Author: Suman, Army law college, pune
Supreme Court of India- Judgement delivered on February 10, 2022
Bench: Justice M.R. Shah and Justice Sanjiv Khanna.
Introduction
The case has been regarded to be a landmark case by the bank of Baroda v. M/s Karwa trading Company is involved in handling of very important issues in the SARFAESI Act, 2002 and this objection is on interpretation in Section 13( 8). It explains how the right of secured creditor to sale of the mortgaged property under Section 13 can be countered by partial payment made by a debtor prior to auction. The judgment of the Supreme Court did not just strengthen the protection of creditors but it also reinstated the statutory protection of the recovery process.
Factual background
Bank of Baroda sanctioned a term lending of 1 crore and cash credit limit of 95 lakhs as loan to Karwa Trading Company, the loan was against two properties. The account has been marked NPA with effect-31 October 2012 after the borrower defaulted. The bank issued a demand of 1.85 crores on January 7, 2013 together with a Section13(2) notice and then subsequently issued an enforcement notice under Section 13(4) which was dated August 22, 2013.
On November 8, 2013, the bank symbolically acquired possession relying on Section 14 and the residential property was physically grabbed on November 25, 2013, with the police help. The general auction starting bid at 48.65 lakhs in one of the reserve properties was announced on December 16, 2013 and was to give offers on January 20, 2014.
On January 11, 2014, Securitization Application (SA No. 09/2014) was filed by Karwa Trading Company. The DRT also directed an interim relief, under which the borrower had to deposit 20 lakhs by January 20, 2014 and kept open the option of full redemption should he deposit 48.65 lakhs by January 27, 2014 .The borrower has also paid 48.65 lakhs in full.
On January 11, 2014, Karwa Trading Company lodged an application of Securitization (SA No. 09/2014). The DRT allowed the interim relief to the borrower to evade the auction by depositing the amount of 20 lakhs till January 20,2014 and retaining all redemption rights in case deposited 48.65 lakh till January 27, 2014. The bank filed appeal against the order of DRT to DRAT. DRAT upheld DRT wherein although the DRT did not meet the final auction bids of 61.5-71 lakhs, complete deposit revealed that the borrower remained redemption worthy.
The orders were however changed by a High Court Division Bench that allowed the bank to auction the property but only on condition that Karwa paid 17 lakhs more and this was in addition to the 48.65 lakhs already paid . This order was alleged to have diluted the statutory mandate of SARFAESI and Bank of Baroda subsequently sought the Supreme Court in the exercise of its powers by way of the Article 136, against this order.
Issue before the Supreme Court
When a mortgagee makes part payment against auction, does it prevent the bank to sell the mortgaged property?
Is the order of the High Court compromising statutory provisions under the Section 13(8) a jurisdictional error?
Judicial reasoning
A division bench comprising Justice M.R. Shah gave an emphatic victory to the bank by pointing out:
Strict interpretation of section 13(8): Under the bankruptcy code, the secured creditors can sell property under section 13(8) in the event that set conditions are not satisfied. This notice that explains the debt that is owed by the borrower is a formal letter, which contains information about the amount of money owed. Then the creditor may auction himself to get back the outstanding amount of his or her loan money and the obligator should pay in full before they publish such auction notice. The borrower can avoid the auction in case he or she fails to pay before the auction process is started. In case of default, the lender may go ahead to auction the property to retrieve the defaulting amount of the loan, together with charges and costs. This is a last chance to the borrower to reduce his or her debt so that the property is not sold. This provision is to prevent the secured creditor wasting much time since the last warning is issued to the borrower to repay. In section 13(8) creditors have it easy because there is a clear boundary: staying action is possible only when the borrower pays all the dues prior to the publication of the auction notice.
Partial payments are insufficient: The borrower paid 48.65 lakhs claiming that he has settled all his debt, but the actual debt against the borrower by January 2013 was around 1.85 crores. This highlights the amount of non-paid balance and inadequacy of payment as a bar under partial payment. The Supreme Court elucidated that in order to redeem a property or clear a loan completely then all the remaining dues should be settled. Deposits or partial payments (however big) are not sufficient unless it is the whole amount being owed. The court further added that as long as part of the debt has not been paid, the borrower is unable to stop the lender to pursue other action to recover the loan especially commencing auction proceedings. This decision highlights the significance of full dues payments prior to any legal redemption, auction of property and in effect conclusively draws a line to the borrowers in order to appreciate the fact that the borrower has to pay the full dues in order to avoid the auction proceedings and to legally redeem his/her property in full.
