Background

On failure on the part of the Borrower (as defined below) to repay the loan taken from the Appellant Bank (as defined below), the Borrower's mortgaged property was put up for auction. The Hon'ble Rajasthan High Court ("High Court") held that on payment of auctioned price of the mortgaged property by the Borrower, the Appellant Bank must handover the title deeds of the mortgaged property along with the possession thereof to the Borrower adding that such an action would discharge the liability of the Borrower for repayment of entire dues payable to the Appellant Bank. The counsel of the Appellant Bank argued that the order passed by High Court is in contravention of Section 13(8) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") and that High Court has erred in interpreting that payment of auctioned price amounts to repayment of entire outstanding amounts in respect of a loan. This argument is concurred by the Hon'ble Supreme Court of India ("SC").

Brief facts

  • M/s Karwa Trading Company ("Borrower"/ "Respondent") had taken a term loan of Rs. 1,00,00,000/- (Rupees One Crores Only) and cash credit limit of Rs.95,00,000/- (Rupees Ninety-Five Lakhs Only) from Bank of Baroda ("Creditor"/ "Appellant Bank") against the security of two immovable properties viz, (i) an industrial plot admeasuring 500 sq.mtrs; and (ii) a residential/ housing property admeasuring 198 sq.mtrs (collectively as "Security"/ "Secured Assets").
  • Subsequently, due to non-repayment of the loan amount as per the provisions of the loan agreement, the Borrower's account became a non-performing asset ("NPA") and the Appellant Bank demanded repayment of an amount of Rs.1,85,37,218.80/- (Rupees One Crore Eighty-Five Lakhs Thirty-Seven Thousand Two Hundred and Eighteen decimal Eight Zero) ("Outstanding Amounts") by and under a notice under Section 13(2) of SARFAESI Act.
  • Later, the Appellant Bank, vide an application under Section 14 of SARFAESI Act, took possession of one of the Secured Assets viz., the residential house. Thereafter, in accordance with SARFAESI Act, the Appellant Bank took over the possession of the residential house and issued a public auction and the reserve price of the residential house was fixed at Rs.48,65,000/- (Rupees Forty-Eight Lakhs and Sixty-Five Thousand Only) ("Reserved Price").
  • Thereafter, the Borrower challenged this auction by filing Securitisation Application (SA) No.09/2014 under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal, Jaipur ("DRT"), and the DRT passed an interim order stating that if the Borrower deposits a sum of Rs.20,00,000/- (Rupees Twenty lakhs Only) by 20th January 2014, then the Appellant Bank shall accept the bids but not finalize the bids or confirm the sale of the residential house ("DRT Order"). Further, it was observed that if the Borrower repays the Reserved Price before 27th Jan 2014, then Appellant Bank shall deliver the possession of the residential house to the Borrower along with original title deeds of the same.
  • The DRT Order was challenged by the Appellant Bank at Debt Recovery Appellate Tribunal ("DRAT") on the grounds that it was in clear violation of Section 13(8) of SARFAESI Act. The Appellant Bank contended that the Borrower owed over Rs.2,00,00,000/- (Rupees Two Crores Only) in dues. The Appellant Bank further contented that since the residential house in public auction received the highest bid of Rs.71,00,000/- (Rupees Seventy-One lakhs Only) ("Highest Bid") as against the Reserved Price, the payment of Highest Bid by the Borrower does not discharge the entire liability of the Borrower.
  • Upholding the DRT Order, DRAT dismissed the said appeal of the Appellant Bank on the grounds that if the Borrower is ready and willing to pay the Highest Bid, then no fault can be found. On dismissal of the appeal by the DRAT, the Appellant Bank then appealed the order of DRAT before a Single Judge Bench of the High Court ("Single Judge Bench"). The Single Judge Bench passed the order setting aside the DRT Order and the order passed by DRAT on the grounds that both the said orders are in contravention of Section 13(8) of SARFAESI Act ("Single Judge Bench Order").
  • Thereafter, the judgement and order passed by the Single Judge Bench was further challenged by the Borrower before the Divisional Bench of the High Court ("Division Bench") who allowed the appeal of the Borrower and quashed the judgment dated 12th January 2017 passed by the learned Single Judge Bench and ordered that on payment of further Rs.17,00,000/- (Rupees Seventeen lakhs Only) (Reserved Price being already deposited) the Appellant Bank must handover the possession of the residential house along with title deeds.
  • Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the Division Bench, the Appellant Bank has preferred the present civil appeal1 in the SC.

