1. Loan default — SARFAESI Act proceedings — Auction sale — Challenge to sale for non-compliance with mandatory notice under Security Interest (Enforcement) Rules, 2002. (Para 3 , 4 )
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2024 Supreme(SC) 365
SUPREME COURT OF INDIA
Vikram Nath, Satish Chandra Sharma, JJ.
Govind Kumar Sharma & Anr. – Appellants
Versus
Bank of Baroda & Ors. – Respondents
Civil Appeal No. 5028 of 2024 (Arising out of S.L.P.(C) No.24155 of 2018)
Decided On : 18-04-2024
Important Points
IMPORTANT POINT
Once auction sale is set aside, all consequent developments will have to be undone.
Once auction sale is set aside, all consequent developments will have to be undone.
Subject
Civil Law - Property Law
Act Referred
Headnote
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 13(4) – Recovery of debt – Auction sale of secured asset – Appellants were tenants in premises in question which had been put up for auction – Their possession and status as tenants were converted into that of owners after sale was confirmed and sale certificate issued – In view of concurrent finding based on admission by Bank that mandatory notice of 30 days was not given to Borrower before holding auction/sale, setting aside of auction/sale by DRT and later on by DRAT cannot be faulted with – Same has to be approved – Once sale is set aside, status of appellants as owners would automatically revert to that of tenants – Status of possession at best could have been altered from that of an owner to that of tenants but Bank would not have any right to claim actual physical possession from appellants nor would appellants be under any obligation to handover physical possession to Bank – Direction issued by DRT that Bank will first take possession and thereafter refund auction money with interest applicable to fixed deposits, is not a correct direction – Entire controversy has arisen because of Bank not following prescribed mandatory procedure for conducting auction sale and, therefore, Bank must suffer and should be put to terms for unnecessarily creating litigation – As of date dues of Bank have been fully discharged and additional amount of auction money is lying with Bank since 2009 – This amount is to be returned to appellants – Award of interest on auction money at the rate applicable to fixed deposits is not a correct view – Rate of interest deserves to be enhanced – Interest of justice would be best served if auction money with 12 per cent per annum compound interest is returned to appellants. (Paras 11, 12 and 13)
Facts of the case:
In recovery proceedings, Recovery Officer conducted an open auction. Appellants were highest bidder. Their bid was accepted and they made good deposits as per terms of this auction. Accordingly, sale certificate was issued in their favour on 30.03.2009. Appellants were tenants of borrower in premises in question which had been put to auction. As such status of appellants changed from that of tenants to that of owners after sale was confirmed and sale certificate was issued.
Findings of Court:
Borrower Respondent nos.3 and 4 and the Bank–Respondent nos.1 and 2, would streamline their accounts and Bank upon settlement of same will issue a No Dues Certificate to the Borrower.
Result : Appeal disposed of with directions.
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. R. P. Shukla, Adv. Mr. Dhruv Shukla, Adv. Ms. Upasana Shukla, Adv. Ms. Aeishwarya Sharma, Adv. Mr. Vibhav Mishra, AOR Mr. Vijay K. Jain, AOR
For the Respondent(s): Mr. Arun Aggarwal, AOR Ms. Anshika Agarwal, Adv. Mr. Mohit Saini, Adv. Mr. Shiviam Saini,Adv. Mr. Praful Rawat, Adv. Mr. Pramod Kumar Singh, Adv. Mr. Vijay Pal, Adv. Mr. Ram Shiromani Yadav, Adv. Ms. Namrata Trivedi, Adv. Mr. Gajendra Kumar, Adv. Mr. Om Prakash, Adv. Mr. Mahendra Singh, Adv. Mr. Rameshwar Prasad Goyal, AOR
For the Petitioner(s): Mr. R. P. Shukla, Adv. Mr. Dhruv Shukla, Adv. Ms. Upasana Shukla, Adv. Ms. Aeishwarya Sharma, Adv. Mr. Vibhav Mishra, AOR Mr. Vijay K. Jain, AOR
For the Respondent(s): Mr. Arun Aggarwal, AOR Ms. Anshika Agarwal, Adv. Mr. Mohit Saini, Adv. Mr. Shiviam Saini,Adv. Mr. Praful Rawat, Adv. Mr. Pramod Kumar Singh, Adv. Mr. Vijay Pal, Adv. Mr. Ram Shiromani Yadav, Adv. Ms. Namrata Trivedi, Adv. Mr. Gajendra Kumar, Adv. Mr. Om Prakash, Adv. Mr. Mahendra Singh, Adv. Mr. Rameshwar Prasad Goyal, AOR
Table of Contents
2. Whether bonafide auction purchasers are entitled to retain property or receive compensation for improvements despite statutory non-compliance in the auction process. (Para 8 , 9 , 10 )
3. Non-compliance with mandatory notice requirements invalidates the sale; however, auction purchasers who were prior tenants revert to tenant status without needing to surrender possession first. (Para 12 )
4. Failure to provide mandatory statutory notice under the Security Interest (Enforcement) Rules, 2002, renders an auction sale void, necessitating a refund of the purchase price. (Para 12 )
5. Auction sale set aside — Appellants' status restored as tenants — Auction money to be refunded with twelve per cent compound interest — No Dues Certificate to be issued. (Para 13 , 14 )
6. Does failure to provide the mandatory 30-day notice under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, affect an auction sale?
