Secured Creditor Can Sell The Mortgaged Property Via Public Auction Over Non-Payment Of Total Dues From The Borrower As Per SARFAESI Provisions: Supreme Court In Bank Of Baroda Vs Karwa Trading Company

CAUSE TITLE:
Bank of Baroda v Karwa Trading Company & Anr

DATE OF ORDER:
10 February 2022

JUDGE(S):
Hon’ble Mr. Justice M R Shah

PARTIES:
Petitioner: G Bank of Baroda
Respondent: Karwa Trading Company & Anr

SYNOPSIS

The Hon’ble Supreme Court (hereinafter referred to as ‘Supreme Court’ or ‘the Court’), has set aside the impugned order of the Division Bench of Rajasthan High Court and held that a secured creditor cannot be restrained from selling any property mortgaged to him by holding the public auction to recover the outstanding dues unless the borrower deposits/pays the entire amount due along with the costs incurred by the secured creditor as per the provisions of the SARFAESI Act.

IMPORTANT PROVISIONS

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)

• Section 13(2) – enforcement of interest – notice by a secured creditor to discharge in full his liabilities within 60 days of receipt of notice.
• Section 13(4) – Recourse to secured creditor in case of debtor’s failure to discharge liability within the period stipulated under Section 13(2).
• Section 13(8) – If the dues of the secured creditor together with all costs, charges and expenses incurred by him are discharged at any time before the sale, the secured asset shall not be sold or transferred by the secured creditor.
• Section 14 – Mandates Chief Metropolitan Magistrate or District Magistrate to assist the secured creditor in taking possession of a secured asset.
• Section 17 – Application by any person, including the borrower, against measures to recover secured debts.

Security Interest (Enforcement) Rules, 2002 (SI Rules)

• Rule 8 – On such deposit of money for discharge of the encumbrances, the authorised officer may issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make the payment accordingly.
• Rule 9 – The authorised officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7).

BRIEF FACTS

• The Appellant Bank, Bank of Baroda, allowed a term loan of ₹ 100 lakhs and a cash credit limit of ₹ 95 lakhs in favour of the Respondent. The said loan was secured against the security of two mortgaged properties viz, an industrial plot and a residential property (Collateral Assets).
• Subsequently, the borrower failed to refund the loan amount and the account of the Respondent was declared as a Non-Performing Asset (NPA) by the Bank.
• A notice under Section 13(2) of SARFAESI demanding ₹185 lakhs was issued and upon non-payment, the Appellant Bank took symbolic possession of theCollateral Assets; another notice was also issued under Section 13(4).
• Later, the Appellant, vide application under Section 14, took possession of the residential property.
• Thereafter the bank issued a sale notice for public auction of the residential propertyfor ₹ 48.65 lakhs in accordance with Rule 8 read with Rule 9 of SI Rules.
• The said auction was challenged by the Respondent by filing a Securitisation Application (SA) under Section 17 of SARFAESI before the Debt Recovery Tribunal (DRT), Jaipur.
• The DRT, in its interim order, directed the Appellant to pay a sum of ₹ 20 lakhs on the day of the auction to prevent the Bank from confirming the sale and the balance was to be paid within a week from the date of auction. Upon payment, the Bank was to deliver the possession of the property to the Respondent. The order was duly followed and the Respondent duly deposited a sum of ₹ 48.65 lakhs with the Appellant Bank.
• The aforementioned order was challenged by the Appellant before the Debt Recovery Appellate Tribunal (DRAT) on the grounds that it was in violation of Section 13(8) of SARFAESI and the Bank also contended that the Respondent owed over ₹ 200 lakhs in dues. It submitted that since the property in auction received the highest bid of ₹ 71 lakhs as against the reserve price of ₹ 48.65 lakhs, the Respondent was required to pay an equivalent sum if not the total dues. The Bank agreed to release the subject property upon payment of ₹ 71 lakhs. However, the Appellant’s appeal was dismissed by the DRAT.
• Aggrieved, the Appellant challenged the order before the Learned Single Judge of Rajasthan High Court who set aside the orders of DRT and DRAT on the grounds that such orders were in contravention of Section 13(8) of SARFAESI.
• On a further appeal to the Division Bench by the Respondent, the judgment of the Single Judge was quashed and set aside with a direction to the Bank to release the property to the Respondent upon payment of an additional sum of ₹ 17 lakhs. Consequently, the total sum payable by the Respondent amounted to ₹ 65.65 lakhs.
• Feeling aggrieved, the Appellant Bank preferred this instant appeal before the Supreme Court.

