Sale Under SARFAESI Act vis-a-vis Third Party Rights

With a view to help the Banking sector to overcome the mounting ‘non performing

assets’, Banks have been vested with enormous powers in the matter of enforcing their

security interest under the Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002. This article portrays the judicial thinking

in the matter of enforcement of security interest.

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The Civil Procedure Code 1908 was enacted for enforcing

substantive civil rights and it was ruling the field for several

decades. It was realized later that litigation through the Civil

Procedure Code was virtually defeating the process of rendering

justice in view of abnormal delays and technicalities in following

the Code. Added to that enormous increase in litigation caused

serious concern and therefore measures were initiated to have

procedures which could render justice without delay.

Banks and financial institutions are the custodians of public

money and there was a need to rotate the money for the public

good. Non-Performing Assets (NPA) is a loss to the economy.

When the SARFAESI Act was enacted in 2002, the NPA stood

at Rs. 1.10 lac crores and were threatening the balance of

economy. In this background the Government of India had

appointed the Narasimhan Committee for studying and

recommending the ways and means for quick recovery of the

public money locked up in NPAs. In furtherance of the

recommendations of the Narasimhan Committee, the Recovery

of Debts by Banks and Financial Institutions Act 1993, was

enacted with much hope that the said Act would enable quick

recovery of NPAs by Banks and Financial Institutions. However

the Act (DRT Act) failed to yield the desired result. In

Transcore, the Supreme Court itself has taken note of the failure

of the DRT Act by observing “…..Further in cases where the

debt is secured by pledge of shares or immovable properties,

with the passage of time and delay in the DRT proceedings,

the value of the pledged assets or mortgaged properties

invariably falls. On account of inflation, value of the assets in

the hands of the bank/FI invariably depletes which, in turn,

leads to asset liability mismatch. These contingencies are not

taken care of by the DRT Act and, therefore, Parliament had

to enact the NPA Act, 2002.”

Enactment of SARFAESI Act

In the above background the policy makers and legislators

realized the need for further measures for the quick recovery of

NPAs, and to empower Banks and Financial Institutions to

recover the NPAs without intervention of judicial process. In

that process guidance was found from Section 69A of Transfer

of Property Act and State Finance Corporation Acts, where

there is provision for the sale of secured assets without the

intervention of Courts. In that process Securitisation And

Reconstruction of Financial Assets and Enforcement of Security

Interest Act 2002 (SARFAESI) was enacted. The Preamble of

the Act states that ”Narasimham Committee I and II and

Andhyarujina Committee constituted by the Central

Government for the purpose of examining banking sector

reforms have considered the need for changes in the legal system

in respect of these areas. These Committees inter alia have

suggested enactment of a new legislation for securitization and

empowering banks and financial institutions to take possession

of these securities and to sell them without the intervention of

the Court. Acting on these suggestions the SARFAESI

Ordinance 2002 was promulgated on the 21st June 2002 to

regulate securitization and reconstruction of financial assets and

enforcement of security interest and for matters connected

therewith or incidental thereto. The provisions of the Ordinance

would enable banks and financial institutions to realize longterm

assets, manage problem of liquidity, asset liability


mismatches and improve recovery by exercising powers to take

possession of securities, sell them and reduce non-performing

assets by adopting measures for recovery or reconstruction.”


Section 13 of the SARFAESI Act empowers the Banks/

Financial Institutions inter alia to take possession and effect

sale of the secured assets. After the enactment of the

SARFAESI Act, like any other new legislation it was subjected

to judicial scrutiny and interpretation to settle down the legal

position. Two most important cases in that process are Mardia

Chemicals Ltd v. Union of India (2004 (4) CTC 759; 2004

(4) SCC 311) and Transcore v. Union of India & Anr (2006

(5) CTC 753;AIR 2007 SC 712) wherein the Supreme Court

had settled the legal position substantially with regard to the

SARFAESI Act and made the rigor of SARFAESI Act for

the recovery of NPAs effective in letter and spirit.