Yes, the court held that the 30-day notice is mandatory. Non-compliance with these statutory provisions renders the auction sale liable to be set aside. (Para 4 , 5 , 12 )
7. What happens to the possession and status of an auction purchaser who was previously a tenant if the sale is set aside?
The status of the purchaser automatically reverts to that of a tenant. Since they were already in possession as tenants, the bank cannot demand physical possession as a condition for refunding the auction money. (Para 12 )
8. Is a refund of the auction money at the fixed deposit rate sufficient when the sale is set aside due to the bank's statutory failure?
No. Where the bank's failure to follow mandatory procedures creates unnecessary litigation, the court may enhance the interest rate to serve the interests of justice, as the bank must suffer for its illegality. (Para 12 )
JUDGMENT :
VIKRAM NATH, J.
Leave granted.
2. The appellants herein have assailed the correctness of the judgment and order dated 02.07.2018 passed by the Allahabad High Court dismissing the Writ Petition of the appellants, confirming the orders passed by the Debt Recovery Tribunal1[DRT] as also the Debt Recovery Appellate Tribunal2[DRAT], whereby the auction sale held in favour of the appellants had been set aside and the appeal was dismissed.
Brief facts in nutshell are as follows:
3. The firm-respondent no.3, had taken a loan from the respondent no.1-Bank. However, as it went into default, the Bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20023[SARFAESI Act]. In the said recovery proceedings, the Recovery Officer conducted an open auction. The appellants were the highest bidder. Their bid was accepted and they made good the deposits as per the terms of this auction. Accordingly, a sale certificate was issued in their favour on 30.03.2009. It may be noted here that the appellants were tenants of the borrower in the premises in question which had been put to auction. As such the status of the appellants changed from that of tenants to that of owners after the sale was confirmed and sale certificate was issued.
4. The borrower-respondent nos.3 and 4 filed a securitization application under Section 17 of the SARFAESI Act for setting aside the sale on the ground that the Bank had not followed the statutory procedure prescribed under the Security Interest (Enforcement) Rules, 20024[2002 Rules], in particular, the notice as required under Rules 8(6) and 8(7) which required a mandatory notice of 30 days to the borrower, had neither been issued nor served upon the borrower.
5. The DRT, after examining the matter, came to the conclusion that the Bank itself had admitted that the statutory compliance under the above rules had not been made and as such proceeded to set aside the sale vide order dated 21.04.2015. The operative portion of the order passed by the DRT is reproduced hereunder:
“…The sale as pointed out earlier is liable to be quashed for the non-compliance of Rule 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The auction purchaser set up his case that he has spent huge money on improvement of property in question. The auction purchaser has not place on record any material to prove the alleged improvements in the property. The auction purchaser is enjoying this property since 2009 as such auction purchaser is not entitled to any extra compensation. However, Bank will be under obligation to refund the auction money with interest as applicable to fixed deposit. The sale is accordingly set aside and it is made clear that Bank will refund the auction money only after receiving possession of property from auction purchaser within 15 days from the delivery of auction purchaser to the Bank. The applicant is directed to pay the dues of the sic within 15 days with upto date interest, failing which Bank will be at liberty to proceed further under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 to recover its dues.
xxx xxx xxx”
6. In effect the DRT, after setting aside the sale, further proceeded to direct the Bank to refund the auction money with interest as applicable to fixed deposits only after receiving possession of the property from the auction purchaser within 15 days thereof. The borrower was directed to pay the dues of the Bank within 15 days with up to date interest, failing which the Bank would be at liberty to proceed further under the SARFAESI Act for recovery of its dues.
7. The appellants preferred an appeal before the DRAT registered as Appeal No. R-57 of 2015, which came to be dismissed, vide order dated 19.04.2018. Thereafter the appellants approached the High Court by way of a Writ Petition registered as Writ Petition (C) No.20266 of 2018, which has since been dismissed
