Financial institution can’t be restrained from selling mortgaged property by holding public auction and recover outstanding dues from borrower, if loan becomes NPA: SC

Read Judgment: Bank of Baroda V. M/s Karwa Trading Company & Anr.

Pankaj Bajpai

New Delhi, February 11, 2022: While deciding an issue regarding the auction of mortgaged property by Bank of Baroda upon term-loan account becoming NPA, the Supreme Court has observed that the bank cannot be restrained from selling the mortgaged property by holding the public auction and recover the outstanding dues, unless the borrower deposits the entire amount due and payable along with the costs incurred by the secured creditor as per Section 13(f) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). 

A Division Bench of Justice M.R Shah and Justice Sanjiv Khanna observed that it will be open for Bank of Baroda (Appellant – Secured creditor) to proceed further with the auction proceedings of residential house by inviting the bids afresh and whatever the amount is already paid by the borrower, the same may be adjusted against the dues/total liability of the borrower. 

The observation came to be passed with reference to an appeal filed by the secured creditor challenging the judgment, whereby the Division Bench of Rajasthan High Court (Jaipur Bench) had directed that if Karwa Trading Company (Respondent – Borrower) deposited a further sum of Rs 17 lakhs to the bank, the bank shall release the property and handover the possession along with the title deeds of the residential/housing property in question to the borrower. 

After considering the submissions, the Top Court observed that when the auction proceedings were initiated u/s 13 of the SARFAESI Act and after the bank took over the possession u/s 14 of the SARFAESI Act as per Section 13(8), the secured asset shall not be sold and/or transferred by the secured creditor, where the amount dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered by the borrower or debtor to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease assignment or sale of the secured assets. 

“In the present case though as on 07.01.2013 the dues were Rs. Rs.1,85,37,218.80/ and without the secured property was sold in a public auction the Division Bench of the High Court has directed to release the mortgaged property and handover the possession along with original title deeds to the borrower on the borrower depositing/paying a total sum of Rs.65.65 lakhs only. At this stage, it is required to be noted that Rs.65.65 lakhs was not the amount realized by selling the mortgaged property in a public auction. It was only a highest bid received and before any further auction proceedings were conducted, the DRT passed an interim order directing to handover the possession and handover the original title deeds on payment of Rs.48.65 lakhs which was the base price, which was the subject matter before the DRAT and before the Single Judge”, noted the Court. 

Therefore, speaking for the Bench, Justice Shah found that the borrower did not deposit and was not ready to deposit the entire amount of dues with the secured creditor with all costs, charges and expenses incurred by the secured creditor. 

Hence, it was open for the secured creditor to sell the mortgaged property which was put as a security and realize the amount by selling it in a public auction, added the Bench. 

At this stage, Justice Shah noted that even as per the Division Bench of the High Court the borrower made an offer to deposit/pay Rs 71 lakhs as a purchaser and not by way of redeeming the mortgaged property. 

Therefore, the order passed by the Division Bench directing 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 lakhs only was held to be contrary to Section 13(8) of the SARFAESI Act. 

The Apex Court therefore directed that in case pursuance to the orders passed by the DRT and the Division Bench of the High Court if the borrower is put into possession, considering the fact that the mortgaged property is a residential property, till the auction is finalized and the mortgaged property is sold in a public auction, the possession of the borrower may not be disturbed. 

However, it was directed that on public auction being finalized and the mortgaged property being sold by the bank, the borrower had to handover the peaceful and vacant possession of the property to the bank and/or the auction purchaser, added the Court.