Author: Gopika Karunakaran a student at Government law college, Vellore.
Abstract:
This case involved a dispute between a bank (creditor) and a trading company (borrower) under the SARFAESI Act of 2002. The borrower had obtained a loan for Rs. 1.95 crore but defaulted, and the bank initiated auction proceedings to recover the amount owed. The borrower challenged this in court, arguing it had the right to retain the property by depositing the auction’s base price. The higher courts agreed but the Supreme Court overturned this, finding that allowing retention for anything less than full repayment violated the SARFAESI Act. The ruling reinforced that the Act aims to allow swift recovery of bad debts for creditors.
IN THE HON’BLE SUPREME COURT OF INDIA
Citation: Civil Appeal No. 363 of 2022
Date of Judgement: 10 February,2022
Judge’s Bench: Justice M.R Shah
Case Type: Appeal
Petitioner: Bank of Baroda
Respondent: M/s Karwa Trading Company
Fact:
The facts leading to the present appeal in nutshell are as under: That the appellant herein and – The respondent – borrower (hereafter referred to as the borrower) was granted a term loan of Rs.100 lakhs and a cash credit limit of Rs.95 lakhs by the bank on the security of 2 mortgaged properties: (i) an industrial site measuring 500 square meters on Chittor Road in Bundi. (ii) a residential/housing 2 property situated at 1Ja27, Vikas Nagar, Bundi measuring 198 Sq.Mtrs.bThat the borrower failed to repay the term loan according to the terms and circumstances of the arrangement. The account of the borrower became NPA on 31.10.2012. On 07.01.2013, the borrower received a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act, 2002) demanding a sum of Rs.1,85,37,218.80/. On 22.08.2013, the bank took symbolic possession of the immovable property/residential house and issued a notice under Section 13(4) of the SARFAESI Act, 2002. An application was filed under Section 14 of the SARFAESI Act, 2002, which was approved on November 8, 2013, and the bank seized possession of the residential house, which was one of the borrower’s mortgaged properties, on November 25, 2013.
That the bank then issued a sale notice by public auction of the residential property dated 16.12.2013. The reserve price fixed was Rs.48.65 lakhs for sale of the said 3 secured asset in terms of the procedure prescribed under Rule 8 read with Rule 9 of the Security Interest (Enforcement) Rules, 2002. The date of auction notified was 20.01.2014.The borrower disputed the bank’s auction by filing Securitisation Application (SA) No.09/2014 under Section 17 of the SARFAESI Act, 2002 before the DRT in Jaipur.. An interim order was passed by the DRT that if the borrower deposits Rs.20 lakhs on 20.01.2014 by 12.00 noon, the bank shall accept the bids but not Finalize the bids/confirm the sale of the secured asset, and if the borrower defaults on the balance payment of Rs.28.65 lakhs, the restraining order would be automatically vacated. It is undisputed that the borrower deposited Rs.48.65 lakhs with the bank. That the aforementioned temporary order issued by the DRT was contested by the bank in an appeal before the Debt Recovery Appellate Tribunal.
The DRT also stated that if the borrower deposits Rs.48.65 lakhs with the bank on or before January 27, 2014, the bank must deliver possession of the secured asset along with the authentic title deeds to the property in question. It was the appellant bank’s case that In a public auction, the bank received bids of up to Rs.71 lakhs, and the amount of debt due against the borrower at the time was more than Rs.2 crores, and if the borrower is interested in redeeming the mortgaged property, he can do so by discharging the entire liability rather than paying Rs.48.65 lakhs, as ordered by the DRT. The appellant – bank also claimed that the DRT’s order dated 17.01.2014 violated Section 13(8) of the SARFAESI Act, 2002. However, It was argued on behalf of the bank that the bank may not have any trouble releasing the subject property if the borrower is willing to pay the maximum bid available with the bank, which is Rs.71 lakh. The borrower’s deposit of Rs.71 lakhs may not fully satisfy the outstanding liability against the borrower, but the bank may still be able to release the property.
