Legal Analysis of Mortgage Sale Procedures

Delve into the detailed legal analysis of mortgage sale procedures as highlighted in recent court cases. The focus is on understanding the complexities of borrower rights, creditor responsibilities, and the application of the SARFAESI Act. Discover how the courts navigate through intricate legal frameworks to ensure fairness and transparency in mortgage enforcement proceedings.

Facts

• The guarantors approached the DRT, Chennai, seeking to quash the First Sale Notice dated 21.1.2012.
• An interim stay was granted by the DRT, Chennai, restraining the respondent-Bank from proceeding with the First Sale Notice for 30 days, subject to depositing 50% of the outstanding amount.
• A sum of Rs.12.25 crores was remitted to the respondent-Bank after the sale of the mortgaged property at Item ‘B’ in the Schedule of Properties.
• Various legal proceedings and challenges were initiated by both parties regarding the sale notices and auction outcomes.
• The High Court and the DRAT, Chennai, were involved in reviewing and deciding on the appeals and challenges regarding the sale processes.
• Multiple interim orders, petitions, and representations were made, leading to further litigations and disputes.
• Specific instances of auctions, sale notices, and payments made by the guarantors and auction purchasers were detailed in the court records.
• DRAT, Chennai allowed both appeals and set aside DRT’s order dated 25.6.2018.
• Civil Revision Petitions were dismissed by the Division Bench of the High Court on 29.7.2013.
• Guarantors failed to make the payment as directed by the Division Bench and instead sought an extension.
• The High Court observed that the sale was not conducted fairly and directed DRT to hear the parties without delay.
• Auction scheduled for 16 November 2012 was stayed by DRT based on agreements and lack of bidders.
• The High Court directed maintenance of status quo regarding the amount in question on 30.4.2013.
• High Court allowed parties to settle the liability and deferred a sale posted on 25.9.2007.
• Various orders were issued by High Court and DRT regarding refunds and sale cancellations.
• The Division Bench dismissed the Civil Revision Petitions on 29.7.2013.

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Issue

• The court will have to initiate the procedure de novo.
• The question to be considered is whether the sale notified on 21.1.2012 could not take place on the scheduled date due to reasons solely attributable to the guarantors.

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Arguments

• Learned Senior Counsel submits that if the sale does not take place pursuant to a notice issued under Rules 8 and 9 of the said Rules, then the procedure prescribed by the said Rules will have to be followed afresh.
• Senior Counsel argues that the sale in respect of properties at Items ‘A’ and ‘D’ of the Schedule of Properties in the First Sale Notice dated 21.1.2012 should be quashed and set aside.
• The amount withdrawn by respondent No.3 in an illegal manner, along with interest accrued, is highlighted.
• Senior Counsel argues that the Second Sale Notice provided only 10 days for paying revised outstanding dues, which was done in haste and with a mala fide intention.
• The contention of the respondent-Bank that the Second Sale Notice is a continuation of the First Sale Notice is deemed erroneous by Senior Counsel.
• It is argued that the excess amount generated from the sale of properties should have been kept in an Escrow account by the respondent-Bank for possible refunds.
• Violation of Rule 8(6) and Rule 9(1) of the Security Interest (Enforcement) Rules, 2002 is pointed out by Senior Counsel.
• The legal position regarding the time gap between notice and sale of immovable assets as per the rules is discussed.
• Arguments and submissions from both sides, including respondent-Bank’s defense and appellant’s claims, are presented.
• Senior Counsel emphasizes that the sale conducted in breach of mandatory rules would be null and void.
• Effects of the ongoing litigation on the auction purchaser’s rights and benefits are highlighted.
• Senior Counsel reiterates that the respondent-Bank should have followed the mandatory procedures despite the borrower’s attempts to thwart the sale.
• Respondents stood as guarantors for a credit facility granted by the bank to a company.
• They created an equitable mortgage by depositing the title deeds of their property.
• Appellants argue that the second sale notice did not provide a mandatory 30-day period and was thus invalid.
• The judgment in Mathew Varghese case extensively considered SARFAESI Act provisions.
• Respondent-Bank issued notices under Section 13(2) and 13(4) when the transaction became non-performing.
• Respondent-Bank did not take physical possession recovery steps for 9 years.
• Respondent No.3 received an excess amount from the third sale notice and is not directly related to promoters.
• The court imposed costs on the petitioners for pressurizing relief not sought and wasting court’s time.

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Analysis

• Equitable grounds are considered for not interfering with the direction given in the case.
• Most guarantors are either Promoters/Directors or their family members, except respondent No.3, who is only connected through marriage to a Promoter/Director’s family member.
• The case highlights how a litigant strategically uses multiple legal proceedings to hinder the enforcement of a security interest, ultimately undermining the purpose of the SARFAESI Act.
• Mere conferment of power to sell in the mortgage deed without court intervention does not deprive the mortgagor of the right to redemption.
• The right to redemption is not lost until the sale is complete by registration of sale.
• The right to redemption stands extinguished upon registration of the sale certificate.
• The mortgagor’s right to redeem survives until completion of sale by the mortgagee through a registered deed.
• The power to sell should not be exercised without serving a written notice requiring payment of the principal money to the mortgagor.
• The right of redemption under Section 60 of the Transfer of Property Act can only be extinguished by the act of parties.
• The case involved multiple rounds of litigation, with the appellants attempting various tactics to delay the proceedings.
• The SARFAESI Act allows banks and financial institutions to possess and sell securities without court intervention.
• The need for providing clear notice to borrowers before sale or transfer of secured assets is emphasized.
• Compliance with Rules 8(6) and 9(1) of the SARFAESI Act is crucial for conducting a valid sale of secured assets.
• The importance of ensuring borrowers have sufficient time to redeem their properties is highlighted.
• A comparison with the case of Mathew Varghese is made to distinguish the facts and decisions.
• The auction purchaser faced delays in enjoying the benefits of the sale due to continued litigation by the appellants.
• Clear guidelines were provided regarding the sale process, borrower rights, and creditor responsibilities.
• The court emphasized the need for proper procedures and transparency in the sale of mortgaged properties.
• The judgement reinforces the borrower’s right to redeem the property before the sale or transfer takes place.
• Sub-section (8) of the SARFAESI Act recognizes and asserts a valuable right in favor of the borrower, allowing them to stop the sale or transfer of the secured asset until the last minute.
• This provision is intended to protect the constitutional right of the borrower as the owner of the secured asset, as per Article 300-A of the Constitution.
• The secured creditor, acting as a trustee, must adhere to the provisions of the SARFAESI Act when realizing dues by selling the property entrusted to them.

Decision

• Interim injunction granted for 30 days restraining the Authorised Officer from selling properties under an Auction Sale Notice.
• Applicants requested time to sell remaining property and clear dues within a month.
• Appellants directed to handover possession of specific properties to the auction purchaser within 8 weeks.
• Appellants must pay rent received from properties to the auction purchaser since a specific date.
• Dismissal of Civil Revision Petitions with a cost to be paid to the respondent-Bank and auction purchaser.
• Interim stay granted for 30 days against the bank proceeding on sale notice subject to a deposit of outstanding amount.

Case Title: S KARTHIK Vs. N SUBHASH CHAND JAIN (2021 INSC 534)

Case Number: C.A. No.-005920-005923 / 2021

Click here to read/download original judgement