SARFAESI Act, is simply a procedural enactment like CPC

and it seldom deals with substantive rights on the properties.

In effect SARFAESI Act, explicitly or by implication

overrides all other earlier procedural laws for the recovery of

NPAs. To be more specific Banks and Financial Institutions

need not take steps as prescribed under CPC/DRT Act in the

process of recovery of NPAs. But there is a confusion to the

effect that the SARFAESI Act overrides the substantive laws

also. In Transcore case the Supreme Court has held in : “In our

view, Section 17(4) shows that the secured creditor is free to

take recourse to any of the measures under Section 13(4)

notwithstanding anything contained in any other law for the

time being in force, e.g., for the sake of argument, if in the

given case the measures undertaken by the secured creditor under

Section 13(4) comes in conflict with, let us say the provision

under the State land revenue law, then notwithstanding such

conflict, the provision of Section 13(4) shall override the local

law. This position also stands clarified by Section 35 of the

NPA Act which states that the provisions of NPA Act shall

override all other laws which are inconsistent with the NPA Act.”

When the Supreme Court compared State Revenue law with

the SARFAESI Act it sent wrong signals as if the SARFAESI

Act overrides even the substantive laws. In Sree Lakshmi

Products v. State Bank of India (2007 (2) CTC 193) the

Division Bench of the Madras High Court quoting the above

observation of the Supreme Court has held (at Para 9) that by

virtue of Section 17(4) read with Section 35 of the SARFAESI

Act if in a given case the measures undertaken by the secured

creditor under Section 13(4) comes into conflict with the

provisions of the State law, then notwithstanding to such

conflict, the provisions of Section 13(4) shall override the

local law. Section 13(13) of the SARFAESI Act operates as

an attachment/injunction restraining the borrower “ No

borrower shall, after receipt of notice referred to in sub-section

(2), transfer by way of sale, lease or otherwise (other than in

the ordinary course of his business) any of his secured assets

referred to in the notice, without prior written consent of the

secured creditor” and therefore any tenancy created after such

notice would be null and void. Any tenancy created by the

mortgagor after the mortgage in contravention of Section 65A

would not be binding on the Bank/FI and in any event such

tenancy rights shall stand determined once action under Section

(4) has been taken by the Bank/FI. When the petitioner is

claiming a tenancy prior to the creation of mortgage and such

tenancy is disputed by the Bank the remedy of the petitioner

is to approach DRT by way of an application under Section

17 of the SARFAESI Act to establish its rights.”

The Madras High Court cited with approval a judgment of the

Division Bench of the Kerala High Court and observed : S

Shameem v. The City Police Commissioner and others it was

held that in respect of the transactions governed by SARFAESI

ACT the overriding provisions effectively nullify the rights

normally admissible even to a tenant as available under the

Rent Control laws.

A decision of the Delhi High Court was also cited and it was

observed that :

“In Sanjeev Bansal v. Oman International Bank SAOG 2006

(4) BC 299 (DB) (Delhi), the Court held that the protection

afforded by the Rent Control Act to a tenant is from the

landlord of the premises and the landlord of the premises cannot

recover possession from the tenant unless he takes recourse to

any of the grounds as available to him under Rent Control Act

and the right of the tenant is fully protected notwithstanding

anything contrary contained in any other law or contract. This

protection is however not available against the mortgagee who

seeks to enforce his right under the SARFAESI Act against

the principal borrower who had mortgaged the property in

question by duly and validly executing the memorandum of

mortgage in favour of the mortgagee. The Court further held

that Section 65-A of the Transfer of Property Act clearly

mandates that the duration of lease to be executed by the

mortgager cannot exceed 3 years.

