Introduction:

The present case, E. Muthurathinasabathy & Ors. v. M/s. Sri International & Ors., decided by the Supreme Court in 2026, deals with a crucial question under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002—whether an auction sale can attain finality when the auction purchaser fails to deposit the balance sale consideration within the statutorily prescribed period, and whether such a defective sale can extinguish the borrower’s right of redemption.

The dispute arose from a loan transaction wherein the respondent-borrower had availed financial assistance of approximately ₹4 crore from the Central Bank of India in 2017. Upon default, the bank initiated recovery proceedings under the SARFAESI Act and conducted an auction of the secured asset in September 2020. The auction purchaser deposited 25% of the bid amount as required, but failed to deposit the remaining 75% within the period mandated under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002.

During the pendency of proceedings before the Debts Recovery Tribunal (DRT) and the High Court, and despite interim judicial orders affecting the completion of the sale, the auction purchaser deposited the balance consideration only after a delay of about 15 months. A sale certificate was subsequently issued. Meanwhile, the borrower continued to make payments and ultimately cleared the entire outstanding dues in December 2022. However, the bank refused to accept the repayment on the ground that the sale had already been concluded.

The Madras High Court set aside the auction sale on account of material irregularities and delay in payment of the balance sale consideration, restoring the property to the borrower. Aggrieved, both the secured creditor and the auction purchaser approached the Supreme Court.

The Supreme Court, affirming the High Court’s decision, addressed the interplay between procedural compliance under SARFAESI, the doctrine of finality of auction sales, and the borrower’s equitable right of redemption.

Arguments of the Petitioners (Secured Creditor and Auction Purchaser):

The petitioners, comprising the secured creditor (bank) and the auction purchaser, advanced several arguments seeking to uphold the validity and finality of the auction sale.

Firstly, it was contended that the issuance of a sale certificate in favour of the auction purchaser signifies the completion of the sale process. Once such a certificate is issued, the title in the secured asset stands transferred, and the borrower’s right of redemption is extinguished. The petitioners emphasized that allowing interference after issuance of the sale certificate would undermine certainty in commercial transactions and discourage participation in public auctions.

Secondly, reliance was placed on the Supreme Court’s earlier decision in Celir LLP v. Bafna Motors Pvt. Ltd. (2024) 2 SCC 1. It was argued that this judgment recognized the sanctity and finality of auction sales conducted under SARFAESI once procedural requirements are substantially complied with and a sale certificate is issued. The petitioners asserted that courts should refrain from unsettling concluded transactions, particularly when third-party rights have crystallized.

Thirdly, the petitioners contended that the delay in depositing the balance sale consideration should not invalidate the sale, especially when such delay was occasioned by judicial interventions, including interim orders passed by the DRT and the High Court. According to them, the delay was neither deliberate nor attributable to any mala fide conduct on the part of the auction purchaser. Therefore, strict enforcement of the timeline under Rule 9(4) would lead to undue hardship and injustice.

Fourthly, the auction purchaser argued that having paid the entire sale consideration, albeit belatedly, and having been issued a sale certificate, they had acquired vested rights in the property. It was submitted that such rights deserve protection under law, and the borrower cannot be permitted to reclaim the property after the sale process has reached its logical conclusion.

Additionally, reliance was placed on the decision in M. Rajendran v. M/s KPK Oils and Proteins India Ltd., wherein it was held that once a sale is confirmed, the borrower’s right of redemption stands extinguished. The petitioners argued that the present case fell within the ambit of this principle, and therefore, the borrower could not be allowed to redeem the property after the sale certificate had been issued.

Finally, the petitioners stressed the importance of maintaining the integrity and efficiency of the SARFAESI mechanism. They argued that permitting borrowers to redeem properties at a belated stage would frustrate the object of the Act, which is to enable speedy recovery of debts without judicial intervention.

Arguments of the Respondents (Borrower):

The respondent-borrower, on the other hand, strongly opposed the petitioners’ contentions and supported the decision of the High Court.

At the outset, it was argued that compliance with Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 is mandatory and not merely directory. The Rule clearly stipulates that the balance 75% of the sale consideration must be deposited within three months from the date of confirmation of sale. Failure to comply with this timeline renders the sale incomplete and inchoate.