QUESTIONS RAISED:

• Whether the Division Bench was justified in its order directing the Appellant to hand over the possession and title deed of the property to the Respondent upon payment of ₹ 65.65 lakhs against its total sues of ₹ 185 lakhs?

ARGUMENTS ADVANCED BY THE APPELLANT

• The Counsel appearing on behalf of the Appellant vehemently submitted that the Learned Division Bench erred in directing the Bank to release the property upon payment of an additional sum of ₹ 17 lakhs only.
• The Bank contended that it was also the observation of the Division Bench that the Respondent did not come forward to redeem the property but merely made an offer in the capacity of a purchaser upon payment of the reserved price money. The Bank also highlighted that as on the date of issue of notice under Section 13(2), ₹185 lakhs was outstanding and the Respondent couldn’t be absolved from its liability merely upon payment of ₹ 71 lakhs.
• It was also clarified that payment of ₹71 lakhs would entail only reversion of the residential property of the Respondent and would not discharge the outstanding liability in full as against the misinterpretation of the Division Bench that such payment would discharge the entire liability against the Respondent.
• The Appellant argued that the Division Bench, in its judgment, failed to appreciate the increase in the valuation of the property due to the passage of time and that the property would have certainly fetched a higher amount than ₹ 71 lakhs.
• The Appellant also submitted that the Division Bench failed to appreciate the fact that the original order passed by the DRT was an interim order and therefore, the Division Bench could not have passed the final order.

ARGUMENTS ADVANCED BY THE RESPONDENT

• The Counsel appearing on behalf of the Respondent submitted that the order passed by the Division Bench was equitable and does not warrant any interference by the Supreme Court in the exercise of power sunder Article 136 of the Constitution.
• The Counsel also submitted that the Respondent was ready to pay a sum equivalent to the highest bid and also duly discharged the payment of ₹ 48.65 lakhs in compliance with the order of the DRT.

ANALYSIS BY THE COURT

• At the outset, the Court noted that Division Bench of the High Court, by its impugned order, directed the release of the secured property on payment of a total sum of ₹ 65.65 lakhs as against the total dues of ₹ 185 lakhs.
• The Court also noted that appeal before the DRT under Section 17 of SARFAESI was still pending on technical grounds as the order of the DRT was an interim order only.
• The Court stated that the amount required to be paid in adherence to the directions of the High Court was not the amount realised by the Appellant Bank but only the highest bid received and before any further auction proceedings could be conducted, the DRT passed an interim order directing to handover the possession and original title deed to the Respondent upon payment of the base price of ₹ 48.65 lakhs.
• This, in the view of the Court, did not tantamount discharge of total dues of the secured creditors with all costs, charges and expenses incurred by the secured creditor as envisaged under Section 13(8) of SARFAESI. Consequently, it was open for the Appellant Bank, being the secured creditor, to sell the property in a public auction and realize the amount due.
• In this regard, the Court remarked that the DRT was also not justified in directing the release of the residential property on payment of ₹ 48.65 lakhs.
• The Court also stated that the payment of ₹ 65.65 lakhs against the total dues of ₹ 185 lakhs could not be viewed as the discharge of total liability and even if the property were to be sold in an auction, the Respondent was liable to discharge the balance dues.

CONCLUSION

Affirming the order passed by the Learned Single Judge, the Court held that unless the Respondent was ready to discharge the total amount of dues, it could not be discharged from the outstanding liability. Therefore, according to the Court, no order could have been passed either by the DRT or by the Division Bench to discharge the Respondent from its liability.

Allowing the appeal, the Court held that the Bank could not be restrained from selling the mortgaged property by holding a public auction to recover the outstanding dues, unless the Respondent deposited the entire amount of due payable along with the costs incurred by the Bank in accordance with the provisions of SARFAESI.

The Court also directed the DRT to dispose the SA filed by the Respondent under Section 17 of SARFAESI in accordance with law and on merits and whatever other grounds which may be available to the Respondent.

Click here to download the original copy of the judgement