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Supreme Court: Non-compliance of the statutory provisions by the Bank while conducting auction sale can cause the sale in question to be set aside

In a recent case before the Supreme Court, the Court set aside the auction sale as the bank did not follow the prescribed mandatory procedure while conducting the auction sale. 


Background of the case: 


The Borrower availed of limits from the Bank but defaulted on the same. The Bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI], and the Recovery Officer conducted an open auction where the appellants were the highest bidders. 


The Appellants deposited the auction purchase price, and the Bank issued the Sale Certificate in the favour of the Appellants. Pertinently the Appellants were already in possession of the auction property as they were the tenants of the Borrowers.  


The borrower filed 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, 2002, particularly the notice 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.    


After hearing the parties and perusing the documents, the Debt Recovery Tribunal [DRT] concurred that the bank had failed to complete the statutory compliances under Rules 8(6) and 8(7) and set aside the auction sale.  The DRT also directed 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 also 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. 


The Appellants preferred an appeal before the Debt Recovery Appellate Tribunal [DRAT] which was dismissed and the order of the DRT was upheld. The Appellants then approached the High Court who also rejected the contentions of the Appellants vide the impugned order. 


Submissions of the parties: 


It was the Appellants case that they were bonafide purchasers for value  of the auction property and, therefore, the DRT, the DRAT and the High Court had erred in setting aside the sale.  Alternately they also submitted that in case the sale is set aside, the Appellants should be suitably compensated not only by refund of the auction money along with interest but also for the improvements and investments done by them for developing the property.  


The bank submitted that although all the procedure prescribed had been followed, they could not substantiate the same to rebut the findings recorded by the DRT, DRAT and the High Court that the Bank had failed to follow the statutory provisions of notice under Rules 8(6) and 8(7) of the 2002 Rules.  The Bank argued that the Appellants could not claim any additional compensation for the improvements made by them as they were aware of the litigation initiated by the borrowers under the SARFAESI Act and whatever improvements have been made were at their own risk. In any event, the Appellants were in possession of the property and enjoying it. 


The Borrowers submitted that they have already paid the entire outstanding dues of the Bank which the Bank admitted but at the same time the bank declined to issue the No Dues Certificate because of pending litigation. The Borrowers further submitted that the Bank had conducted the auction without following due procedure and  therefore, the DRT had rightly set aside the sale which has been confirmed by the DRAT and the High Court. 


The analysis of the courts:  


The court noted that the Bank had admitted that mandatory notice of 30 days was not given to the Borrower before holding the auction/sale.  


The court opined that the DRT erred in issuing directions that the Bank will first have to take possession and thereafter refund the auction money with interest as once the sale is set aside, the status of the appellants as owners would automatically revert to that of tenants. The Bank did not have any right to claim actual physical possession from the appellants nor were the appellants be under any obligation to handover physical possession to the Bank.  


The court observed that the failure of the Bank in following the prescribed mandatory procedure for conducting the auction sale has resulted in prolonged litigation for all the parties. The court also noted that the dues of the Bank have been fully discharged and an additional amount of the auction money is lying with them, which should be returned to the appellants. In the circumstances the bank was of the view that the award of interest on the auction money deserves to be enhanced.  


Order of the court: 


The Court set aside the auction sale and restored the status of the Appellants as ‘tenants’ of the property.  The Borrowers were granted liberty to evict the appellants in accordance with law. 


The court ordered the Bank to refund the entire auction/sale money to the Appellants along with compound interest @12 per cent per annum to be calculated from the date of deposit till the date of payment.  


The Borrower and the Bank were directed to streamline their accounts and upon settlement of the same the Bank was directed to issue a ‘No Dues Certificate’ to the Borrower. 


The judgement underlines the importance of following the mandatory process laid down by the law as failure to do so causes unnecessary litigation, consequent expenses and wastage of time for the litigants and the court.   

 

In The Supreme Court of India  

Civil Appellate Jurisdiction  

Civil Appeal No.        Of 2024  

(Arising Out Of S.L.P.(C) No.24155 Of 2018)  

Govind Kumar Sharma  & Anr.           

Versus  

Bank Of Baroda & Ors.        

 

 

 

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