The DRAT dismissed the appeal, finding that the reserve price was Rs.48.65 lakhs, which the borrower placed, and the bank had received bids ranging from Rs.61.50 lakhs to Rs.71 lakhs and the alleged bidders failed to deposit the earnest money and when the borrower is ready to purchase the said property for there is no issue with the DRT’s order worth Rs.71 lakhs. The order issued by the DRAT dismissing the bank’s appeal was challenged before the learned Single Judge. The learned Single Judge threw aside both DRT and DRAT orders in its judgment and decision dated 12.01.2017, largely because the orders violated Section 13(8) of the SARFAESI Act, 2002. The borrower appealed the learned Single Judge’s verdict and order before the Division Bench of the High Court through the present intra-court appeal. By the impugned judgment and order, the Division Bench of the High Court has allowed the said appeal, quashed and set aside the judgment and order passed by the learned Single Judge, and directed the bank to release the secured property 6 (residential house) upon the borrower depositing a further sum of Rs.17 lakhs with the bank and handing over possession along with the title deeds to him.
The bank – financial institution – secured creditor filed this appeal because it was unsatisfied with the impugned judgment and order given by the Division Bench of the High Court.
Historical background:
Bank of Baroda extended credit facilities amounting to ₹1.95 crores to M/s Karwa Trading Company, secured against two properties: an industrial plot and a residential house. The borrower defaulted on repayment, leading the bank to classify the account as a non-performing asset (NPA). Consequently, the bank initiated proceedings under the SARFAESI Act to recover the outstanding dues.
The Bank of Baroda served a notice to Karwa Trading Company under the SARFAESI Act in 2013. The Bank took possession of Karwa Trading Company’s residential property. The Bank issued a public auction notice for the property in 2013. The Rajasthan High Court ruled in favor of Karwa Trading Company.
Issue:
Is it true that purchasing or selling mortgaged property/secured assets at a reserved or auctioned price relieves the borrower of all liability for the whole amount owed?
Feeling aggrieved and dissatisfied with the impugned judgment and order dated 20.09.2017 passed by the Division Bench of the High Court of Judicature for Rajasthan Bench at Jaipur in D.B. Special Appeal Writ No.349 of 2017, by which the Division Bench of the High Signature Not Verified Court has authorized the stated intra-court appeal and has been digitally signed by R Natarajan Date: 2022.02.10 16:44:46 IST Reason: quashed and set aside the judgment and order dated 12.01.2017 passed by the learned Single Judge and has 1 directed that if the appellant In this case, Bank of Baroda , further directed that the Division Bench of the High Court restore the SA No.9/2014 filed by the borrower before the learned Debt Recovery Tribunal (DRT) to its original number so that it can be heard on merits. Respondent—the borrower deposits an additional Rs. 17 lakhs to the bank, which will release the property and hand over possession along with the title deeds of the residential/housing property in question to the borrower.
Contention:
Appellant:
The Counsel arguing on behalf of the Appellant Bank said that the learned Division Bench erred in directing the Appellant Bank to release the residential house upon payment of an extra sum of Rs.17,00,000/- (Rupees Seventeen Lakhs only).
The Appellant Bank also asserted that the Division Bench observed that the Borrower did not come forward to redeem the property on the basis of the Reserved Price, but rather made an offer as a purchaser upon payment of the Reserved Price. It was also clarified that payment of the Highest Bid would only result in the reversion of the Borrower’s residential property and would not fully discharge the outstanding liability, contrary to the Division Bench’s misinterpretation 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:
The Borrower claimed that it had deposited the Reserved Price plus an additional cost of Rs.17,00,000/- (Rupees Seventeen lakhs only) in compliance with the DRT’s orders, and hence the residential house should be released. The counsel arguing on behalf of the Borrower contended that the order issued by the Division Bench of the High Court was equitable and did not deserve any interference by the SC in the exercise of power under Article 136 of the Constitution. Mrs. Christi Jain, skilled counsel for the respondents – borrowers, strongly opposes this appeal.