These judgments have opened a new angle as if the SARFAESI

Act overrides the substantive laws and more specifically the

right of the tenant vis–a–vis that of the mortgagee, the secured

creditor. In these judgments the judiciary has glorified Section

65A of Transfer of Property Act though Sub-section (3) of

Section 65A of TP Act saves the right of contract and thereby

provides that if the mortgage deed contains provisions contrary

to sub-section (1) & (2) of Section 65A, the provisions under

Sale Under SARFAESI Act vis-a-vis Third Party Rights


the mortgage deed shall prevail. The analogy that applies to

the covenants of the mortgage deed shall apply to the statutory

tenancies which varies with the provisions of Sub-sections (1)

and (2) of Section 65A of T P Act.

In the above circumstances the judiciary has merged the rights

of the mortgagor and the rights of the lessor with the

mortgagee/Bank in a summary manner without giving

reasonable opportunity to a lessee to prove his bona fides

before a Court.

Decisions discussing analogous provisions under the


The Division Bench of the Madras High Court in A Stephen

Samuel v Union of India 2003 (3) CTC 95 (Writ Appeals

filed under Clause 15 of Letters Patent against the common

order passed by the Single Judge) dealt with in detail the Rules

of Income-tax (i.e Rule 39 & 40) (Certificate Proceedings)

Rules, 1962 read with section 29 of the Recovery of Debts

Act under which the Recovery Officer had issued the orders

of eviction.

The Bench considered the comprehensive effect of the Rules

while holding that the order of the Recovery Officer is not

sustainable in law and is liable to be set aside. While arriving

at the above decision two main points were considered:

􀂄 The Bench analysed the Rules empowering the Recovery

Officer to put the auction purchaser in possession of the

properties.(Rule 40). The Bench also considered the rules

which permitted the Recovery Officer to put back in

possession any person who other than the defaulter

claiming in good faith to be in possession of the property

on his own account or on account of some person other

than the defaulter. (Rules 44 to 47)

􀂄 Secondly they drew an analogy with the provisions of

CPC and held that the Rules framed under the ITCP

Rules largely correspond to the relevant Rules occurring

under Order 21 of the Code of Civil Procedure relating

to the execution of a decree. They held that Rule 39 of

the ITCP Rules corresponds to Order 21 Rule 95 C.P.C.

which deals with delivery of possession in occupancy of

judgment debtor and Rule 40 of the ITCP Rules

corresponds to Order 21 Rule 96 C.P.C. They were of

the view that Rule 40 of the ITCP Rules dealing with

the case where the property is in occupation of the tenant

or other person entitled to occupy the same in his own

right contemplates only symbolical possession to the

auction purchaser and the tenants (who are strangers to

the decree) cannot be evicted by the Recovery Officer

by issuing an order directing them to vacate the properties

forfeiting their rights under the relevant provisions of

the Rent Control Law.

The Bench applied the ratio decidendi in Tara Chand v.

Ganga Ram MANU/DE/0163/1977 (Delhi High Court)

and (Division Bench of the Delhi High Court decision in)

M/s. Puran Chand & Co. v. M/s. Ganeshi Lal Tara

Chand MANU/DE/1160/2000 wherein it was held that

where the property is in possession of a tenant, the auction

purchaser would be entitled to symbolical possession of

the property in terms of Order 21 Rule 96 C.P.C the reason

being that if the tenanted property is sold, the purchaser

would be purchasing the right, title and interest of the

judgment debtor and he would become the landlord and

it is for him to take proceedings to evict the tenant in

occupation of the property.

This coupled with the fact that property was in the occupation

of tenants much before the time when it was sold, the Bench

held that auction purchaser would be entitled to symbolical

possession of such property only and hence quashed the orders

of the Recovery Officer and allowed the appeals.

Similarly the Calcutta High Court in Ratan Kumar Khaitan v.

