Written By: Suvangana, Vaibhav Manu Shrivastava
Introduction:
The Kerala High Court at Ernakulam, in Ajmal K.V. & Anr. v. Union Bank of India & Ors [1] (W.P.(C) Nos. 24087 & 27867 of 2023, decided on 5 March 2024), addressed a recurring tension under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”)[2] The Court examined whether a bank, after conducting an auction and receiving the sale consideration, may nevertheless cancel the sale and enter into a One Time Settlement (“OTS”) with the borrower. The Court held that until the auction sale is confirmed and a sale certificate issued, the bank retains discretion to settle with the borrower, even if such settlement defeats the expectations of auction purchasers.
Background: Rights under the SARFAESI Framework:
The SARFAESI Act was enacted to empower banks and financial institutions with speedy recovery mechanisms for secured debts, without recourse to lengthy civil litigation. Section 13 authorises secured creditors to enforce security interests through measures such as possession and auction of mortgaged property. Section 13(8), particularly after its 2016 amendment, restricts the borrower’s right of redemption by providing that once an auction notice is published, the mortgagor cannot redeem the property.[3]
At the same time, judicial precedents such as Agarwal Tracom Pvt. Ltd. v. Punjab National Bank [4] have clarified that auction purchasers acquire no rights until the sale is confirmed and a sale certificate issued under Rule 9 of the Security Interest (Enforcement) Rules, 2002.[5] This duality—between the extinguishment of borrower rights after notice and the incomplete crystallisation of purchaser rights before confirmation—creates a grey area. It is in this context that disputes arise when banks explore OTS arrangements after conducting auctions.
Context:
The petitioners were successful bidders in an auction conducted by Union Bank of India for mortgaged properties. Having deposited the full sale consideration, they awaited confirmation of the sale and issuance of the sale certificate. However, interim orders passed by the Debts Recovery Tribunal (DRT) stalled the process. During this interregnum, the borrower negotiated an OTS with the Bank. Acting upon the settlement, the Bank cancelled the auction sales and refunded the petitioners’ deposits.[6]
The petitioners challenged this action before the Kerala High Court, contending that the Bank’s cancellation was arbitrary, unlawful, and violative of their rights as bona fide auction purchasers.
Petitioners’ Arguments:
The petitioners argued that the Bank’s action was contrary to Section 13(8) of the SARFAESI Act. Post the 2016 amendment, this provision extinguishes the mortgagor’s right of redemption once the auction notice is published.[7] Thus, according to the petitioners, the Bank could not subsequently allow redemption through an OTS.
They further relied on Rule 9 of the Security Interest (Enforcement) Rules, 2002, which requires the secured creditor to confirm the sale and issue a sale certificate once the purchaser has paid the full consideration. The petitioners submitted that by paying in full, they had acquired vested rights in the property, which could not be nullified unilaterally.
Bank’s Defence:
The Bank contended that under the SARFAESI framework, acceptance of a bid and payment of consideration do not by themselves conclude a sale. The purchaser’s rights crystallise only when the sale is confirmed and a sale certificate is issued. Until then, the Bank retains discretion, including the authority to settle with the borrower.
To support its position, the Bank relied on precedents such as Agarwal Tracom Pvt. Ltd. v. Punjab National Bank (2017) 1 SCC 7538, where the Supreme Court recognised that an auction purchaser acquires no vested rights until confirmation.[9] The Bank
[1]Ajmal K.V. & Anr. v. Union Bank of India & Ors., W.P.(C) Nos. 24087 & 27867 of 2023 (Ker. HC, Mar. 5, 2024).
[2]THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 https://www.indiacode.nic.in/bitstream/123456789/2006/1/A2002-54.pdf
[3]Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, No. 54 of 2002, § 13(8).https://www.indiacode.nic.in/bitstream/123456789/2006/1/A2002-54.pdf
[4]https://api.sci.gov.in/supremecourt/2016/31816/31816_2016_Judgement_27-Nov-2017.pdf
[5]https://ibclaw.in/sarfaesi-the-security-interest-enforcement-rules-2002/
[6]Ajmal K.V. (supra note 1)
[7]SARFAESI Act, § 13(8) (as amended by Act 44 of 2016).
[8]https://api.sci.gov.in/supremecourt/2016/31816/31816_2016_Judgement_27-Nov-2017.pdf
[9]Agarwal Tracom (supra note 3)
