BATCH 2019-24

SYNOPSIS
Topic

“Landmark Case Laws under SARFEASI

Act, 2002 ”
Financial Market Regulation

Submitted to: Submitted by:

Mr. Rahul Nikam, Aaditya Popat
ASSOCIATE PROFESSOR (FMR) B. A. LLB Hons.,
FACULTY OF LAW, ROLL NO- 91901040011
MARWADI UNIVERSITY

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DECLARATION BY THE STUDENT

I, AADITYA POPAT , certify that the work embodied in this project work,
entitled “Landmark Case Laws under SARFEASI Act ”, is my own bon-
a-fide work carried out by me under the supervision of Dr. Rahul Nikam of
Faculty of Law, Marwadi University. The matter embodied in this Project has
not been submitted for the award of any other degree/diploma.
I declare that I have faithfully acknowledged, given credit to and referred to the
authors/ research workers wherever their works have been cited in the text and
the body of the project. I further certify that I have not wilfully lifted up some
other's work, Para, text, data, results, figures etc. reported in the journals, books,
magazines, reports, dissertations, theses, etc., or available at web-sites and
included them in this project work and cited as my own work.

Place: Marwadi University

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SUPERVISOR’S CERTIFICATE

This is to certify that the work embodied in the accompanying project entitled
“Landmark Case Laws under SARFEASI Act ” has been carried out
entirely by the candidate AADITYA under my direct supervision and guidance
and that the candidate has fulfilled the requirements of the regulations laid down
for the partial fulfilment of B. A. LLB Hons. degree examination in the course
Financial Market Regulation (Semester IX), Faculty of Law, Marwadi
University.

Dr. Rahul Nikam

Assistant Professor (FMR),
Faculty of Law,
Marwadi University

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 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and
assistance from the supervisor and I am extremely privileged to have got this all
along the completion of my project. All that I have done is only due to such
supervision and assistance of Dr. Rahul Nikam. I am thankful to and fortunate
enough to get constant encouragement, support and guidance from him.

Place: Marwadi University

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 TABLE OF CONTENTS

Serial no. Particulars Page no.

1 Introduction 6

2 Case Analysis 8

2.1. Harshad Govardhan' Sondagar vs. 8

International Assets Reconstruction
Company Ltd.
2.2. Swiss Ribbons Pvt. Ltd. vs. Union of 12
India

2.3. Bank of Baroda v. Parasaadilal 15

Tursiram Sheetgrah (P) Ltd

2.4. Union Bank of India v. Rajasthan Real 17

Estate Regulatory Authority & Ors.

2.5. Moonlight Poultry Farm v. Union 20

Bank of India

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 Introduction
The SARFAESI Act full form is – “Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act”. The SARFAESI Act allows banks and other
financial institutions for auctioning commercial or residential properties to recover a loan
when a borrower fails to repay the loan amount. Thus, the SARFAESI Act, 2002 enables
banks to reduce their Non-Performing Assets (NPAs) through recovery methods and
reconstruction.

The SARFAESI Act provides that banks can seize the property of a borrower without going
to court except for agricultural land. SARFAESI Act, 2002 is applicable only in the cases of
secured loans where banks can enforce underlying securities such as hypothecation,
mortgage, pledge etc. An order from the court is not required unless the security is invalid or
fraudulent. In the case of unsecured assets, the bank would have to go to court and file a civil
case against the defaulters.

Applicability of SARFAESI Act, 2002

The Act deals with the following:
 Registration and regulation of Asset Reconstruction Companies (ARCs) by the
Reserve Bank of India.
 Facilitating securitization of financial assets of banks and financial institutions with or
without the benefit of underlying securities.
 Promotion of seamless transferability of financial assets by the ARC to acquire
financial assets of banks and financial institutions through the issuance of debentures
or bonds or any other security as a debenture.
 Entrusting the Asset Reconstruction Companies to raise funds by issue of security
receipts to qualified buyers.
 Facilitating the reconstruction of financial assets which are acquired while exercising
powers of enforcement of securities or change of management or other powers which
are proposed to be conferred on the banks and financial institutions.
 Presentation of any securitization company or asset reconstruction company
registered with the Reserve Bank of India as a public financial institution.
 Defining ‘security interest’ to be any type of security including mortgage and change
on immovable properties given for due repayment of any financial assistance given by
any bank or financial institution.