Legal Reasoning:
The Court’s reasoning was anchored in a strict interpretation of the SARFAESI Act. It held that the borrower failed to meet the total outstanding obligations, including the principal, interest, costs, and expenses. The Division Bench’s directive to release the mortgaged property upon partial payment was deemed inconsistent with Section 13(8) of the SARFAESI Act, which mandates full settlement of dues for the release of collateral. The Supreme Court underscored that provisional relief cannot override the established legal framework governing secured credit recovery.
Judgment:
However, the DRT’s order dated 17.01.2014 was an interim relief order in SA No.9/2014, and therefore, even if the interim relief order is set aside by this Court, the appeal/application must be decided and disposed of on merits and on whatever grounds the borrower may have. However, the bank cannot be prevented from selling the mortgaged property at a public auction, realizing the amount, and recovering the outstanding dues, unless the borrower deposits/pays the entire amount due and payable, as well as the costs incurred by the secured creditor, in accordance with Section 13(f) of the SARFAESI Act.
In light of the foregoing and for the reasons described above, this appeal is successful. The impugned judgment and order dated 20.09.2017 passed by the Division Bench of the High Court in DBSAW No.349/2017 is hereby quashed and set aside, and the order passed by the learned Single Judge quashing and setting aside the DRT’s order dated 17.01.2014, confirmed by the DRAT, is hereby restored.
It will be open to the appellant – bank to continue with the auction proceedings of the mortgaged property, i.e., residential house, by inviting bids anew, and whatever amount is already paid by the borrower may be adjusted against the borrower’s dues/total liability in accordance with the interim relief order passed by the DRT and/or the impugned judgment and order passed by the Division Bench of the High Court. At the same time, DRT will decide and dispose of SA No.09/2014 submitted by the borrower under Section 17 of the SARFAESI Act in accordance with the law, on its own merits, and on any other reasons accessible to the borrower.
It also observed and directed that if the borrower is put into possession in accordance with the orders issued by the DRT and the Division Bench of the High Court, and the mortgaged property is a residential property, the borrower’s possession may not be disturbed until the auction is finalized and the mortgaged property is sold in a public auction. However, once the public auction is completed and the mortgaged property is sold by the bank, the borrower must transfer quiet and vacant ownership of the property to the bank and/or the auction bidder. However, in the interim, the bank will keep the original title deeds to the mortgaged property.
In the meanwhile, and until the borrower remains in possession of the mortgaged property as per the current order and the mortgaged property is sold in a public auction, the borrower shall not transfer or alienate the mortgaged property in any way, including possession. The present appeal is granted, with the aforesaid additional remarks and directives. There will be no cost order based on the facts and circumstances of this case.
Impact
This decision confirms the inviolability of the SARFAESI Act’s provisions, guaranteeing that financial institutions can properly recover debts without facing unnecessary legal obstacles. It establishes a precedent that partial settlements do not oblige creditors to release secured assets until the total due amount is paid. This decision is expected to streamline the NPA recovery process by providing clarity and assurance to banks and financial institutions about their rights and the legal procedures to be followed.
Conclusion
The Supreme Court’s decision in Bank of Baroda (S) v. Karwa Trading Company And Another (S) is a critical affirmation of the SARFAESI Act’s provisions, ensuring that secured creditors retain their rights to recover dues unhindered by partial settlements or interim orders that contravene established legal frameworks. This decision not only strengthens the position of financial institutions in managing NPAs but also underscores the necessity for borrowers to meet their comprehensive financial obligations to avoid forfeiture of secured assets. In the broader legal context, the ruling fortifies the mechanisms for financial recovery, promoting financial stability and accountability.
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