United Bank of India has held that in a suit filed for recovery

the Recovery Officer cannot evict a bona fide tenant of

mortgaged property. In the recovery application filed by United

Bank of India the mortgaged property was tried to be sold by

the Receiver on “as is where is basis”. This was successfully

resisted by one of the lawful tenants. The Court while directing

the Recovery Officer/DRT to proceed with the recovery

proceedings strictly in accordance with law held that: “The

petitioner in this revisional application is admittedly a tenant

in respect of the premises in question. The certificate debtors

mortgaged the said premises and in the recovery proceedings

a receiver has been appointed to sell the property. Nevertheless,

a property should be sold “as is where is basis” and a bona

fide tenant in respect of the said premises cannot be evicted

taking recourse to the recovery proceedings. The Tribunal

has directed sale of the mortgaged property, but it cannot be

said to mean that the property should be sold in vacant

possession or that the auction purchaser has been entitled to

vacant possession of the premises in question. A tenant in

lawful possession cannot be evicted from the property.

Therefore, the Recovery Officer had no authority to pass an

order directing the petitioner either to vacate or to offer the

real value to the portion over which he has been found

remaining in possession.”

Analogous provisions under the SFC Act

In the Supreme Court’s decision in Krishnan Singh Rana v.

Sale Under SARFAESI Act vis-a-vis Third Party Rights


Haryana State Industrial Development Corporation (2000 IV

CTC 767) the scope of Section 29 of the SFC Act was examined

as to whether SFC can evict tenant of borrower while bringing

property for sale . The appellant’s case was that he is a tenant

and has been paying rent to the landlord. He has filed the suit

for permanent injunction against the respondent which is still

pending in the trial court. The short point for consideration is

whether in view of proceedings under Sec 29 of the SFC Act

whether the court has the right to refuse the injunction to the

appellant not to evict in a pending suit. It was held : “.......The

field of Section 29 is between Corporation and the owner.

Respondent - Corporation can do all that is permissible to it

under Section 29 as against owner, but as against tenant or

person claiming such right could only be evicted in accordance

with law by the owner now or owner who may subsequently

come in. But under Section 29 respondent cannot evict the


The submission for the respondent that the pendency of this

suit is coming in its way to sell this property is misconceived.

We do not find anything either in law or fact, which has been

pointed out by the respondent which restricts its right under

Section 29 to sell the property. We do not find any merit in

this submission.”


A tenant gets vested right of tenancy or lease in the property

let out. It is a transfer of leasehold interest in the immovable

property and it is a substantive right. The same applies in case

of statutory tenancy where tenancy rights are created by a

statute. SARFAESI Act does not over ride any substantive

right as stated earlier. Out of enthusiasm in equipping the

Banks and Financial Institutions to recover the NPAs and to

pave the way for such smooth and early recovery the judiciary

has tried to overlook the substantive rights of the tenancy.

Justifying such an enactment in the face of mounting dues to

the Banks and in the guise of protecting public interest the

Supreme Court while upholding the provisions of SARFAESI

Act, has held in Mardia case (2004 (4) CTC 759) thus :

“It is well known that in different states Rent Control

legislations were enacted providing safeguards to the sitting

tenants as against the existing rights of the landlords, which

before coming into force of such law were governed by

contract between the private parties. Therefore, it is clear

that it has always been held to be lawful, whenever it was

necessary in the public interest to legislate irrespective of

the fact that it may affect some individuals enjoying certain

rights. In the present we find that case the unrealized dues

of banking companies and financial institutions utilizing

public money for advances were mounting and it was

considered imperative in view of recommendations of

experts committees to have such law which may provide

speedier remedy before any major fiscal set back occurs

and for improvement of general financial flow of money

necessary for the economy of the country that the impugned

Act was enacted. Undoubtedly such a legislation would be

in the public interest and the individual interest shall be

subservient to it. Even if a few borrowers are affected here

and there, that would not impinge upon the validity of the

Act which otherwise serves the larger interest.”

