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

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. 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.
Hon’ble Supreme Court in its judgment dated 10/02/2022 titled “Bank of Baroda vs. Karwa Trading Company and Anr”1 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. 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. 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. The Apex Court decided the following issues: 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 whether possession as well as original title documents may be released in favour of Borrower (in capacity of Auction Purchaser)?
Facts of the case are:
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. Borrower committed default in payments and his account was declared as NPA dated 31/10/2012. 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. 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.
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. 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.
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.
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”. The Appellate Tribunal however dismissed the appeal.
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.
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.
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.
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
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. 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.
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.