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  Classification of the borrower’s account as a non-performing asset in accordance with
the directions given or under guidelines issued by the Reserve Bank of India from
time to time.
 The officers authorized will exercise the rights of a secured creditor in this behalf in
accordance with the rules made by the Central Government.
 An appeal against the action of any bank or financial institution to the concerned
Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery
Tribunal.
 The Central Government may set up or cause to be set up a Central Registry for the
purpose of registration of transactions relating to securitization, asset reconstruction
and creation of the security interest.
 Application of the proposed legislation initially to banks and financial institutions and
empowerment of the Central Government to extend the application of the proposed
legislation to non-banking financial companies and other entities.

Non-application of the proposed legislation to security interests in agricultural lands, loans

less than rupees one lakh and cases where eighty per cent, of the loans, is repaid by the
borrower.

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 Chapter 2

Case Analysis

1. Harshad Govardhan' Sondagar vs. International Assets

Reconstruction Company Ltd.1

The bunch of appeals has been stimulated by tenants of properties which are mortgaged to
banks and was heard by the Supreme Court. But did the judiciary done a splendid job and did
justice by clarifying the rights of a lessee under SARFAESI Act. Presenting in words of
thought the case of Harshad Govardhan v International Assets Reconstruction Ltd which was
decided in the year 2014.

The present case is basically a Special Leave Petition which has been filed in Supreme Court
against the Judgment and Order of the High Courts. In this case leave was granted by the
Supreme Court and it was said that the question of law raised in these appeals will be decided
taking into account the facts of the three different categories of the case where the appellants
claimed to be in possession of the lease prior to creation of mortgage but the Chief
Metropolitan Magistrate passed orders under section 14 of the SARFAESI Act, 2002 for
delivery of possession of the secured assets to the secured creditors.

FACTS OF THE CASE:

The appellants who were intending to be the lessees were occupying different premises in
Mumbai which the borrower had kept with the bank as collateral security in order to secure
the debt. All these premises were mortgaged to different banks as securities for loan
advanced by the banks. The banks here were referred to as the secured creditors. The
borrowers had taken a loan from the bank and they failed to repay the loan to the secured
creditors. Since the borrowers failed to repay the loan to the secured creditors their debts have
been classified as non- performing assets by the secured creditors. Thereafter as the
borrowers failed to repay the debt or the instalments the notice of 60 days was served upon
the borrowers by the secured creditors. Then as per the provisions of the section 13 (2) of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 i.e. SARFAESI Act the notice of 60 days period was served upon the borrowers.
1
(2014) 6 SCC 1

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When the borrowers failed to repay the amount after the lapse of the time the only right the
bank has is to enforce the secured assets which was under the possession of the appellants.
The secured creditors then exercised their right of enforcing the securities under section 13(4)
of the SARFAESI Act, 2002 to take possession of the secured assets of the borrowers. The
secured creditors thereafter initiated an action for the enforcement of securities and
accordingly the bank requested the Chief Metropolitan Magistrate Mumbai under section
14(1) of the SARFAESI Act to assist in taking the possession of the property. The appellants
then approached the court after being threatened to get dispossessed from the premises under
section 14(1) of the SARFAESI Act.

Procedural Background

This is a landmark judgment of Supreme Court in which large number of appeals has been
filed by the lessee for delivery of possession to the secured creditors and the decision of this
case created ripples as the appeal was allowed by the Supreme Court and it determines the
right of the lessee and it provides for protection of right of third parties.

