SARFAESI | Civil Court Must Lift Property Attachment If Mortgage Predates It: Kerala High Court

The Kerala High Court has ruled that a civil court cannot refuse to consider a secured creditor's request to lift an attachment over a mortgaged property merely because the attachment would otherwise be effaced after publication of a SARFAESI sale notice.

The court held that where the mortgage predates the attachment, the attachment must be lifted.

“Once the secured creditor approaches the Civil Court with an application for lifting the attachment in accordance with the principles laid down by the Full Bench, the Civil Court is required to consider such application in accordance with law and in case the mortgage is prior to the order of attachment, must lift the order of attachment,” Justice Easwaran S. held.

K.G Thomas, Rinu Thomas and Tharun K Thomas filed a commercial suit before the Commercial Court, Thiruvalla, seeking recovery of ₹3.26 crore, and obtained an order attaching 24.93 Ares of property in Thiruvalla Village.

State Bank of India, claiming to be the secured creditor, subsequently filed a claim petition under Order XXI Rule 58 of the Civil Procedure Code seeking lifting of the attachment.

The Commercial Court dismissed the petition, holding that no execution proceedings were pending. The District Court affirmed the order, relying on Axis Bank v. Hilal Ahamed Bhat and holding that the attachment would automatically stand effaced upon publication of the SARFAESI sale notice.

SBI thereafter approached the High Court, contending that its application for lifting the attachment was maintainable and that the courts below had failed to consider the Full Bench decision in Fathima v. Canara Bank and the Supreme Court's decision in Celir LLP v. Bafna Motors (Mumbai) Pvt Ltd.

The respondents opposed the petition, arguing that the attachment was necessary to protect their interests, as the property was valued at over ₹20 crore and a sale at a lower value could prejudice their recovery.

The Court examined the effect of the amended Section 13(8) of the SARFAESI Act, under which the borrower's right of redemption stands extinguished upon publication of the auction notice, subject to the statutory requirements.

It observed that once the equity of redemption is extinguished by operation of law upon publication of the SARFAESI sale notice, the borrower no longer retains the right or interest that was subject to attachment. Therefore, such a right cannot continue to remain under attachment after its extinguishment.

Referring to precedents, the bench observed:

“this Court is inclined to hold that a right which is not absolute, but is dependent upon the occurrence or non-occurrence of a particular statutory event and which comes to an end upon the happening of such event, cannot be treated as an unqualified proprietary interest capable of sustaining an attachment after such event has occurred.”

The Court held that where a secured creditor has priority under Section 26E of the SARFAESI Act, the Civil Court cannot refuse to consider its application for lifting an attachment merely because the attachment would otherwise be effaced upon publication of the sale notice.

The Court also considered the Full Bench judgment in Fathima v. Canara Bank, which held that where a secured creditor seeks removal of an attachment entry, it must approach the court which issued the attachment. The registering authority cannot independently efface an attachment made pursuant to a court order.

“When the Full Bench has categorically held that the registering authority has no jurisdiction to efface an entry made pursuant to an order of a court, a secured creditor cannot be faulted for approaching the court with an application for lifting the attachment.” it stated

Justice Easwaran further held that where a secured creditor seeks lifting of an attachment based on a prior mortgage, the Civil Court cannot refuse to lift the attachment.

The relevant enquiry, the Court said, was whether the mortgage preceded the attachment. Since the respondents had not shown that the attachment preceded the bank's mortgage, they could not claim priority merely by virtue of the attachment.

The Court also clarified that an attaching creditor does not acquire any title or proprietary interest in the property merely by virtue of an attachment.

On the respondents' apprehension that their rights would be affected by lifting the attachment, the Court held that this, by itself, could not be a ground to refuse relief.

It noted that Section 13(7) of the SARFAESI Act provides a safeguard by requiring any surplus remaining after the secured creditor's dues to be paid to those entitled to it.

Accordingly, the Court allowed SBI's petition, set aside the orders of the Commercial Court and District Court, and directed that the attachment over the property be lifted forthwith.

The Commercial Court was directed to communicate the order to the jurisdictional Sub-Registrar and Village Office and ensure removal of the attachment entry from the relevant records.

It also directed SBI to intimate the respondents when it publishes the sale notice, enabling them to ascertain whether any residue remains after adjustment of the secured creditor's dues and to pursue their remedies under Section 13(7) of the SARFAESI Act.

For Petitioner: Advocate Tom K Thomas

For Respondents: Advocates Binu George and Hemalatha