A three-judge bench of the Supreme Court, in S. Karthik & Ors. v. N. Subhash Chand Jain & Ors.(“S. Karthik”), recently relaxed the mandatory pre-requisites prescribed for sale of mortgaged assets under the Security Interest (Enforcement) Rules, 2002 (“The SI Rules”), under certain circumstances. It was held that when a sale notice under the SI Rules does not result in a sale due to reasons entirely attributable to the borrower, then the lender need not wait another 30 days before selling the mortgaged assets through a subsequent sale notice. This decision assumes significance as it is indicative of a lender friendly approach in monetising their security interests by adopting a flexible standard in interpreting the procedural prerequisites, rather than reading them pedantically. This blog examines the judgement in detail.
Facts of the case
Ace Concrete Private Limited (“Borrower”) availed loans from the Indian Overseas Bank (“Lender”), with the erstwhile promoters of the Borrower (“Guarantors”) mortgaging four immovable properties pursuant to the transaction.
In April 2010, the account of the borrower was characterised as a ‘Non-Performing Asset’. Soon after, a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002 (“SARFAESI Act”) , to enforce the security interest, was issued by the Lender. Later, in January 2012, a sale notice in respect of all four mortgaged properties was issued by the Lender, giving the Guarantors more than 30 days to make payment of outstanding dues to recover secured assets (“First Sale Notice”).
The Guarantors challenged the First Sale Notice before the Debt Recovery Tribunal, Chennai (“DRT”), pursuant to which the DRT stayed the sale notice for a period of 30 days. However, this interim stay was subject to the condition that the Guarantors would deposit 50% of the outstanding amount with the Lender within this period.
When the Guarantors failed to deposit this amount, the Lender proceeded to sell one of the four mortgaged properties through a private treaty in March 2012. Subsequently, in July 2012, the Guarantors’ application, challenging the First Sale Notice was dismissed by the DRT.
Soon after the dismissal of the Guarantors’ application, the Lender issued another sale notice for the remaining three mortgage properties (“Second Sale Notice”), asking the borrowers to repay the outstanding amounts within 10 days to avoid the sale of mortgaged assets.
The Guarantors approached the DRT, challenging the legality of the Second Sale Notice, alleging non-compliance with the SI Rules, which mandate a 30-day notice period. In August 2012, the DRT ordered an interim stay on the Second Sale Notice for 30 days, subject to the Guarantor making a part payment to the Lender within the said period. However, instead of complying with this direction, the Guarantor approached the DRT, seeking that the amount be deposited in another account, considering that criminal investigations were pending against the officers of the Lender.
The DRT dismissed this application in September 2012, allowing the Lender to proceed with the sale of the mortgaged properties, although the application related to the legality of the Second Sale Notice was kept pending. Soon after, the sale of two of the remaining three mortgaged properties were completed through auction.
Meanwhile, several applications and revision petitions were filed by the Guarantors before the DRT, Debts Recovery Appellate Tribunal, Chennai (“DRAT”), and the Madras High Court. In June 2018, the DRT set aside the Second Sale Notice and consequent sale of the mortgaged properties. This was challenged by the Lender and the auction purchaser before the DRAT, which set aside the DRT’s order, holding in favour of the legality of the Second Sale Notice. The Madras High Court, on further appeal, upheld the order of the DRAT, following which, the matter came up before the Supreme Court.
Section 13 of the SARFAESI Act allows a lender to enforce its rights against a secured asset, if the borrower’s account is classified as a ‘Non-Performing Asset’. Rules 8 and 9 of the SI Rules provide the prerequisites with which a lender must comply, after the issuance of the proceedings under Sections 13(1) to (4) of the SARFAESI Act and prior to selling the mortgaged immovable asset in question. Rule 8(6) contemplates that the authorised officer should serve a notice of 30 days for the sale of the immovable secured assets to the borrower. Rule 9(1) provides that no sale of an immovable property under the Rules should take place before the expiry of 30 days from the date on which the public notice of sale is published in the newspapers, as referred to in the proviso to subrule (6) of Rule 8 or notice of sale has been served to the borrower. On a conjoint reading, it is clear that the scheme contemplates a clear 30 days’ individual notice to the borrower and a public notice by way of publication in the newspapers.