Arguments Advanced

Contention from the Appellant

 The appellants in a Special Leave petition filed before a Supreme Court contended
that every citizen has a right to property under Article 300 A of the Constitution and it
should not be deprived to anyone save by authority of law. He further contended that
lessee with respect to lease also has a right and further alleged that there is nothing in
the Section 13 of the SARFAESI Act, 2002 which talks about the protection of third
parties and which depicts that right of a lessee stands extinguished when the bank
initiates the action. It was also submitted by the appellants that if we see Section
13(13) of the SARFAESI Act,2002 it says that if secured creditor has served a notice
on borrower such borrower on receiving notice shall not lease out, sell or transfer
property, dispose or assign property to any other person.
 Further it was submitted by the respondents that if any lease is created as per the
provisions of sub- section (1) of Section 65A of the Transfer of Property Act, 1882
such lease will be valid lease and if the lease fulfils the requirements of sub- section
(2) of Section 65A it will be valid lease and will be binding on the secured creditor

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 and it was further submitted by the respondents that if any contrary intention appears
the lease will not be a binding on the mortgagee.

Contention from the Respondents

 It was further submitted by the respondents that as far as section 13(13) of

SARFAESI Act, 2002 is concerned which talks about restrictions that once notice is
served borrower shall not assign the lease to other person without prior consent of the
secured creditor and if such lease is assigned without the prior written consent by the
bank then that lease shall be void.
 Another contention that was raised by the respondents was that although the
SARFAESI Act is silent on the remedies available to the lessee in accordance with the
provisions of section 65A of the Transfer of Property Act, 1882 the lessee has a
remedy under section 17(1) of the SARFAESI Act, 2002 as the application under
section 17(1) of the SARFAESI Act, 2002 can be filed by any person not just the
borrower.

Judicial Background

Decision of the Chief Metropolitan Magistrate

The appellants claimed to be in possession of the secured assets of a lease prior to the
creation of a mortgage but the Chief Metropolitan Magistrate, Mumbai passed orders under
section 14 of the SARFAESI Act for delivery of possession to the secured creditors which
was set aside and fresh orders were passed after giving opportunity of hearing to the parties.

Decision of the High Court

In this case it was said that the statutory provisions shall not be a bar for High Court or this
Court as the statutory provisions cannot take away the power vested in the Constitution and
the decision of the Chief Metropolitan Magistrate or the District Magistrate can be challenged
before High Court under Article 226 or Article 227 of the constitution and the High Court
will examine the matter as per the settled principles of law. The High Court in this case failed
to appreciate the provisions of section 13 of the SARFAESI Act, 2002 but it does not
overrides the rights of lessee under a lease created before a receipt of notice under section
13(2) of the SARFAESI Act, 2002.

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Judgement of the Supreme Court

 The Supreme Court in this case dealt with the rights of a lessee and held that when the
lessee becomes aware that possession has been taken by the secured creditor he
should either restore the possession or made an attempt to prevent a secured creditor
from taking the possession by showing that he was a lessee prior to the creation of
mortgage or after the mortgage in accordance with the provisions of Section 65A of
the Transfer of Property Act, 1882 and that the lease does not stand determined in
accordance with section 111 of the Transfer of Property Act, 1882.
 The Supreme Court further said that lessee has no right to file a writ petition and the
lessee should approach DRT first before filing the writ petition. The secured creditor
as per the provisions of the Section 65A of the Transfer of Property Act, 1882 cannot
take the possession of the premises where the lease is created prior to mortgage or
after the creation of mortgage under section 14 of the SARFAESI Act, 2002. The
power to decide the rights of the lessee is exclusively with the Chief Metropolitan
Magistrate under section 14 of the SARFAESI Act, 2002.

Cases Referred

 Central Bank of India v State of Kerala and Ors.2

 Authorised Officer, Indian Overseas Bank and Anr v Ashok Saw Mill3
 United Bank of India v. Satyawati Tondon4

Appraisal and Criticism of the Judgement

SARFEASI ACT

This landmark judgment of Supreme Court is an important judgment which deals with the
rights of the third parties. In Harshad Govardhan Sondagar v International Assets
Reconstruction Co. Ltd. & Ors and connected appeals, the instance of the Appellants before
the Supreme Court was that they are not the borrowers; however they are the tenants of the
borrowers and are entitled to remain in possession of the secured assets.

