High Court Upholds SARFAESI Auction Rules Regarding Notice Periods and Valuation Requirements

The High Court of Judicature at Madras, in a recent judgment delivered by Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan, has reaffirmed the robustness of proceedings initiated under the SARFAESI Act. The ruling addresses critical procedural challenges brought by a borrower regarding the auction of secured assets, providing clarity on notice periods and the validity of property valuation.

Background of the Conflict

The appellant, M/s. Lucky Footwear Components , challenged an order from the Debt Recovery Appellate Tribunal (DRAT) which had previously dismissed their Securitisation Application. The dispute arose following the borrower's default on loan repayments to the Indian Bank. The bank subsequently invoked the SARFAESI Act, taking symbolic possession and eventually auctioning the commercial property to recover the outstanding debt.

The appellants argued that the auction was flawed on multiple grounds, citing a failure to comply with the 15-day notice period, improper property description, and reliance on an outdated valuation report. Furthermore, they alleged that their account was wrongfully classified as a Non-Performing Asset (NPA) and that they were unfairly denied Covid-19 moratorium assistance.

Arguments from the Petitioner and Respondent

The appellants contended that the sale notice, published on July 26, 2022, with an auction date of August 10, 2022, did not provide "15 clear days" as required by Rule 9 of the Security Interest (Enforcement) Rules, 2002. They further claimed that the bank ignored recent market trends by using a valuation report from July 2021.

Conversely, the bank maintained that the rule requires only 15 days, which was satisfied in this instance. The bank’s counsel argued that the property description was exhaustive and that the valuation was conducted by a professional registered under the Wealth-Tax Act, rejecting the appellant’s reliance on a non-certified surveyor. The auction purchaser, who had already paid ₹67 lakhs, further argued that the sale had reached a stage of finality that should not be disturbed.

Judicial Analysis: The 15-Day Rule and Supervisory Limits

The Court clarified that the intent of Rule 9 is to ensure the borrower has sufficient "reasonable time" to settle the debt before the auction proceeds. The Court noted that in the context of the legislative framework, 15 days serves as the minimum threshold for subsequent sales.

"The object of the said provision appears to be to put the borrower to notice of a minimum period of 15 days so that before auction, the borrower could repay the entire loan liability," the Court remarked.

The Court also emphasized its limited role under Article 227 of the Constitution. It held that in the absence of patent perversity, the judiciary should not act as an appellate authority on factual findings regarding property valuation, especially when the bank employs authorized, registered valuers.

Key Observations

• On the Objective of Rule 9 : "The context in which the rule-making authority has provided 15 days notice, is only intended to serve as a reasonable time to the borrower to satisfy the loan amount."
• On Judicial Intervention: "While exercising jurisdiction under Article 227 of the Constitution of India, this Court, in the absence of any perversity, would not assume role of an appellate authority on facts to re-appreciate the evidence on record."
• On Finality of Auctions: "Any sale by auction or other public procurement methods once already confirmed or concluded ought not be set-aside or interfered with lightly except on grounds that go to the core of such sale process."

Final Decision and Implications

The Madras High Court dismissed the petition, refusing to disturb the competitive auction process. By upholding the bank's adherence to procedural norms, the judgment strengthens the position of financial institutions in executing recoveries under the SARFAESI Act. It serves as a stark reminder to borrowers that technical objections, unless they demonstrate fundamental procedural error or substantial prejudice, are insufficient to overturn concluded auction sales. The court’s clear stance against "lightly" setting aside confirmed auctions provides significant relief to auction purchasers and banks alike.