On a perusal of all of the above instances cited by the Supreme

Court it could be seen that sufficient protection was given to

the substantive rights of the lessee, whereas the same rights

have been trampled upon by the various judicial interpretations

under the SARFAESI Act. Further in the case of SARFAESI

Act, there is no specific provision overriding substantive laws.

While discussing the issue relating to taking over actual

possession of the mortgaged securities under Section 14 of

SARFAESI Act by the secured creditor the Supreme Court in

Transcore case had held that “It is well settled that third party

interests are created overnight and in very many cases those

third parties take up the defence of being a bona fide purchaser

for value without notice”. This observation of the Apex Court

is only apprehension expressed and it should not mislead to

override the rights lawfully created.

In Hutchinsons Essar South Ltd. v. Union Bank of India Ltd

2008(2)CLR 393 (Kant) the Karnataka High Court allowed

the lessee’s Writ petition challenging the action of the Bank

under Section 14 of SARFAESI seeking a declaration that the

petitioner’s leasehold rights are not regulated and covered by

SARFAESI. The ratio decidendi in the said case was : “If a

bonafide third party is in occupation of the secured asset, third

party lessee cannot be thrown out and the secured person can

acquire only symbolic and not actual possession.”

“If the purchaser of the secured asset has to take the actual

possession, the same has to be in accordance with the due

process of law only.”

“Even where the sale of assets takes place the tenant cannot

be evicted without the due process of law.”

In Para 23. the Court has held : “However if the secured asset

is in the possession of a bonafide lessee or tenant, he cannot

be thrown out by invoking Sections 13 and 14 of the

Securitisation Act………. However, if the banker or purchaser

of the secured asset has to take the actual possession, the same

has to be in accordance with the due process of law only. This

is the view taken by Patna High Court in the case of Abhay

Kumar Pandey (supra) while dealing with the issue of

Sale Under SARFAESI Act vis-a-vis Third Party Rights


possession of the property auctioned under Section 29 of the

State Financial Corporation Act, 1951.”

Tenancy before and after mortgage

As far as the judicial interpretation under the SARFAESI Act

is concerned on a reading of the various judgments it becomes

clear that the only yardstick applied by the Courts is whether

the lease has been executed before or after the mortgage, for

the lessee to be entitled to seek relief under the civil laws. If

the lease has been created subsequent to mortgage, the tenancy

becomes determined immediately on taking action under Sec

13(4). If the lease was prior to the date of mortgage then the

Courts held that the tenancy could be terminated under the

due process of law.

Section 65A of the TP Act is an empowering section and it

confers on the mortgagor a power to lease which shall be

binding on the mortgagee. Sub-section (3) lays down that the

conditions laid down in Sub section (2) can be varied and

altered in the mortgage deed in which case the covenants in

the mortgage deed would prevail. Therefore no doubt certain

conditions have been stated in Sub-section (2) of Sec 65A,

but a statutory permission has been given to contract out of

the above conditions in Sub-section (2) of Section 65A. As

stated in Mulla page 737” The present section confers upon

the mortgagor in possession a statutory power of leasing, subject

to any express provision in the deed of mortgage…… Under

this section the validity of the lease granted by a mortgagor in

possession is determined with reference to the section and the

terms of the deed of mortgage without regard to its effect on

the mortgagee’s security. Such a lease would not bind the

mortgagee or anyone claiming though him unless the

mortgagee has given his consent to the lease. Such consent

may be given in the lease deed itself……It is submitted on a

parity of reasoning that this new section which expressly gives

power to the mortgagor in possession to grant a lease binding

on the mortgagee, does not take away the old right of the

mortgagor to grant a lease which, without the consent of the

mortgagee, will not be binding on the mortgagee, but will be

binding on the mortgagor.”