Distinctive High Courts have taken diverse position as respects to distinctive issues including
the rights of the tenants and the remedies if any accessible to the occupants when the secured
2
4 SCC [2009]94
3
8 SCC [2009]366
4
8 SCC [2010]110

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creditors move ahead to take ownership of the secured assets in exercise of the powers
conferred on them under Section 13 (4) of the SARFAESI Act, 2002. The Supreme Court in
Harshad Govardhan Sondagar v International Assets Reconstruction Co. Ltd. & Ors has now
put an end to clashing perspectives taken by diverse High Courts on a number of issues
obliging clarity in this respect.

An endeavour has been made in the accompanying passages to clarify the issues which are
being within the said judgment to ensure that the Supreme Court’s judgment is understood in
the right perspective. The significant issue in the present case was whether a mortgagee of a
previously rented out property can claim ownership of the property upon the failure of the
mortgagor in passing his obligations within the stipulated time. It was also ruled out in this
case that without the determination of a valid lease, the possession of the lessee is lawful and
such lawful possession of a lessee was to be protected by all courts and tribunals.

Considering the essential requirement of deciding the lease, the Court obliged that a tenant
could either restore or oppose the ownership of the property by the secured creditor. Further
the Court in the case of M/s Trade Well v. Indian Bank, set aside a Judgment of the Bombay
High Court and said that the appellants had to move to the DRT for a remedy as they have no
remedy under the SARFAESI Act, 2002. The Supreme Court then set aside the orders of the
Chief Metropolitan Magistrate and ordered them to issue fresh orders after giving opportunity
of being heard to the parties.

2. Swiss Ribbons Pvt. Ltd. vs. Union of India5

The instant case decided by the Supreme Court is considered to be a landmark judgement in
upholding the constitutionality of certain provisions of Insolvency and Bankruptcy Code,
2016 which gave way to the foundation of modern bankruptcy laws. Fourth amendment to
the Code was made in 2016 subsequent to which the present case came into picture. The
court referred various reports including the Committee of Bankruptcy Law Reforms,
Insolvency Law, Joint Parliamentary Committee in order to arrive at the judgement. The
decision of the apex court in this case lays down a foundation stone for implementing
insolvency resolution process and in easing its application.

5
AIR (2019) 4 SCC 17

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FACTS OF THE CASE:

One of the Senior Advocate appears on behalf of the petitioner challenging the constitutional
validity of the enactment. It was presided by 10 civil writ petitions including a SLP. To
dismiss all these petitions, a consolidated order was passed by the apex court on 25 th January
2019. Now that various cases were already filed before the S.C. with respect to
constitutionality of the Code, the court decided of not delving into facts and dealing with the
issues straight away. After receiving the entries, Court found it fit to answer all ambiguities in
connection with Insolvency Laws in India. Eradi Committee Report was also cited which
helped in addressing the importance of Sick Industrial Companies Act of 1985.

QUESTION OF LAW:

Following issues were brought forward in the court of law:

1. Whether operational creditors are obliged to give demand notice to operational debtor to
initiate insolvency proceedings as specified under Sec. 8(4) of the Code?

2. Whether Sec. 29A & Sec. 53 of the IBC constitutionally valid?

3. Whether 90% threshold of voting shares in favour of committee of creditors for withdrawal
of application from adjudicatory authority provided under Sec. 12A of the Code admissible ?

4. Whether members of NCLT and NCLAT have been appointed as per precedence of the
court?

5. Whether restrictions laid by the Code on certain parties to act as resolution professionals
justifiable?

CONTENTION OF THE PETITIONER:

The contentions of the petitioner were related to the procedure of appointment of members of
National Company Law Tribunal and National Company Law Appellate Tribunal, alleging
that it is opposed to the precedence of the court.

