Bank Loan Dispute and Property Auction: Supreme Court’s Key Judgment on Borrower’s Rights

The case of Bank of Baroda vs. M/s Karwa Trading Company & Anr. is a significant ruling concerning bank loan defaults, the SARFAESI Act, and the legal procedures for recovering dues through property auctions. The Supreme Court of India examined whether a borrower could reclaim mortgaged property by making partial payments, despite outstanding liabilities.

The case stemmed from a dispute between Bank of Baroda and Karwa Trading Company over a loan default. The bank, acting as a secured creditor, sought to recover dues by auctioning the mortgaged property. However, the borrower contested the auction and sought to reclaim the property by depositing part of the dues. The legal battle escalated from the Debt Recovery Tribunal (DRT) to the Rajasthan High Court and eventually to the Supreme Court.

Background of the Case

Bank of Baroda had extended financial assistance to Karwa Trading Company in the form of a term loan of Rs. 100 lakhs and a cash credit limit of Rs. 95 lakhs. These loans were secured against two mortgaged properties:

An industrial plot at Chittor Road, Bundi
A residential property in Vikas Nagar, Bundi

When the borrower failed to repay the loan as per the agreed terms, the account was classified as a Non-Performing Asset (NPA) on 31st October 2012. Consequently, the bank initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. A demand notice was issued under Section 13(2) of the SARFAESI Act, demanding Rs. 1,85,37,218.80.

Legal Dispute and Auction Proceedings

Upon non-payment, the bank took symbolic possession of the secured property and proceeded with the auction process:

A notice under Section 13(4) was issued on 22nd August 2013.
A public auction notice for the residential property was published on 16th December 2013.
The reserve price was set at Rs. 48.65 lakhs, and the auction was scheduled for 20th January 2014.

To prevent the sale, the borrower filed a Securitisation Application (SA) before the Debt Recovery Tribunal (DRT), Jaipur, challenging the auction. The DRT passed an interim order allowing the borrower to deposit Rs. 20 lakhs as an initial amount and later deposit Rs. 48.65 lakhs to reclaim the property.

Although the borrower deposited the amount, the bank appealed to the Debt Recovery Appellate Tribunal (DRAT), arguing that the highest bid received in the auction was Rs. 71 lakhs, and the borrower must match this bid to redeem the property. The DRAT upheld the DRT’s order, leading the bank to challenge the decision in the Rajasthan High Court.

High Court’s Decision

The High Court ruled in favor of the borrower, directing the bank to release the property upon the borrower making an additional payment of Rs. 17 lakhs, totaling Rs. 65.65 lakhs. The Division Bench restored the borrower’s Securitisation Application before the DRT and held that the borrower had the right to reclaim the property.

Arguments Before the Supreme Court

Bank’s Arguments

Senior Counsel for the bank, Ms. Praveena Gautam, made the following submissions:

The borrower was required to repay the full outstanding amount of Rs. 1.85 crores under Section 13(8) of the SARFAESI Act.
Allowing redemption of the property for Rs. 65.65 lakhs would result in a financial loss for the bank.
The reserve price was Rs. 48.65 lakhs, but the highest bid in the auction was Rs. 71 lakhs; the borrower should match this bid to reclaim the property.
The High Court’s order effectively discharged the borrower from the remaining dues without full repayment.

Borrower’s Arguments

The borrower, represented by Mrs. Christi Jain, argued that:

The bank had already agreed to accept Rs. 65.65 lakhs as settlement.
The High Court’s order was fair and equitable, ensuring that the borrower could reclaim the property while the bank recovered a substantial amount.
The property was residential, and evicting the borrower without a reasonable opportunity for redemption would be unfair.

Supreme Court’s Judgment

The Supreme Court, after hearing both sides, ruled in favor of the bank and quashed the High Court’s order. The key findings of the Court were:

The SARFAESI Act mandates that a borrower must repay the full outstanding dues before reclaiming a mortgaged property.
The High Court erred in reducing the borrower’s liability to Rs. 65.65 lakhs when the dues exceeded Rs. 1.85 crores.
Allowing partial payments to redeem secured assets would set a bad precedent, undermining the rights of secured creditors.
The borrower’s outstanding liability remained, even if the bank auctioned the property.

Conclusion

The Supreme Court ruled that the bank could proceed with auctioning the mortgaged property unless the borrower repaid the full dues, as mandated by Section 13(8) of the SARFAESI Act. The judgment reinforces the principle that secured creditors must be fully compensated before mortgaged properties can be redeemed.

The decision provides clarity on the legal position of borrowers in loan default cases and highlights the stringent requirements of the SARFAESI Act for reclaiming secured assets.

Petitioner Name: Bank of Baroda.
Respondent Name: M/s Karwa Trading Company & Anr..
Judgment By: Justice M. R. Shah, Justice Sanjiv Khanna.
Place Of Incident: Bundi, Rajasthan.
Judgment Date: 10-02-2022.

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