Very few Courts have opined that Section 65A does not bar

the mortgagor from creating a lease. On a reading of the entire

section it is clear that Sub-section (3) of Section 65A permits

the mortgagor and mortgagee to contract out of the provisions

of Sub section (2). Hence the terms of the mortgage deed

have to be gone into in detail. As the facts and circumstances

may vary in each case such an oversimplification of the law as

in Sree Lakshmi Products’ case that “Any tenancy created by

the mortgagor after the mortgage in contravention of Section

65-A would not be binding on the bank/ FI, and in any event

such tenancy rights shall stand determined once action under

Section 13(4) has been taken by the bank/ FI”, is erroneous.

The secured creditor is bound by the contract and the

SARFAESI Act does not override such contract.

In tune with the above observations the findings in Indian Oil

Corporation Ltd. v. Shikshak Sahakari Bank Ltd. IV (2005)

BC 50, is very relevant. In the said case the lessee in possession

of the property based on a registered lease deed challenged

the SARFAESI action by the Bank. It was held :

“8. On the facts, there is hardly any controversy. I say so

because the appellant’s possession as lessee on the basis of

registered lease deed dated 30th June, 2003 is not disputed

on behalf of respondent No. 1 (Bank). Indisputed, there is

evidence of the copy of lease deed proving that fact.

The contention on behalf of the Bank, however, is that the

lease deed is not legal and valid since it has been subsequent

to the creation of equitable mortgage. The copy of

memorandum dated 6.3.1997 is produced by the Bank on

the record. Mr. Gharpure, learned Counsel for the Bank

has submitted that the lease deed contravens of following

clause in the agreement of term loan:

“The borrower/s shall not, without the written consent of

the Bank, create in any manner any charge, lien or other

encumbrance on the property/Assets and security given to

the Bank in respect of such advance or create any interest

on such security in favour of any other party or person.”

By that clause the borrower (respondent 3) had undertaken

that without the Bank’s (respondent No. 1) consent, it will

not create charge, etc. on “the property/asset” and security

given to the Bank. Now, the term loan agreement does not

mention any property or asset to which the words “the

property/asset” could be co-related. The word “the” is not

without significance and connotes specific property.

Therefore, I think these words cannot be made applicable

to all property/assets of the respondent No. 3. The clause

can apply to the security actually given to the Bank on the

date of said agreement of term loan. The equitable mortgage

in this case was created on or about 6th March, 1997 which

means that the same was created subsequent to the term

loan agreement. Thus, the property in question was not the

Bank’s security on the date of term loan agreement which

in turn means that the aforesaid clause cannot be made

applicable to the property in question. In the result, it cannot

be said that the creation of lease was in contravention of

the equitable mortgage by respondent No. 3 in favour of

respondent No. 1 of the property.

9. The learned Counsel for the parties admit that there is

no provision in law which puts fetters on the ownership

Sale Under SARFAESI Act vis-a-vis Third Party Rights


rights of mortgagor, Section 65-A of Transfer of Property

Act even if is applied to equitable mortgage (which in fact

is doubted) there is no complete bar in that provision on

creation of lease. In the circumstances, it will have to be

held for the limited purpose of the applicant that the lease

in favour of the appellant is legal. It is trite law that a

person in lawful possession cannot be dispossessed except

in due course of law. There is unanimity amongst the parties

that the provisions of SRFAESI Act by themselves do not

empower the secured creditor to dispossess the lawful tenant.

The due process of law means the process as per ordinary

civil law. That means, the dispossession by the respondent

No. 1 Bank will have to be held to be illegal. Consequently,

the direction for restoration of possession has to be given.”

As regards any tenancy before mortgage the Courts were of

the uniform opinion that if there is any grievance the lessee

could approach the DRT under Section 17 of SARFAESI Act.

