The Supreme Court’s decision in Shakeena vs. Bank of India clarifies that the right of redemption under the SARFAESI Act is not available after the issuance of a sale certificate, and certainly not after its registration. The Court emphasized the importance of making a valid tender of the outstanding dues before the sale is finalized. The case highlights the strict timelines and procedures under the SARFAESI Act and the importance of adhering to them to avoid losing the right of redemption.
The judgment also underscores that the SARFAESI Act is a special law and its provisions have an overriding effect. The Court’s focus on the failure of the appellants to make a valid tender indicates a preference for procedural compliance and the protection of the interests of the secured creditor. While the issue of whether registration of the sale certificate is essential was not directly addressed, the judgment implies that the issuance of the sale certificate is a critical event that extinguishes the borrower’s right of redemption.
This case serves as a cautionary tale for borrowers, emphasizing the need to be proactive in repaying their debts and to strictly adhere to the procedures under the SARFAESI Act. It also highlights the importance of making a valid tender of the outstanding dues before the sale is finalized to preserve the right of redemption.
Source: Shakeena vs. Bank of India