The twin objectives that are served by the notice requirements under Section 13 and allied rules 8 and 9 are: first, the notice offers the borrower a reasonable opportunity to repay the outstanding debt to retain rights over the secured asset; second, Rule 8 requires that details with respect to the asset be duly published in order for the intended purchaser to get a complete picture as to the nature of the asset he or she intends to purchase. This ensures that the asset’s sale reaps a good price and that the borrower’s vulnerable position is not exploited to undersell the asset.
The Court’s decision
The key issue before the Court was the legality of the Second Sale Notice, issued by the Lender. The Guarantors primarily relied on the Supreme Court’s decision in Mathew Varghese v. M. Amritha Kumar (“Mathew Varghese”), to suggest that the requirements under Rules 8 of the SI Rules must mandatorily be complied with and, since the borrowers were not given the statutorily mandated 30 days through the Second Sale Notice, it was liable to be set aside. The Lender, on the other hand, submitted that the Second Sale Notice was only a continuation of the First Sale Notice and therefore it was not necessary for the Lender to wait for another 30 days, prior to selling the secured asset.
The Supreme Court in Mathew Varghese had held that the notice requirements under Rules 8(6) and 9(1) of the SI rules must be scrupulously complied with, prior to the sale of immovable mortgaged assets under Section 13. The Court held that the sale can only be completed once at least 30-days have passed since both the individual and the public notice (pursuant to an auction) have been rendered. Importantly, with respect to subsequent sale notices, given for the sale of the same mortgaged properties, the Court held that the Lender cannot rely on the earlier notice, unless the sale pursuant to the first notice did not take place for reasons solely attributable to the borrower.
Based on the above, the question before the Court in S. Karthik therefore was whether the sale through the First Sale Notice could not take place for reasons ‘solely attributable’ to the Guarantors or not.
In the instant case, when challenging the First Sale Notice, the Guarantors had impressed upon the DRT that it would be able to settle the amount with the Lender. However, it was the Guarantor’s failure to comply with this representation, which led to the failure of the First Sale Notice. Moreover, given that the Second Sale Notice concerned the same properties as those mentioned in the first one and that the sale pursuant to the First Sale Notice could not be completed solely due to the actions of the Guarantors, it was concluded that the Second Sale Notice was only in continuation to the First Sale Notice. Resultantly, a 30-day notice was duly given to the borrowers.
Importantly, the Court pointed out that the Guarantors were given ample opportunities by the DRT to render payment of the outstanding amount. However, the Guarantors resorted to dilatory tactics by filing multiple applications, thus frustrating the Lender’s rights apropos the secured assets. Considering these factors, the Court held in favour of the legality of the Second Sale Notice.
Through this decision, the Supreme Court has reiterated that the SARFESI Act was brought about to ensure that lenders are able to swiftly take possession and sell secured assets hypothecated to them, in line with global standards. The Supreme Court has upheld the rationale underlying Rules 8 and 9 of the SI Rules, which offer borrowers an important protection. However, these protections cannot be read devoid of context. Considering that the Guarantors were given ample opportunities to pay the outstanding loan amounts, the Court frowned upon the dilatory tactics adopted by them in frustrating the secured interests of lenders, by challenging the notice on technical requirements. Ultimately, the Court strikes a careful balance between the lenders’ right to enforce security interest and borrowers’ protections.
 S. Karthik & Ors. v. N. Subhash Chand Jain & Ors 2021 SCC OnLine SC 787 (The judgment was authored by Justice B.R. Gavai on behalf of a three-judge bench constituting himself, Justice L. Nageswara Rao and Justice B.V. Nagarathna)
 Mathew Varghese v. M. Amritha Kumar (2014) 5 SCC 610