The respondent emphasized that in the present case, the auction purchaser deposited the balance consideration after an inordinate delay of approximately 15 months, far beyond the permissible period. Such a gross violation of statutory requirements cannot be condoned, and any subsequent issuance of a sale certificate cannot cure the illegality.

Secondly, the respondent contended that the right of redemption is a valuable statutory and equitable right, which subsists until the sale is completed in accordance with law. Since the sale in the present case had not attained finality due to non-compliance with mandatory timelines, the borrower’s right of redemption remained intact.

Thirdly, it was argued that the borrower had acted bona fide by continuously making payments during the pendency of proceedings and ultimately clearing the entire outstanding dues in December 2022. The refusal of the bank to accept the repayment, despite full discharge of liability, was arbitrary and unjust.

The respondent further submitted that the reliance placed by the petitioners on Bafna Motors Pvt. Ltd. was misplaced, as that case involved a situation where the sale process had been completed in accordance with statutory requirements. In contrast, the present case was characterized by significant procedural irregularities and non-compliance with mandatory provisions.

Similarly, the respondent distinguished M. Rajendran, arguing that the principle laid down therein applies only when the sale is validly completed. Where the sale itself is defective or incomplete, the borrower’s right of redemption cannot be said to have been extinguished.

The respondent also highlighted the broader principle of equity and justice, contending that depriving a borrower of property despite full repayment of dues would result in disproportionate hardship and unjust enrichment of the auction purchaser. The SARFAESI Act, while facilitating recovery of debts, does not sanction such inequitable outcomes.

Judgment of the Supreme Court:

The Supreme Court, in a detailed and reasoned judgment authored by Justice Dipankar Datta, dismissed the appeals and upheld the decision of the Madras High Court.

At the heart of the Court’s reasoning was the interpretation of Rule 9(4) of the Security Interest (Enforcement) Rules, 2002. The Court categorically held that the requirement to deposit the balance sale consideration within three months is mandatory. Non-compliance with this requirement renders the sale incomplete and prevents it from attaining legal finality.

The Court observed that in the present case, the auction purchaser had failed to deposit the balance consideration within the prescribed period, and instead made the payment after a delay of about 15 months. Such a substantial deviation from the statutory timeline could not be overlooked or condoned.

Importantly, the Court held that the mere issuance of a sale certificate does not confer legality upon an otherwise defective sale. If the underlying process suffers from material irregularities or fails to comply with mandatory requirements, the sale certificate cannot validate the transaction.

The Court emphasized that a sale which remains “inchoate” cannot be relied upon to divest the borrower of their property, particularly when the borrower has discharged the entire outstanding liability. It noted:

“A sale that remained inchoate in favour of the auction purchasers, owing to non-compliance with mandatory timelines prescribed under Rule 9(4), cannot be invoked to defeat the right of the borrowers to redeem.”

The Supreme Court further held that the delay in depositing the balance consideration operated to the benefit of the borrower and against the finality of the sale. A transaction conducted in violation of statutory timelines cannot be used as a basis to deprive the borrower of their secured asset.

On the issue of the borrower’s right of redemption, the Court reaffirmed that such a right continues to exist until the sale is completed in accordance with law. Since the sale in the present case had not attained finality, the borrower’s right to redeem the property remained intact.

The Court also distinguished the precedents relied upon by the petitioners. It clarified that the decision in Bafna Motors Pvt. Ltd. was based on a situation where the sale had been completed in compliance with statutory requirements. In contrast, the present case involved significant procedural lapses and non-compliance, thereby rendering the earlier judgment inapplicable.

Similarly, the Court held that the principle in M. Rajendran would not apply where the sale proceedings themselves are incomplete or defective.

The Court also took into account the equitable considerations of the case. It noted that the borrower had, during the pendency of proceedings, cleared the entire outstanding dues. In such circumstances, allowing the auction sale to stand would result in disproportionate deprivation of property and would be contrary to the principles of substantive justice.

The Court concluded that:

The auction sale had not attained finality due to non-compliance with Rule 9(4).

The borrower had discharged the entire outstanding liability during the pendency of proceedings.

The borrower could not be divested of the secured asset in such circumstances.

Accordingly, the appeals were dismissed, and the order of the High Court setting aside the auction sale and restoring the property to the borrower was affirmed.