The Information utilities were challenged on the ground that they are unregulated in nature
which puts the truthfulness of information provided by them at risk. Sec. 7, 21, 24 & 53 of
IBC provides an inequitable distinction between financial and operational debtors and
creditors respectively and violate Art. 14 of the Constitution.

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It was further added by the appellant that Sec. 29A was in violation of the code’s objective of
getting speedy resolution of Insolvency and Clause C of the same puts restraint on the
participation of all promoters of corporate debtors.

CONTENTION OF THE RESPONDENT:

Respondents argued that laws before IBC had failed because it only stresses on revival of
corporate debtor thereby lacking the fundamentals which is to maximize the value of assets.

With respect to appointment, they contended that it was with committee’s consideration that
the members of NCLT and NCLAT had been selected. Committee comprised of two
Supreme Court judges and two bureaucrats who kept in mind the precedence to be followed
in such matters.

In response to Sec. 29A, it was regarded to be an important object of the code which is to
overlook that undesired persons mentioned in all its clauses are rendered ineligible to submit
plans of resolution. This will restrict their entry into management of stressed corporate
debtors.

JUDGEMENT:

It was observed by the Supreme Court that both the creditors are distinct from each other by
relying on the rule provided under Art. 14 of the Indian Constitution. While dealing with the
issue of difference between financial and operational creditors, the Court gave a notable view
by bringing forth the object of the code which is to preserve the corporate debtor as a
growing concern ensuring the maximum recovery for all the creditors. In the case of Madras
Bar Association v. Union of India 6, various issues including the establishment of NCLT and
NCLAT and qualification of members with technical knowledge were discussed by the
Supreme Court.

The court laid emphasis on need for judicial restraint that court must exercise while
considering constitutional validity of any Code by relying on R.K. Garg 7 case. While dealing
with the issue against Sec. 12A & the way in which 90% of board of trustees of lenders are
supposed to permit withdrawal, the Court clarified that the reason behind putting such high
limit is clearly mentioned in the Insolvency Law Committee Reports as every money lender
is expected to focus while permitting such withdrawal. While dealing with the

6
AIR (2015) 8 SCC 583
7
R.K. Garg & Ors. v. Union of India, AIR (1981) 4 SCC 675

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constitutionality of Sec. 53 of the Code, in situation of winding up of the company, court held
that it is the operational creditors who are at minimal phase of getting anything as they stand
beneath every other creditor including unstable leasers who showcase themselves as money
lenders.

CONCLUSION:

This case is believed to have a significant impact on the way the Code is interpreted. As of
now, there was a lack of insecurity that could be seen in investors and bidders with regard to
acquisition of assets. IBC thereby strives to improve the flow of funds in the Indian
commercial market. The judgement aims to provide clarity on the duties of Resolution
Professionals and brings a balance between their roles and responsibilities keeping in mind
that they are in charge of administrative functions and subject to judicial supervision. By
highlighting various distinctions between operational and financial creditors, the Code
ensures that legislative goals of the economy are secure and that chances of bad debts comes
down. The contribution of Supreme Court in a much-awaited economic law proves that it is
way ahead of its international coequals.

3. Bank of Baroda v. Parasaadilal Tursiram Sheetgrah (P) Ltd.8

Brief Facts of the case

Parasaadilal Tursiram Sheetgrah Private Limited (“Company”) had availed certain credit
facilities from Bank of Baroda (“Bank”). The credit facilities were secured by way of an
equitable mortgage over certain immovable property owned by the Company and the
personal guarantees issued by the directors of the Company. On the due date, the Company
defaulted in repayment of the credit facilities availed from the Bank. In furtherance thereof,
the Bank issued a notice under Section 13(2) of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”),
demanding payment of the outstanding amounts from the Company and its directors. Since
the Company and its directors defaulted in making the payment of the outstanding amounts,
the Bank issued a notice under Section 13(4) of the SARFAESI Act, demanding actual
physical possession of the mortgaged property.