In Tradewell v Indian Bank (2008)81SCL173(Bom) in the writ

petition filed by borrower on the orders of CMM allowing the

Bank’s petition under Section 14 for possession, the Bombay

High Court decided that appeal under Section 17 is an efficacious

alternate remedy. It has been categorically stated by the Division

Bench that any grievances of third parties can be entertained by

way of application to DRT under Section 17 only, except under

extreme conditions. The Bench has further held in Para 67:

“When the bank takes any measure under Section 13(4), on

account of failure of the borrower to repay the liability is already

crystallized. Similarly when the secured creditor approaches

the CMM/DM for assistance to take possession of the secured

asset, the liability having been crystallized, there can be no

adjudication about it at that stage. Possession has to be taken by

non-ad judicatory process. There is no question of pointing out

to the CMM/DM at that stage that the person who is to be

dispossessed is a tenant, or that he has a prior registered sale

deed or that in case of simple mortgage, ownership rights are

not transferred; that the mortgagee is only entitled to an obligation

to pay and, hence, possession cannot be taken or that such a

course will improve or change………..This is the scheme of

the NPA Act. It is so framed to achieve its object. At first blush

this may appear harsh. But it is not so. The borrower and the

third party is not remedy-less. Remedy is provided in Section

17 where appropriate relief can be given to them…..”

The Bench has given a go by to the arguments of the borrower’s

counsels that on a combined reading of Section 13(2) and

Section 13(4) the NPA Act contemplates action against the

borrower. That “in Transcore’s case (supra), the Supreme Court

has discussed the provisions of the NPA Act in the context of

the borrower. The NPA Act does not deal with third parties.

Possession of third parties cannot be taken by adopting

measures under Section 13(4). Third party is not given notice

under Section 13(2). Taking possession from a third party in

such a manner is not contemplated in the NPA Act nor has the

Supreme Court said so in Transcore’s case (supra).

The Bombay High Court in Tradewell case has held that in an

appeal under Section 17, the DRT could adjudicate beyond

the correctness of the measures under Section 13(4) and apply

the principles of natural justice to seek the ends of justice.

However any relief to a bonafide tenant who has been

dispossessed is far fetched, as it is also a principle of natural

justice that for the cause of the public good, private interest

should be sacrificed.

As regards the contention that no relief can be given to a third

party because Section 17(3) speaks only of restoration of

possession of the secured asset to the borrower the Bombay

High Court has simply glossed over the same by holding that

“…………... Section 17(3) further goes on to say that DRT

can pass such order as it may consider appropriate and necessary

in relation to any of the recourse taken by the secured creditor

under Sub-section (4) of Section 13.”

Another example of third party rights accrued before the

mortgage is title by adverse possession. If a third party acquires

title by adverse possession before mortgage in favour of Banks/

Financial Institutions and if the third party raises such ground

against SARFAESI action, Banks/Financial Institutions cannot

proceed further, since mortgagor even at the time of mortgage

would have lost title to the property.


On a perusal of the judgments of the various Courts including the

Supreme Court it could be concluded that with an intention to arm

the Banking Sector to overcome the mounting NPAs, enormous

powers are vested in the mortgagee/Bank while enforcing its

mortgaged securities under SARFAESI Act. But the SARFAESI

Act does not override the substantive rights of third parties, accrued

prior to mortgage. In fact the observation of the Supreme Court in

Transcore case stating that the SARFAESI Act will have overriding:

effect has opened Pandora’s Box. This has emboldened the litigants

to challenge time-tested Section 58 (f) and Section 59 (f) of Transfer

of Property Act. In X. Sahaya Mary & others v. Union of India &

others the Division Bench of the Madras High Court has observed :

“Though the petitioners have raised the issue regarding the validity

of Sections 58(f) and 59 of the Transfer of Property Act, in view

of Section 35 of the SARFAESI Act, which has the overriding

effect of other laws as held by the Apex Court in the said judgment

(Transcore case) we are not going into the ground raised in the

Writ petitions.” And has kept open the issue.

This will be a starting point to further litigation on the

subject. 􀂉

Sale Under SARFAESI Act vis-a-vis Third Party Rights


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