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IN THE HIGH COURT OF KERALA AT ERNAKULAM
D.K. SINGH, J.
M/s Vasu Coco Resorts Pvt. Ltd. & Ors. - Petitioners
Versus
The Authorised Officer, State Bank of India, Stressed Assets Management Branch & Ors. - Respondents
WP(C) No. 23464 of 2024
Decided On : 19-11-2024
(A) SARFAESI Act, 2002 - Sections 13(2) and 13(8) - Security Interest (Enforcement) Rules 2002 - Auction sale of secured assets - Petitioners challenged the auction sale on grounds of violation of mandatory procedures under the Rules, including failure to obtain separate valuations for movable and immovable properties and selling below reserve price - Court found that the auction process was flawed and not in compliance with statutory requirements. (Paras 11-21)
(B) Auction Sale - Bona Fide Purchaser - The auction purchaser was found to have prior knowledge of the petitioners' negotiations and had previously offered a higher price, thus not qualifying as a bona fide purchaser. (Paras 21-21.1)
Facts of the case:
The petitioners, a private limited company, availed a loan from the respondent Bank secured by immovable and movable properties. Due to financial hardships, the loan was classified as NPA, leading to auction proceedings. The petitioners challenged the auction sale citing procedural violations.
Findings of Court:
The auction sale was set aside due to non-compliance with the Security Interest (Enforcement) Rules 2002, including failure to fix separate reserve prices and conduct proper valuations.
Issues: The main issues were whether the auction sale violated the Security Interest (Enforcement) Rules and if the auction purchaser was a bona fide purchaser.
Ratio Decidendi: The court ruled that strict adherence to statutory provisions is essential in auction sales to protect borrowers' rights, and the auction purchaser's actions indicated a lack of bona fides.
Result: Writ petition allowed, auction sale set aside, and the Bank directed to refund the auction amount.
JUDGMENT :
D.K. Singh, J.
Heard Ms. V. Mohana, learned Senior Counsel assisted by Mr. Praveen K. Joy, learned Counsel for the petitioners and Mr. K. Jaju Babu, learned Senior Advocate assisted by Mr. Tom K. Thomas, learned Counsel for R1 and R2 and Mr. P.L. Narayanan learned Senior Counsel for R3.
Facts:
2. The first petitioner, a private limited Company, runs a resort at Cherthala, Alleppey under the name and style “Vasundhara Resorts”. The second petitioner is the Managing Director of the first respondent Company. The petitioners had availed credit facilities to the tune of Rs.53 crores from the first respondent Bank for the construction of a five-star resort. The said loan was secured by creating an equitable mortgage of certain immovable properties and hypothecation of the movable properties. The primary security comprised 6.60 Ares of land with resort building and superstructure. Fourteen agricultural lands were offered as collateral security to secure the aforesaid loan. It is stated that as a result of the Nipah Virus, Kerala floods and COVID-19, the resort business faced huge hardship as the tourism business itself was down to a great extent. The petitioners failed to discharge the liability in terms of the loan agreement. Therefore, the Bank classified the loan account of the petitioners as NPA and proceeded with the SARFAESI measures under the provisions of the SARFAESI Act and the Rules made thereunder.
3. The petitioners filed a Securitization Application, S.A. No.530/2022 under Section 17 of the SARFAESI Act on 20.08.2022, initially challenging the possession notice dated 06.07.2022 issued by the respondent Bank and later amended the S.A. to challenge the two sale notices dated 15.09.2022 and 29.10.2022. The petitioners also challenged the Advocate Commissioner's notice dated 28.11.2022 for taking possession of the secured assets. After the sale of the secured assets, the petitioners amended the Securitization Application to challenge the sale confirmation advice dated 26.12.2022 in favour of the third respondent.
4. Initially the Debts Recovery Tribunal passed an order of status quo dated 30.11.2022. It was further directed that sale confirmation be deferred if the sale was held on the same day on 30.11.2022. The Debts Recovery Tribunal dismissed the Securitization Application on 07.07.2023. The respondent Bank issued two separate sale certificates in respect of the movables and immovables on 10.07.2023 and 12.07.2023 respectively. The appeal filed by the petitioners against the decision in S.A. was unsuccessful and the Debts Recovery Appellate Tribunal (DRAT) dismissed the petitioners’ appeal and upheld the order passed by the Debts Recovery Tribunal vide final order dated 12.06.2024.
5. The petitioners, thereafter, filed the present writ petition challenging the final order of the Debts Recovery Appellate Tribunal. However, this Court refused to grant any interim protection in respect of the possession of the secured asset. Against the refusal to grant any interim protection, the petitioners filed W.A. No.910/2024 before the Division Bench of this Court. The Division Bench dismissed the Writ Appeal vide order dated 05.07.2024. After the dismissal of the Writ Appeal, the petitioners approached the Supreme Court by filing SLP(C) No.14273/2024. The Supreme Court vide order dated 10.07.2024 directed the petitioners to deposit a sum of Rs.30 crores with the Bank by 25.07.2024 to show their bona fides and left it to this Court to decide the timeframe for making further deposit of a sum of Rs.20 crores by the petitioners. The order dated 10.07.2024 passed by the Supreme Court in SLP (C) No.14273/2024 reads as under :
The auction sale of secured assets was invalid due to violations of statutory procedures, including failure to obtain separate valuations and selling below the reserve price.
The auction sale is invalid if not compliant with SARFAESI Act rules on property valuation, requiring distinct treatment of movable and immovable assets without collusion.
Mandatory compliance with procedural requirements under the SARFAESI Act is essential; failure to adhere prejudices borrowers' rights and invalidates auction proceedings.
Point of Law - Rule 15 of Schedule II Part I of the Income Tax Act, 1961, in the first place it will have to be stated that a reading of the said Rule does not in any way conflict with either Section....
Secured creditors must adhere to proper notice and valuation requirements per the SARFAESI Act, as failure to do so invalidates asset sales.
The court reinforced that compliance with statutory notice requirements and fair valuation is essential in property auctions under the SARFAESI Act to protect borrower rights.
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