The Company filed a civil writ petition before the High Court of Allahabad (“HC”) to
challenge the notices issued by the Bank under Section 13(2) and Section 13(4) of the

8
2022 SCC Online SC 1006

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SARFAESI Act and sought a writ of mandamus to restrain the Bank from taking any
coercive action for recovery of the outstanding amounts. The HC disposed the writ petition
filed by the Company, directing it to make the payment of the outstanding amounts to the
Bank in 4 (four) equal instalments within a prescribed period. Further, the HC authorized the
Bank to proceed against the Company and, or its directors in accordance with law, if the
Company fails to pay the outstanding amounts within the prescribed period. The Company
and the directors failed to comply with the revised repayment schedule determined by the
HC. Accordingly, the Bank proceeded under the provisions of the SARFAESI Act and sold
the mortgaged property to the successful bidder.

The Company and its directors (with 1 (one) deceased director of the Company being
represented by his legal representative) challenged the Bank’s sale of the mortgaged property
by filing an application under Section 17 of the SARFAESI Act, before the Debts Recovery
Tribunal (“DRT”).

Judicial Background of the Case

However, the DRT dismissed the application on the ground that it was filed beyond the
statutory limitation period of 45 (forty-five) days (“DRT Order”) set out under Section
17(1) of the SARFAESI Act. The Company and its directors filed a review application
against the DRT Order. The DRT vide its order dated August 08, 2016 allowed the review on
the ground that 1 (one) of the directors had expired before the auction had taken place and
that his legal representative was not issued the notice of sale of the mortgaged property
(“DRT Review Order”). The Bank challenged the DRT Review Order before the Debts
Recovery Appellate Tribunal (“DRAT”) vide Appeal No. 210/ 2016.

The DRAT vide order dated December 02, 2016 allowed the appeal on the ground that there
was apparent error for the DRT to exercise its review jurisdiction (“DRAT Order”).
Aggrieved by the DRAT Order, the Company and its directors filed a writ petition before the
HC (“Writ Petition”). The HC admitted the Writ Petition and pursuant to an interim order
dated December 19, 2016 held that until further orders of the HC, the DRT should proceed
with the securitization application, and the operation and implementation of the DRAT Order
should remain stayed (“HC Interim Order”). In light of the above, the Bank challenged the
HC Interim Order before the Supreme Court of India (“SC”).

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THE SC JUDGMENT

The SC held that to grant or refuse to grant an interim order, it was sufficient for the HC to
rely on the observations made in the DRAT Order, wherein the DRAT had held that the DRT
Order was passed after a detailed consideration and that there is no justifiable ground for the
DRT to invoke its review jurisdiction to pass the DRT Review Order. Further, the SC also
held that the rationale for providing a limitation period of 45 (forty-five) days for filing an
application under Section 17 may be inferred from the purpose and object of the SARFAESI
Act. It relied on Transcore vs. Union of India and Anr. 9, wherein the SC had held that the
SARFAESI Act was enacted for quick enforcement of the security. In the present case, the
SC however held that it was rather unfortunate that the proceedings where a property had
been brought to sale and certain third-party rights were created under the provisions of the
SARFAESI Act have remained inconclusive even after a decade thereof.

Therefore, the SC held that the HC was not justified in staying the operation of the DRAT
Order. Accordingly, the SC allowed the appeal and set aside the impugned HC Interim Order.
Further, it requested the HC to dispose the Writ Petition expeditiously, preferably within a
period of 3 (three) months from the date of receipt of the order.

THE WAY AHEAD

The SC judgment will refrain the DRT from exercising its jurisdiction in an application,
which is barred by the statutory limitation period of 45 (forty-five) days prescribed under
Section 17(1) of the SARFAESI Act. This would benefit the secured creditors as it would
ensure speedy conclusion of the enforcement process prescribed under the SARFAESI Act.
Accordingly, the SC judgment may be viewed as a positive step to achieve the purpose and
object of the SARFAESI Act.

