Court Rules Auction Purchaser Cannot Remove Known Encumbrances from Property Records Without Settling Statutory Liabilities; Priorities Under SARFAESI and RDB Acts Do Not Override Security Interest (Enforcement) Rules
In a significant ruling dated September 30, 2026, the Division Bench of the Madras High Court, comprising Justices Abdul Quddhose and R. Rajesh Vivekananthan, dismissed the writ appeal filed by Indian Overseas Bank seeking to direct the Registration Department to remove encumbrance entries recorded on a property purchased through SARFAESI auction without first settling outstanding dues.
The case arose when Indian Overseas Bank, acting as a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), sold an immovable property of the borrower through a public auction. The sale certificate issued by the authorized officer of the bank explicitly disclosed known encumbrances on the property, including an attachment in favor of the Central Excise Department (respondent). The auction purchaser bought the property on an "as is where is" basis with full knowledge of such encumbrances but did not discharge the statutory dues payable.
The bank, through its writ petition, sought a mandamus to the Registration Department to expunge the encumbrance entries so that the sale certificate could be registered free of such encumbrances. The Single Judge of Madras High Court had earlier dismissed the writ petition, and the bank appealed.
The Division Bench upheld the dismissal, holding that the statutory procedure under Rule 9(6) to 9(10) of the Security Interest (Enforcement) Rules, 2002, which supplement the SARFAESI Act, is mandatory and must be strictly followed. The Rules mandate that when a secured asset is sold subject to known encumbrances, the purchaser must deposit sufficient funds to clear those encumbrances before the property can be delivered free from such liabilities.
The Court emphasized the principle of "caveat venditor" (let the seller beware), obligating the bank to disclose known encumbrances transparently in the sale notice and certificate. Simultaneously, the purchaser is bound by "caveat emptor" (let the buyer beware) to make an informed decision and discharge statutory dues accordingly. The sale certificate in the instant case explicitly mentioned the encumbrances, and the purchaser took the risk knowingly.
The Court further clarified that the priority of secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 does not override the procedural requirements under the Security Interest (Enforcement) Rules. These provisions grant secured creditors priority over government dues but do not dispense with the obligation to clear encumbrances before seeking removal from property records.
Rejecting the contention that the bank had become functus officio after issuing the sale certificate, the Court held that the bank's rights continue until full recovery of dues, and pending recovery proceedings before the Debt Recovery Tribunal affirmed the maintainability of the writ petition.
Importantly, the Court held that an attachment by a government department, reflected in the encumbrance certificate, constitutes an encumbrance that restricts alienation or transfer of the property under Section 100 of the Transfer of Property Act, 1882. Therefore, the auction purchaser cannot claim to have acquired the property free of such encumbrances without discharging the dues.
The judgment reaffirms the mandatory nature of compliance with SARFAESI Rules and the need for transparency and due diligence in auction sales of secured assets, balancing the rights of secured creditors and government revenue authorities. It acts as a precedent emphasizing that removal of encumbrances from public records without settling the liabilities is impermissible and would amount to circumventing statutory protections.
Consequently, the Madras High Court dismissed the writ appeal and associated applications, upholding the earlier decision that the known encumbrances must remain on record until dues are discharged.
Bottom Line:
SARFAESI - Sale certificate issued by secured creditor disclosing known encumbrances - Auction purchaser who purchased property on "as is where is", "as is what is" and "whatever there is" basis with notice of statutory attachment cannot seek removal of such encumbrance from encumbrance certificate without first discharging dues under Rule 9(7) of the Security Interest (Enforcement) Rules, 2002 - Priority of secured creditor under Section 26E of SARFAESI Act and Section 31-B of RDB Act does not override mandatory compliance with Rule 9(6) to 9(10).
Statutory provision(s):
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sections 26E, 35), Security Interest (Enforcement) Rules, 2002 (Rules 9(6) to 9(10)), Recovery of Debts and Bankruptcy Act, 1993 (Section 31B), Customs Act (Section 142A), Central Excise Act (Section 11E, repealed), Transfer of Property Act, 1882 (Section 100)
