Delhi High Court Overturns DRAT Order: Bank's NPA Classification Valid, Borrowers' Consent Validates Property Auction Under SARFAESI Act

Court Upholds Bank's Actions in Long-Running Debt Recovery Dispute

In a significant ruling for banking and debt recovery practices, the Delhi High Court has set aside an order by the Debts Recovery Appellate Tribunal (DRAT), affirming the validity of Canara Bank's (formerly Syndicate Bank) classification of a borrower's account as a Non-Performing Asset (NPA) and the subsequent auction of mortgaged property. The bench, comprising Justice Anil Kshetrapal and Justice Harish Vaidyanathan Shankar, emphasized that explicit consent from borrowers to the sale of secured assets dilutes the need for strict procedural compliance under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The case, W.P.(C) 6494/2016 & CM APPL.4295/2025, involved Canara Bank challenging a DRAT order dated March 2, 2016, which had allowed an appeal by borrowers M/s Karishma Enterprises and others, setting aside a Debt Recovery Tribunal (DRT) dismissal of their securitisation application.

Case Background and Timeline

The dispute traces back to 2007 when Canara Bank extended a credit facility of Rs. 100 lakhs to Respondent No. 1, M/s Karishma Enterprises (a proprietorship firm run by Sh. Vijay Kumar), secured by mortgages on three properties in Village Chandrawali, Shahdara, Delhi, totaling 1,000 sq. yds. Respondent No. 2 acted as guarantor. Additional facilities were sought and renewed in 2008, 2009, and 2010, but defaults began surfacing by 2012.

By December 31, 2012, the accounts showed irregular overdraft (OD) and cash credit (CC) balances exceeding sanctioned limits. Despite reminders in early 2013, no regularization occurred. The bank declared the account an NPA on March 31, 2013, issued a SARFAESI notice on April 22, 2013, and appointed a court receiver. Borrowers challenged these actions via writ petition (dismissed in September 2013) and S.A. No. 325/2013 before the DRT, which imposed conditional stays requiring deposits.

Key developments included: - Symbolic possession of two properties in October 2013. - Borrowers' consent in April 2014 to auction just one property (275 sq. yds.) to cover dues, leading to its sale for Rs. 214 lakhs against dues of Rs. 106 lakhs. - An appeal against the consent order (No. 303/2014) withdrawn as infructuous in December 2014 after the sale. - DRT dismissal of S.A. No. 325/2013 in September 2015, followed by sale confirmation to auction purchaser (Respondent No. 3). - DRAT's reversal in March 2016, prompting the bank's writ petition.

Arguments from Both Sides

Canara Bank's counsel argued that the NPA classification complied with Reserve Bank of India (RBI) prudential norms under the Banking Regulation Act, 1949 , as the 90-day irregularity period from January 1, 2013, ended on March 31, 2013. They highlighted borrowers' explicit consent to the limited auction (recorded in DRT's April 16, 2014, order), their failure to utilize opportunities to deposit dues (e.g., DRT's April 13, 2015, order), and frivolous litigation to delay proceedings. The bank contended that consent waived objections to procedural aspects like valuation and notice publication under SARFAESI Rules 8 and 9.

In response, borrowers' counsel maintained the NPA declaration was premature, predating the full 90-day period. They disputed that their submissions constituted "consent" to the auction, arguing non-compliance with Section 13(3A) of SARFAESI and Rules 8(6) and 9 (requiring proper valuation, reserve price, and publication). They claimed the DRAT correctly faulted these lapses as per settled law.

Legal Principles and Precedents Applied

The court applied RBI's Income Recognition, Asset Classification, and Provisioning (IRACP) norms, holding that OD/CC accounts become NPAs after "more than 90 days" of continuous excess over limits. Citing the mandatory nature under Sections 21 and 35A of the Banking Regulation Act, the bench clarified: "The computation begins from the date immediately succeeding the day on which the account first becomes irregular... If the irregularity continues unabated through the entire 90-day period, the account stands impaired."

On procedural compliance, the judgment distinguished strict mandates from waivable safeguards, noting SARFAESI protections benefit borrowers primarily. Where consent is explicit (via statements before DRT/DRAT or conduct), borrowers waive objections to "minor irregularities" absent prejudice or mala fides. The court referenced jurisprudence recognizing such waiver, shifting focus to "substantive fairness" post-consent.

Pivotal excerpt: "When the borrower has expressly consented to the sale of the secured asset, the rigour of strict compliance with certain procedural safeguards under the SARFAESI Act and the SARFAESI Rules... stands materially diluted... the borrower is deemed to have waived objections relating to minor irregularities in procedure, provided that no prejudice is shown to have been caused."

This aligns with precedents emphasizing borrower acquiescence in auctions, though specific cases were not cited in the judgment text.

Court's Decision and Implications

The Delhi High Court allowed the petition, setting aside the DRAT's March 2, 2016, order. It ruled the NPA classification lawful, the auction valid due to borrowers' consent (evidenced in DRT's April 16, 2014, order and their non-pressing of Appeal No. 303/2014), and procedural lapses immaterial absent prejudice. The sale to Respondent No. 3 stands confirmed.

This ruling reinforces banks' adherence to RBI norms in NPA declarations and clarifies that borrower consent can streamline SARFAESI proceedings, reducing litigation over technicalities. For lenders, it underscores the value of documented consents; for borrowers, it highlights the binding nature of court-recorded submissions. The decision may influence similar debt recovery cases, promoting efficient asset realization while protecting bona fide processes.

The writ petition and pending application were disposed of accordingly.