4. Union Bank of India v. Rajasthan Real Estate Regulatory Authority

& Ors.10

Through a recent decision in Union Bank of India Vs Rajasthan Real Estate Regulatory
Authority & Ors, the Hon'ble Supreme Court delivered a significant order placing the
interests and the rights of the homebuyers over the rights of the Banks/Financial Institutions.
The Hon'ble Supreme Court upheld the judgement given by the divisional bench of the

9
(2008) 1 SCC 125
10
D.B. Civil Writ Petition No. 13688/2021

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Rajasthan High Court thus resolving the conflict between Real Estate (Regulation and
Development) Act, 2016 (hereinafter referred to as RERA Act) and Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(hereinafter referred to as SARFAESI Act). The author of this article aims to analyses the
given order in terms of its impact on the Banks/Financial Institutions.

Brief Facts:

In 2014, a real estate company called SNG Real Estate (hereinafter referred to as promoters)
launched a project called Sunrisers. In order to purchase flats, the homebuyers/allotees had
taken loan from ICICI Bank vide tripartite agreements thus creating mortgage in favour of the
Bank. Thus, out of the total 38 flats, 9 flats were sold to homebuyers. Later, in 2016, SNG
Real Estate took a loan of 15 crores from Andhra Bank (now merged with the Union Bank of
India) by further creating a security interest of the 19 flats (including the 9 flats already sold)
in favour of the Bank.

The project was not completed within the stipulated timeline and the possession was not
offered to the allottees. Consequently, due to non-repayment of the said loan by the
promoters, the building project was attached by the Bank and auction proceedings were
initiated under Section 13(4) of the SARFAESI Act.

Fearing the loss of their flats, the allotees approached the RERA Authority under Section
11(4)(h) of the RERA Act. RERA Authority passed an order staying the auction proceedings.
Subsequently, the Union Bank of India appealed before the Rajasthan High Court contending
that the Banks/Financial Institution do not fall under the jurisdiction of RERA Act. The
Hon'ble Rajasthan High Court consolidated 70 petitions to answer four crucial questions of
law. The author will discuss three points of law as those issues have a glaring impact on the
Banks/Financial Institutions.

Key Issues:

The Court considered three issues, first being whether RERA has jurisdiction to entertain
complaints filed by allottees against a secured creditor. To answer this, the Court held that
held that complaints against banks can be filed before the RERA if the bank (lender) has
taken possession of a project as a secured creditor pursuant to the default of the promoter in
paying its dues.

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The ratio decidendi being that that once the bank takes actions for enforcing their security
interest in terms of Section 13(4) of the SARFAESI Act, the secured creditor for all purposes
enters into the shoes of the borrower/promoter as there is an assignment of statutory rights in
favour of lender.

Thus, bank becomes the assignee of the promoter and the definition of promoter given under
Section 2 (zk) (i)[1] of the RERA Act includes the assignee of the promoter. However, the
Hon'ble Supreme Court clarified that the jurisdiction will only be applicable if the
proceedings are initiated by the allottees/home buyers to protect their rights and interests.

The second issue that arose in the Court was that in event of conflict between provision of
RERA Act and SARFAESI Act, which Act would prevail. Section 35 of the SARFAESI Act
provides that the 'provisions under the said Act shall have the effect notwithstanding anything
inconsistent therewith contained in any other law for the time being in force or any
instrument having effect by virtue of any such law'. Similarly, worded provision giving
overriding effect to RERA Act is contained in Section 89. Therefore, there is direct conflict
between the two sections of the Act.

The Court relied on the case of Bikram Chatterji and Ors V/s Union of India and Ors[2], thus
stating that in case of direct conflict between two central statutes, the legislation that was
enacted later would prevail. In this case, since RERA Act was enacted in 2016 and
SARFAESI Act was enacted in 2002, the provisions of RERA Act would prevail over those
of SARFAESI Act.

The third issue answered by the Court was whether RERA would have a retrospective
application or not. The Judgement stated that RERA would have no retrospective effect
implying that the RERA would not apply to transactions between the promoter and
bank/financial institutions wherein security interest has been created by mortgaging the
property prior to the introduction of the Act. However, the RERA Act would have a
retrospective application if the security interest is created fraudulently or in collusion with the
Bank/Financial Institutions.

