Background and Facts
In a recent judgment passed in the matter of ‘Sanjay Sharma v. Kotak Mahindra Bank Ltd. & Ors.’,[1] the Hon’ble Supreme Court of India (“Court”) addressed the right of redemption of mortgaged properties under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”). The matter revolved around a dispute regarding auction of a secured property where the ownership rights of one of the parties, claiming to be the owner of the secured asset, were under scrutiny due to unregistered transfer instruments.
The appellant in this case, an auction purchaser, acquired the secured asset through a public auction conducted by Kotak Mahindra Bank Limited (“Respondent No. 1/ Kotak”) under the provisions of SARFAESI Act. A sale certificate was issued by Kotak to the appellant in respect of the secured asset on December 27, 2010. However, a claim was made by Respondent No. 2, who relied on an unregistered agreement to sell and other documents to assert its ownership rights over the secured asset. Respondent No. 2 contested the auction process by invoking the right of redemption under Section 13(8) of the SARFAESI Act.
Issue
The primary question before the Court was whether Respondent No. 2, claiming ownership based on unregistered documents, had the right to redeem the mortgaged property after the issuance of the sale certificate.
Key Findings and Analysis
Unregistered Documents and Ownership
The Court emphasized on the requirements under Section 54 of the Transfer of Property Act, 1882 (“TP Act”) to analyse the validity of Respondent No. 2’s claim on the secured asset. The Court reiterated that as per the provisions of the TP Act, for the sale of a tangible immovable property to be valid the transfer must be made through a registered instrument. In this case, the majority of the documents relied upon by Respondent No. 2, including an agreement to sell dated April 23, 2001, executed in favour of Respondent No. 2, were unregistered.
The Court highlighted that unregistered sale deeds cannot lead to conveyance or transfer of ownership as required under Section 54 of the TP Act, and in this regard also relied on the judgment of the Supreme Court in ‘Babasheb Dhondiba Kute v. Radhu Vithoba Barde‘[2]. Furthermore, the Court observed that neither the bank nor the appellant (being an auction purchaser) were in the position to know about the existing claim of Respondent No. 2, given that such claims were based on unregistered documents which are not available in public records.
Redemption Rights Under Section 13(8)
An important aspect of the judgment was the discussion on the amended Section 13(8) of the SARFAESI Act. The Court held that, post the 2016 Amendment[3], the right of redemption is extinguished upon the publication of a public notice for auction under Rule 9(1) of the Security Interest (Enforcement) Rules, 2002 as opposed to the unamended provision whereunder the borrower’s right of redemption extended until the sale or transfer of the secured asset was completed.
In the present case, while the facts related to the unamended SARFAESI Act, the ambiguity arising from Respondent No. 2’s unregistered documents played an important role. Further, the Court also relied on the fact that ample opportunities were provided to Respondent No. 2 to seek the redemption of the mortgage, however, Respondent No. 2 failed to make use of such opportunities.
The Court’s decision in this matter contrasts with its earlier decision in ‘Surinder Pal Singh v. Vijaya Bank & Ors.[4]‘ wherein the Court was dealing with the unamended SARFAESI Act and upheld the borrower’s right of redemption until the sale certificate was registered and possession was handed over. However, in the present matter, the Court’s analysis was seemingly influenced by the ambiguity surrounding the ownership claims of Respondent No. 2 due to the unregistered deeds and the repeated opportunities provided to Respondent No. 2 to redeem the mortgage. Our analysis of Court’s decision in ‘Surinder Pal Singh v. Vijaya Bank & Ors.’ can be accessed here.
Judgment and Implications
The Court set aside the order passed by the High Court and upheld the auction sale and directed Kotak to facilitate the handover of possession of the secured asset to the appellant.
The decision reinforces some important legal principles:
- Unregistered agreements do not convey ownership rights or title in a property;
- The right of redemption under the SARFAESI Act is curtailed by the timelines prescribed thereunder, particularly post the 2016 Amendment; and
- Courts must ensure the sanctity of public auctions to preserve stakeholder confidence and prevent misuse of the redemption right.
Conclusion:
Although, this judgment reaffirms that unregistered documents cannot confer ownership rights or title to property, moreover, the Court has effectively balanced the rights of bona fide auction purchasers with a need to prevent borrowers/ mortgagors from misusing the redemption right. This decision aligns with the evolving jurisprudence surrounding auction processes and is part of a series of rulings, including ‘Celir LLP v. Ms Sumati Prasad Bafna & Ors.‘[5], that aim to uphold the sanctity of the auction process particularly under SARFAESI Act and provide greater certainty to auction purchasers and banks/ financial institutions.
We will keep examining this issue as it will certainly keep unfolding itself in time to come. Watch this space for more…
Footnotes:
[1] Civil Appeal No. 14282 of 2024.
[2] (2024) 4 SCC 310.
[3] Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 01.09.2016, vide Notification No. SO2831(E) dated 01.09.2016 (“2016 Amendment”).
[4] Civil Appeal No. 6843 of 2023.
[5] Contempt Petition (C) Nos.158-159 of 2024 in Civil Appeal Nos. 5542-5543 of 2023.