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Quashes 's SARFAESI Sale Over 's Flat After Loan Restructuring
In a significant ruling that reinforces the rights of guarantors, the has quashed the sale of a former MP's flat by under the . The court held that the bank failed to establish the 's after the loan was restructured without his explicit consent.
The Case at a Glance
Rajani Ranjan Sahu, a former Member of Parliament, had stood for a loan granted by to in . He offered his 2,000 sq. ft. flat on S.P. Verma Road, Patna, as security. The loan was subsequently restructured and fresh financial accommodation was sanctioned on revised terms in and . Sahu claimed he was never informed of these changes and did not renew or extend his guarantee.
Despite his objections, the bank proceeded against the flat under the SARFAESI Act and sold it in an auction in for ₹28.60 lakh—a price Sahu argued was grossly undervalued given the property's valuation of ₹71.30 lakh. The auction was won by Mrs. Suman Parva, who took possession of the flat. Sahu approached the High Court in , seeking to quash the sale and restore possession.
Arguments Before the Court
Petitioner's Contentions:
Sahu argued that the restructuring of the loan constituted a in the credit facility, which discharged him from his under settled contract law principles. He further contended that the bank failed to serve under and that the auction process was vitiated by irregularities—particularly the of the required 25% of the bid amount (₹7.15 lakh) within the stipulated time; only ₹3 lakh was initially paid, and the balance was accepted later by the bank.
Respondent Bank's Defense:
maintained that Sahu never sought a formal and remained liable under the original guarantee. The bank argued that the restructuring did not extinguish his obligations and that fresh guarantees from other parties did not release him. It also defended the auction as transparent and the valuation as reflecting the property's deteriorated condition and market realities.
Auction Purchaser's Stand:
Mrs. Suman Parva, the auction purchaser, opposed the petition, citing the delay of nearly five years in filing and argued that she was a for value without notice of any irregularities. She contended that the sale had been completed and possession delivered, making any challenge stale.
Court's Legal Analysis
Justice G. Anupama Chakravarthy, delivering the judgment, zeroed in on the foundational question: did Sahu's guarantee extend to the restructured loan facility? The court noted that the bank's own documents—while showing the flat as collateral—failed to produce any fresh guarantee deed or evidence of Sahu's consent to the altered terms.
"The stand of the Bank that the petitioner continued to remain liable merely because he had not sought his does not, in the facts of the present case, satisfactorily answer the specific contention of the petitioner that the subsequent financial facilities were sanctioned on materially altered terms without his consent."
The court emphasized that a 's liability is strictly construed based on the terms of the guarantee. Since the bank was for a subsequent facility, it bore the burden of demonstrating that Sahu had consented to cover that facility.
"In the absence of any cogent document evidencing the petitioner's consent to the altered financial arrangement or extending his guarantee to the subsequent facility, the action of the Bank in against the petitioner's property cannot be sustained merely on the basis of the original guarantee."
Turning to the auction process, the court found serious irregularities. The auction terms required immediate deposit of 25% of the bid amount, but the bank accepted the balance later without any explanation. This, combined with the sharp drop in valuation—from ₹71.30 lakh in to a of ₹27.60 lakh in —raised legitimate concerns about the conduct of the sale.
The court also rejected the bank's preliminary objection regarding . While the SARFAESI Act provides a mechanism before the , the court held that could be invoked where the petitioner challenged the very authority of the bank to proceed and alleged flagrant violations of mandatory procedures.
Key Observations
"The petitioner's specific grievance regarding non-service of the statutory notices and the consequential denial of an effective opportunity to object to the proposed measures against his property cannot be overlooked. Where the very authority of the to proceed against the particular secured asset is disputed, with the statutory procedure becomes all the more necessary."
The court further noted that the rights claimed by the auction purchaser are subject to the validity of the underlying SARFAESI proceedings. Accordingly, if the sale is quashed, the auction purchaser is entitled to a refund of the amount paid.
"The subsequent possession of the property by respondent No.4 or issuance of the cannot, by itself, validate a sale if the of the is found to be unsustainable or the mandatory procedure prescribed by law has not been followed."
The Final Decision
Allowing the writ petition, the court quashed the entire sale proceedings and the dated . It directed the respondent bank to take consequential steps in accordance with law and restore possession of the flat to the petitioner, subject to necessary directions for giving effect to the order.
The judgment underscores that banks cannot rely on stale guarantees when loan facilities are materially altered without the 's consent. It also serves as a reminder that with statutory procedures under the SARFAESI Act is non-negotiable, and that courts will not hesitate to intervene where procedural irregularities undermine the fairness of the process.
The auction purchaser, Mrs. Suman Parva, is entitled to a refund of the purchase price from the bank, as per the court's observations.
