Borrower’s Right of Redemption Ends Once Auction Notice is Published: Supreme Court

The SARFAESI Act, 2002 gives banks and financial institutions the power to recover loans by taking possession and selling the secured assets of defaulting borrowers without going through lengthy court procedures. One key safeguard under this Act is the borrower’s right of redemption, which allows them to repay dues and stop the auction of their property.

The SARFAESI Act, 2002 stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. It is a law passed by the Government of India to help banks and financial institutions recover loans quickly from borrowers who default. Earlier, before the 2016 amendment to Section 13(8) of the Act, borrowers could exercise this right any time before the actual sale was completed. This often created last-minute complications, delaying auctions and discouraging buyers.

However, the 2016 amendment changed the position. Now, borrowers must clear their dues before the publication of the auction notice. Once the auction notice is published under Rule 8(6) read with Rule 9(1) of the SARFAESI Rules, the right of redemption is extinguished.

The Supreme Court, in Celir LLP vs Bafna Motors (2023), has confirmed this interpretation. The Court held that the borrower’s right to redeem the mortgaged property ends the moment the auction notice is published. At the same time, the Court stressed that banks must give borrowers a clear 30-day notice under Rule 8(6) before issuing the auction notice, so that borrowers get a fair opportunity to repay and retain their property.

For banks, this means that once an auction notice is out, they must not allow redemption or accept One-Time Settlement (OTS) offers from borrowers. If the auction is successful, a third-party right is created in favour of the buyer, and this cannot be disturbed later.

Banks have also been advised that if any contrary orders are passed by a court or tribunal regarding redemption after publication of auction notice, the matter should be referred to the Litigation Management Cell (LMC), SAM Division HO, before taking further action.

This order brings greater clarity and certainty in recovery proceedings under SARFAESI, strengthening the auction process while giving borrowers a fair but limited window to clear their dues.