Issue

Whether purchasing/ selling of the mortgaged property/ Secured Assets at reserved price or auctioned price discharges the borrower from its lability of the entire amount due?

Contentions

Appellant Bank/ Creditor

  • The Counsel appearing on behalf of the Appellant Bank vehemently submitted that the learned Division Bench erred in directing the Appellant Bank to release the residential house upon payment of an additional sum of Rs.17,00,000/- (Rupees Seventeen Lakhs only).
  • The Appellant Bank contended that it was also the observation of the Division Bench that the Borrower did not come forward to redeem the property on basis of the Reserved Price but merely made an offer in the capacity of a purchaser upon payment of the Reserved Price.
  • The Appellant Bank also highlighted that the Outstanding Amounts were outstanding as on 07th January 2013, and the Borrower couldn't be absolved from its liability merely upon payment of Highest Bid for the residential house as in the present case the amount due was much more than the Highest Bid.
  • It was also clarified that payment of the Highest Bid would entail only reversion of the residential property of the Borrower 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 Borrower.
  • 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.

Respondent/ Borrower

  • The Borrower submitted that it has deposited the Reserved Price plus the additional cost of Rs.17,00,000/- (Rupees Seventeen lakhs Only) in accordance with the orders passed by the DRT and therefore the residential house must be released.
  • The Counsel appearing on behalf of the Borrower submitted that the order passed by the Division Bench of High Court was equitable and does not warrant any interference by the SC in the exercise of power under Article 136 of the Constitution.

Judgment

The SC noted that the impugned judgment and order passed by the Division Bench directing the Appellant Bank to release the mortgaged property/secured property and to handover the possession as well as the original title deeds to the Borrower on payment of a total sum of Rs. 65,65,000/- (Rupees Sixty-Five lakhs and Sixty-Five Thousand Only) is contrary to Sub-section (8) of Section 13 of the SARFAESI Act.

It further stated that the payment of Rs. 65,65,000/- (Rupees Sixty-Five lakhs and Sixty-Five Thousand Only) against the Outstanding Amounts could not be viewed as the discharge of total liability and even if the property were to be sold in an auction at the Highest Bid received, the liability of the Borrower to discharge/ pay the balance dues persist.

Further, the SC restored the Single Judge Bench Order and the judgment dated 20th September 2017 passed by the Division Bench High Court was set aside and the Appellant Bank was permitted to proceed further with the auction proceedings of the mortgaged property i.e., residential house by inviting the bids afresh.

Conclusion

Holding that unless and until the Borrower was ready to deposit/pay the entire amount including but not limited to Outstanding Amounts payable together with all costs and expenses to the Appellant Bank, the Borrower cannot be discharged from the entire liability outstanding, the SC found that the Division Bench had erred in law.

Therefore, according to the SC, no order could have been passed either by the DRT or by the Division Bench to discharge the Borrower from its liability. Allowing the appeal, the SC held that the Appellant Bank could not be restrained from selling the mortgaged property by holding a public auction to recover the outstanding dues, unless the Borrower deposited the entire amount of due payable along with the costs incurred by the Appellant Bank in accordance with the provisions of the SARFAESI Act.

Footnote

1. Bank of Baroda v/s. M/s. Karwa Trading Company & Anr, Civil Appeal No.363 OF 2022

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