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Holds Secured Creditor Cannot Remove Disclosed Encumbrances Without Settling Dues
The has firmly ruled that a secured creditor cannot seek the removal of known encumbrances from property records without first discharging the dues attached to those encumbrances, even if the creditor enjoys over government claims. A Division Bench comprising Justice Abdul Quddhose and Justice R Rajesh Vivekananthan dismissed an appeal by , which had attempted to have an attachment by the removed from the encumbrance certificate of a property sold under the . The court held that the mandatory procedure under must be strictly complied with, and that an auction purchaser who knowingly buys property subject to disclosed encumbrances cannot later seek their removal without paying the corresponding dues.
The Facts of the Case
The dispute arose from a mortgage created by over a property belonging to in . Subsequently, in , the attached the same property towards recovery of statutory dues. The bank initiated proceedings under the SARFAESI Act and auctioned the property. The sale notice and the subsequent sale certificate explicitly disclosed the known encumbrances, including the attachment by the . emerged as the successful auction purchaser and the sale certificate was duly registered.
Thereafter, the bank approached the seeking a writ to direct the registration authorities to remove the 's attachment from the encumbrance records. The Single Judge dismissed the petition, holding that the auction purchaser had full knowledge of the encumbrance and was required to discharge the corresponding dues. Aggrieved, the bank filed a writ appeal before the Division Bench.
The Bank’s Arguments and the Court’s Response
The bank contended that under , read with , secured creditors enjoy priority over all government dues, taxes, cesses, and other statutory claims. It argued that requires the secured creditor to deliver the property free from known encumbrances once the auction purchaser pays the amounts specified under Rule 9(7). The bank further submitted that after issuing and registering the sale certificate, it had become and could not be compelled to settle the Central Excise dues. The auction purchaser supported these submissions.
The opposed the appeal, pointing out that the purchaser had knowingly purchased the property subject to the encumbrance, and that Section 26E—introduced in —could not retrospectively override an attachment that had been made in .
The Division Bench rejected the bank’s arguments, observing that a SARFAESI sale conducted on an “”, “” and “” basis does not grant the secured creditor immunity from disclosing known liabilities or defects. The court underscored that specifically provides for payment towards existing encumbrances: it requires the auction purchaser to deposit sufficient funds with the secured creditor to discharge the encumbrances, including applicable interest and related expenses. “Therefore, it is clear that sale in favour of the successful auction purchaser is only subject to the known encumbrances as disclosed in the sale certificate,” the Bench held.
Legal Analysis: Priority vs. Procedural Compliance
The court drew a crucial distinction between the substantive priority granted to secured creditors and the procedural requirement for removal of encumbrances from registration records. “Even though the aforesaid sections grant priority to the secured creditors over government dues, taxes, cesses and other statutory claims, they do not stipulate that the registration department will have to remove the known encumbrances as reflected in the sale notice,” the Bench observed.
The court emphasised that the priority provisions cannot be used to bypass the mandatory procedure prescribed under Rules 9(6) to 9(10). Rule 9(6) deals with confirmation of sale and issuance of the sale certificate, while Rule 9(10) prescribes the form and contents of the sale certificate, which must include details of known encumbrances. The Bench noted that the bank and the auction purchaser were attempting to achieve indirectly what they could not achieve directly: a sale free of encumbrances without paying the statutory dues. “What the appellant or the fourth respondent could not have legally achieved directly, namely to sell the property free of encumbrances, they are attempting to craftily achieve the said objective by filing the writ petition and this writ appeal which is not legally permissible,” the court remarked.
Additionally, the court noted that the bank had not recovered its entire dues and that its recovery proceedings before the were still pending. Consequently, the argument that the bank had become after issuing the sale certificate was rejected.
Implications for SARFAESI Auctions
This judgment serves as a significant clarification for secured creditors and auction purchasers alike. It reinforces that the under Sections 26E and 35 of the SARFAESI Act and Section 31B of the RDB Act is a substantive right that operates in the realm of distribution of sale proceeds, but does not entitle the creditor to unilaterally erase disclosed encumbrances from public records without following the prescribed procedure. Auction purchasers, who often rely on the sale certificate as a clean title document, are now on notice that purchasing property with knowledge of encumbrances means they must factor in the cost of discharging those encumbrances.
The decision also underscores the importance of in sale notices and sale certificates. By mandating that known encumbrances be listed, the SARFAESI Rules aim to ensure transparency and protect the interests of all stakeholders, including government departments and other statutory authorities. The court’s insistence on compliance with Rules 9(6) to 9(10) sends a clear message: cannot be circumvented by invoking substantive priority provisions.
Conclusion
By dismissing the appeal, the has reaffirmed that the requires strict adherence to the regulatory framework governing the enforcement of security interests. Secured creditors must either ensure that the auction purchaser deposits funds to discharge disclosed encumbrances at the time of sale, or themselves settle those dues before seeking removal of the encumbrances from the records. The judgment provides valuable guidance for future SARFAESI auctions and reinforces the principle that knowledge of encumbrances at the point of purchase carries legal consequences that cannot be later undone through court orders without satisfying the underlying obligations.
