SC sets aside Madras HC order, restores auction purchaser’s rights in loan recovery case

The Supreme Court on Monday asked the Ministry of Finance to take a serious look at the provisions the Securitisation And Reconstruction of Financial Assets And Enforcement Of Security Interest Act, 2002, and Rules so as bring about “necessary changes, before it is too late in the day.”

The apex court said that some of the provisions the SARFAESI Act, which allows banks and financial institutions to recover loans, have “left the interests of secured creditors and auction purchasers high and dry” as “ambiguities” have resulted in a “huge mess” insofar as enforcement of security interest is concerned and has also given rise to “endless pipeline of litigation clogging the specialized forums of the DRT and DRAT, that are expected to expeditiously decide matters of recovery of debt.”

A bench led by Justice J B Pardiwala said that the “ill-wording” of Section 13(8) of the SARFAESI Act relating to resumption of secured assets has resulted in a glaring inconsistency between the provision and the SARFAESI Rules framed in lieu thereof.


“It is unfortunate that the ambiguities within the statutory provisions of the SARFAESI Act and Rules thereunder have left the interests of secured creditors and auction purchasers high and dry. The interpretative deadlock between the provision and the rules has single handedly resulted in a huge mess insofar as enforcement of security interest is concerned., giving birth to an endless pipeline of litigation clogging the specialized forums of the DRT (Debts Recovery Tribunal) and DRAT(Debts Recovery Appellate Tribunal), that are expected to expeditiously decide matters of recovery of debt.

The court said that various amendments have been made to the SARFAESI Act over the years to ensure that the Act continued to be potent in bringing about meaningful change to the poor credit culture prevailing in the country and put a check on the debt evasive acts of scrupulous borrowers.

However, “it is indeed very sad to note that even after these many years procedural issues such as the one involved in the case at hand, have continued to plague the legislation,” the SC said, adding that “despite a catena of amendments, the glaring anomaly that we have come across in respect of Section 13(8) of the SARAFESI Act and Rule(s) 8 and 9 of the SARFAESI Rules persists. The same renders the very mandate of the provision otiose.”

In this case, M. Rajendran vs M/S KPK Oils and Protiens India, the apex court allowed an auction purchaser to get back the property, as it set aside a Madras High Court order that allowed the original borrowers, who had mortgaged the property to a bank, to redeem their land after the loan amount was repaid.

The court held that the original borrowers had paid back the amount after the publication of notice of auction of the mortgaged property and hence they had no right to redeem the property. Thus, the SC termed as “misconceived” the contention of the borrowers that their right of redemption had to necessarily be construed in accordance with the date when the loan was obtained.