Impact on Banks/ Financial Institutions

Firstly, the Banks/Financial Institution will now come under the Jurisdiction of RERA. This
implies that Financial Institutions will have to abide by the notice received by the RERA
Authority and will have to represent themselves in case a complaint has been filed by the

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allottees. Not only this since banks can now be termed as 'promoters' they will have to
comply with the liabilities and responsibilities of a promoter stated in the RERA Act.

Secondly, the process of enforcement of security interest by the Financial Institutions under
the Section 13(4) of the SARFEASI Act will not be a smooth flowing process due to
possibility of several complaints being filed by the allotees. Earlier, Financial Institutions
could initiate proceeding under Section 13(4) of the SARFAESI Act without the intervention
of the Courts or Tribunals. However, with this Judgement coming into play, the proceedings
might be delayed due to intervention of RERA Authority in case the promoter defaults in
payment of dues.

Author's View:

The Financial Institutions will now be required to exercise greater prudence before entering
into real estate lending. The Financial Institutions will have to conduct a thorough Title
Search Report/due diligence of each flat against which loan is being granted to ensure that
security interest is not being created against a sold flat.

The Banks/Financial Institutions can also monitor the utilisation of the credit facilities being
granted to the promotor so the projects are being completed in a timely manner which may
prevent complaints being filed by allottees. In my opinion, this Judgement tends to protect the
home buyers from promoters unscrupulous behaviour resulting in Financial Institutions
bearing consequences.

This Judgement by all means tends to protect the home buyers. However, a lot of issues are
yet to be resolved. Since, this Judgement is in a very nascent stage, a lot of questions remain
answered. With time, we will be able to comprehend the outcomes of this judgement in the
practical world and how it acts in favour of the homebuyers.

5. Moonlight Poultry Farm v. Union Bank of India11

Question arose about the interpretation and extent of applicability of Section 13(8) of the
SARFAESI Act, 2002, about the right of the principal borrower to redeem the mortgage
property after it was sold in auction by the bank under the provisions of Security Interest
(Enforcement) Rules, 2002.

Issues Raised

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2022 SCC Online SC AP 2424

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The two principal questions which arose for consideration before the High Court were as
follows:

A. Whether the respondent Bank was right in issuing the sale certificate in favour of the
auction-purchaser though the petitioners have deposited the entire amount prior to the date on
which the auction-purchaser has deposited the amount.

B. Till what time or date can the right of redemption of the mortgage be exercised by the
mortgagor/borrowers in the light of the amendment to Section 13(8) of the SARFAESI Act.

Judgement and observation of the court

The court analysed both pre-amended and post-amended provisions of Section 13(8) of the
SARFAESI Act, amended through amendment dated 1-9-2016. It was held that amended
Section 13(8) was intended only to deal with the date when the secured creditor’s right to
transfer the secured assets should start and nothing more. Referring to the judgment of the
Supreme Court in Mathew Varghese v. M. Amritha Kumar 12, it was held that, the right to
redeem the mortgage does not get extinguished on the date fixed for sale i.e. the date fixed
for public auction/e-auction but extends further beyond.

The amended provision of Section 13(8) nowhere speaks or extinguishes the equity of
redemption available to the mortgagor but merely prohibits the secured creditor from
proceeding further with the transfer of the secured assets by way of lease, assignment, or sale,
if the entire amount is repaid prior to the notice for auction. The right to redeem the mortgage
always comes later than the sale notice and is not lost immediately upon the highest bid made
by the purchaser in an auction being accepted.

Thus, the sale certificate that was issued to the auction-purchaser was subsequent to deposit
of outstanding amount by the petitioners with the current account of the bank and thus, since
the right of redemption of the mortgage property was existing and not lost immediately upon
the highest bid made by a purchaser in an auction being accepted, the sale certificate was
clearly vitiated. The court accordingly held that the petitioner borrower had exercised the
right to redeem the property from the bank timely and sale confirmation and sale certificate
letters were accordingly quashed by the High Court.

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(2014) 5 SCC 610

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