SARFAESI | Borrower Must Tender Entire Dues Before Auction Notice, Not Wait For Sale Certificate To Redeem Property: Allahabad HC

Section 13(8), in the form reproduced before the Court, provides that where the amount of dues of the secured creditor together with all costs, charges, and expenses incurred by him is tendered before the date of publication of notice for public auction or for inviting quotations or tender from public or private treaty, the secured asset shall not be transferred by the secured creditor, and where any step towards transfer has already been taken, no further step shall be taken.

Section 31(i) of the Act provides that its provisions shall not apply to any security interest created in agricultural land.

Justice Irshad Ali held

“The provision does not, in the version reproduced before this Court, make the date of issuance of the sale certificate the sole or decisive test for determining whether the secured creditor was obliged to discontinue the transfer process. The relevant statutory event is the tender within the period specified by the applicable provision and not merely the date upon which the formal certificate was subsequently issued.”

Petitioner and Smt. Kiran Chaurasia jointly purchased the property at Village Sarosa Bharosa, Alamnagar, Lucknow from Moti Jheel Cooperative Housing Society in 1987. In 2003 the property was mortgaged with Canara Bank as security for a credit facility of about Rs. 30 lakh extended to M/s Chaurasia Traders, a firm run by two relatives of the petitioner's husband. On default, the Bank treated the account as a non-performing asset and took recovery measures under the SARFAESI Act.

The first sale notice was published on 03.02.2007 with the reserve price fixed at ₹40 lakh. As no bidder came forward, a second sale notice was published on 22.03.2007 and the reserve price was brought down to ₹32 lakh. The bid of ₹33 lakh made by the auction purchaser was accepted, and according to the Bank the sale was confirmed on August 8, 2007.

Petitioner's case was that she tendered bank drafts aggregating about ₹34 lakh on December 22, 2007, which was more than the auction consideration, and that the Bank returned the drafts by letter dated January 7, 2008, saying the land had already been sold through the bidding process. The sale certificate was issued to the auction purchaser on January 24, 2008.

It was argued for the petitioner that since the drafts were tendered before the sale certificate was issued, Section 13(8) prohibited the Bank from going ahead with the transfer and that the Appellate Tribunal had failed to distinguish between the date of auction, the date of confirmation of sale, the date of payment of the sale consideration, and the date of issuance of the sale certificate.

The Bank submitted that the offer was made on December 24, 2007, after its acceptance of the bid and after confirmation of sale on August 08, 2007, and that the outstanding liability in the loan account on that date was ₹40,22,861.08 besides expenses. Accordingly, the amount offered did not discharge the entire liability required for claiming the benefit of Section 13(8).

The Debts Recovery Tribunal, Lucknow had allowed the petitioner's securitisation application on 17.08.2010 and set aside the Bank's action. That order was reversed by the Debts Recovery Appellate Tribunal, Allahabad on 18.07.2011, and the petitioner approached the High Court under Article 226 on July 27, 2011.

The Court observed that on the chronology pleaded by the Bank the sale notices preceded the petitioner's offer by several months, and that the petitioner had not established that the tender was made before the relevant publication of the sale notice. It held that the condition prescribed by the applicable version of Section 13(8) was not satisfied merely because the sale certificate was issued at a later date.

“The later issuance of the certificate, standing alone, does not revive a right of redemption which had not been exercised in the manner and within the period prescribed by the applicable statutory provision.”

On the amount tendered, the Court held that there was a material difference between the auction consideration and the outstanding dues of the secured creditor, and that the petitioner could not succeed merely by comparing the two figures.

“The fact that the tendered amount exceeded the auction bid by ₹1,00,000/- does not establish that the amount represented the entire dues of the secured creditor together with all costs, charges and expenses.”

“A secured creditor's statutory rights and the corresponding right of redemption are governed by the statute and cannot be determined solely by comparing competing monetary offers. Nor does a subsequent willingness to pay necessarily confer a right to reopen an auction already undertaken in accordance with law.”

The Court also rejected the argument that the Bank was bound to proceed first against the principal borrowers before enforcing the mortgage over the petitioner's property, holding that her status as a person who was not the principal borrower did not by itself make the mortgage unenforceable.

Declining to direct the Bank to accept the amount, the Court held

“The Court cannot direct the Bank to accept an amount merely because it exceeds the auction consideration, without proof that the statutory requirements governing redemption were satisfied.”

Accordingly, the writ petition was dismissed and the order of the Debts Recovery Appellate Tribunal was affirmed. The Court clarified that nothing in the judgment would be construed as a determination of the petitioner's guilt in the criminal proceedings referred to by the parties, which would proceed independently in accordance with law.

For Petitioner: Ravi Singh, Ravendra Pratap Singh

For Respondents: C.S.C., Alok Saxena, Devi Prasad Maurya, Jagdish Prasad Maurya, Ram Raj, Rama Kant Srivastava, Sandeep Kumar, Vinay Shankar Srivastava