Precedence of statutory framework over judicial equities: This was because the case in the High Court which dealt with the Section 13(8) of the UK Constitution made people worry about how the Court can step on the toes of legislature unintentionally. The step was supposed to bring clarity in the way certain problems are dealt with and restrict the Court discretion. As stressed by the Supreme Court, the statutory rules that are clearly established cannot be overlooked in judicial ruling and must not be undermined by the courts but should be applied and interpreted as they are written, not the way they are understood by the judicial system. The Court made it clear that these limits can be crossed in the interests of justice, which may cause inconsistencies and unfairness. The case of strict following of the boundaries set by statutes as highlighted by the Court ensures that judges need to omit the need of short-changing the original intention of laws, to ensure that laws are predictable and beneficial to all. Judicial discretion against legislative power is a well-discussed old problem in law system all over the world.
Restoration of banks rights: The Supreme Court affirmed the ruling of a single Judge, which permitted a bank to go on with the sale of property via public auctioning. In this process, there is competition among the buyers and hence there is a need of defaulted loan resolution or securing dues. The Court also instructed that the Debt Recovery Tribunal settle the case which ought to be an objective and impartial venture. The case is precedent but the favorability made in regards to all parties is not against the right of the bank to recover the dues due and that of parties making the challenge. It is bound to influence future instances of auctioning of assets after default of loans.
Significance of the judgement
Strengthening SARFAESI credibility: The Supreme Court also strengthened the imperatives of the legislation that enable the banks to repossess NPAs on efficient terms which would have negatively affected exercise of their right to securities.
Clarifying redemption timing: Additional deposits after notice realization and prior to auction are immaterial, but the borrowers are under an obligation to fully pay the dues prior to the notifications of an auction.
Affirming creditor rights: With the ability of intermediary stays that granted the banks partial relief, banks currently possess explicit rights to carry on with publicity auctions in spite of any temporary restrainers.
Impact on stakeholders
New laws have now given the banks and financial institutions powers to collect their loans faster and hence improving on the bad debts in BO. The enhanced legal system means that the process of recalling debt could be carried out a little faster and the time spent in collecting debtors can be reduced besides improving the management of assets. Borrowers need to know the regulations of the loans repossession like settling the entire debt amount before the reproduction of pledged properties. The regulatory body has moved to give better guidelines and time lines so that the procedure will be equally equitable to the lenders and the borrowers. These reforms improve the legal mechanisms that are at the disposal of banks, which will act on responsible lending, borrowing, as well as creating stability in finances. All in all, the possibility to improve the legal climate contributes positively to all parties as it simplifies the debt recovery process and minimizes the number of court cases.
Conclusion
Bank of Baroda v. Karwa Trading Co. authoritatively explains the SARFAESI procedures, particularly as regards to redemptive payments. It reinforces statutory priority against judicial discretion, improves the prompt mechanisms of recovering the debt by the creditors and becomes the hallmark in future cases that involve the partial redemption. This historic decision will probably simplify the process of NPA resolution and rebuild the strength of lender trust in the recovery law.
FAQs
What is the case of Bank of Baroda v. Karwa Trading Co. about?
The Bank of Baroda Vs. Karwa Trading Co. engulfs a case in which Karwa Trading Co. disputed a move by Bank of Baroda which had occurred under the Securitization and Re-construction of financial assets and enforcement of security interests Act, 2002. The firm alleged that the action by the bank to repossess its secured assets was unjust and redress at civil court was sought.
What legal issue was primarily addressed in the case?
The main question that was answered was whether civil courts are competent in hearing suits founded on actions done under the SARFAESI Act. The Supreme Court discussed the section 34 of the SARFAESI Act that excludes the civil court jurisdiction in cases, which fall within the limits of the Debt Recovery Tribunal (DRT) or the Appellate Tribunal.
