Asset Reconstruction Companies- ARCs To Benefit from SC Judgement on Redemption Rights of Borrowers: Report

Moneylife Digital Team 11 December 2023

Economy & Nation

The recent judgement by the Supreme Court of India on the time-bound redemption rights of borrowers is advantageous for asset reconstruction companies (ARCs) as it protects genuine auction purchasers, reduces uncertainty, and maintains the sanctity of the auction process. The judgement is likely to spur confidence in stakeholders preferring the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act route for asset resolution, says a research note.

In the report, India Ratings and Research (Ind-Ra) says, "This judgement is likely to reduce frivolous litigations, thus potentially reducing the resolution timelines. A meaningful impact of the decision on recovery timelines may be visible in the medium to long term, as the rule of law is actioned upon by ARCs. The interpretation of the law by lower courts would also be a key monitorable."

In the present case of Celir LLP, the high court (HC) had permitted the borrower to redeem the mortgage post-successful auction. The Supreme Court upheld the sanctity of the auction process and overturned the HC's decision. The apex court also emphasised on the overriding effect that the SARFAESI Act has over laws such as the Transfer of Property Act.

"This case provides crucial legal clarification regarding the time-bound right to redemption in cases under the amended SARFAESI Act and sets a notable legal precedent," says Jatin Nanaware, senior director of Ind-Ra.

In a normal scenario, an auction can be expected to conclude in a period of two months. However, due to litigations and cross-litigations in the past, resolution took as long as four years depending on the complexity of the case.

According to Ind-Ra, the SC judgement clarified that the borrower's right to redemption gets extinguished once an auction notice is published, ensuring protection for genuine auction purchasers and significantly curtailing the borrower's ability to indefinitely delay the auction process.

However, it says, this does not mean that the right of the borrower to participate in an auction is also extinguished and the borrower will still have the right to participate in an auction.

"This decision provides the much-needed clarity regarding the auction process post 2016 amendment of SARFAESI Act. The ruling aligns with the legislative intent behind the SARFAESI Act and its subsequent amendment, emphasising the need for a swift and expedited recovery of non-performing assets with minimum court intervention," it added.

As per, rule 8(6) of the SARFAESI Rules of 2002, a borrower is entitled to a 30-day notice period enabling them to clear their loan and to redeem their property and, on failure to do so after the expiry of 30 days, its lender can publish a sale notice. On publication of such notice, the right of the borrower to redeem the property stands extinguished.

However, the present ruling by the apex court has no impact on rule 8(6) and lenders will have to follow the process of giving a 30-day notice to their borrowers before publishing an auction notice. Prior to the 2016 amendment, notices to borrowers and publications were executed simultaneously by secured creditors. With the advent of the present judgement, the rating agency says it is clear that once an auction notice is published, borrowers' right to redemption is extinguished.

"The SC's interpretation of the provision regarding auction pre and post-amendment of 2016 is clear and is (in) line with the legislative intent to expedite the recovery process of non-performing assets. Further by maintaining integrity of auction process, the decision will ultimately enhance ARCs effectiveness in tackling auction related uncertainties," Ind-Ra concludes.

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