Supreme Court clarifies timeline for balance payment in property auction under SARFAESI Act: Rakesh Birani vs Prem Narain Sehgal (21 March 2018)

Introduction

Date of the Judgment: 21 March 2018

Citation: Civil Appeal No. 3156 of 2018 (Arising out of SLP (C) No.7626 of 2017)

Judges: Justice Arun Mishra and Justice Uday Umesh Lalit

Can an auction purchaser be penalized for delaying the 75% payment if the delay is due to misinterpretation of the rules? The Supreme Court addressed this question in a case concerning the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002, which specifies the timeline for payment of the balance amount in a property auction.

The core issue revolved around the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002, specifically regarding the timeline for payment of the balance 75% of the auction amount. The court had to determine whether this 15-day period should commence from the date of the auction or from the date the sale was confirmed by the secured creditor.

The judgment was delivered by a two-judge bench comprising Justice Arun Mishra and Justice Uday Umesh Lalit. Justice Arun Mishra authored the judgment.

Case Background

The case revolves around the auction of a property where the appellant was the highest bidder. The auction took place on 14th February 2013. The appellant had deposited Rs. 3,80,500 as earnest money on 1st February 2013.

The appellant then deposited 25% of the auction amount, which was Rs. 5.80 lakhs, on 15th February 2013. Following this, the appellant deposited the remaining amount of Rs. 28,69,500 on 13th March 2013.

The auction purchaser claimed that they were informed about the confirmation of the sale by the Authorised Officer of the secured creditor through a letter dated 27th February 2013. The remaining 75% of the auction amount was deposited on 13th March 2013, which the purchaser claimed was within 15 days of the confirmation of the sale.

The original owner of the property, the principal borrower, challenged the auction by filing a writ petition.

The High Court directed the owner to file an appeal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Debts Recovery Tribunal, Allahabad, set aside the sale on 19th December 2013. This order was upheld by the Debts Recovery Appellate Tribunal and subsequently by the High Court.

Timeline:

Course of Proceedings

The owner of the property filed a writ petition challenging the auction. The High Court directed the owner to file an appeal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

The Debts Recovery Tribunal, Allahabad, set aside the sale. This order was confirmed by the Debts Recovery Appellate Tribunal and subsequently by the High Court.

The auction purchaser then appealed to the Supreme Court against the decisions of the lower courts.

Legal Framework

The core of the dispute lies in the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002. This rule provides the procedure for the sale of immovable property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, states:
“The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of the sale of the immovable property or such extended period (as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months).”

Rule 9(2) of the Security Interest (Enforcement) Rules, 2002, states:
“The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer shall be subject to confirmation by the secured creditor:”

Rule 9(3) of the Security Interest (Enforcement) Rules, 2002, states:
“On every sale of immovable property, the purchaser shall immediately, i.e., on the same day or not later than next working day, as the case may be, pay a deposit of twenty five percent of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorized officer conducting the sale and in default of such deposit, the property shall be sold again.”

Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, states:
“In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited (to the secured creditor) and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for such it may be subsequently sold.”

Rule 9(6) of the Security Interest (Enforcement) Rules, 2002, states:
“On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the form given in Appendix V to these rules.”

Arguments

The appellant, the auction purchaser, argued that the 15-day period for depositing the remaining 75% of the auction amount should be calculated from the date of communication of the confirmation of sale, not from the date of the auction itself.

The auction purchaser contended that Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, clearly states that the balance amount has to be deposited only after the confirmation of the sale. They also pointed out that Rule 9(2) contemplates the confirmation of the bid.

The auction purchaser argued that the forfeiture of the deposit under Rule 9(5) is only applicable as a consequence of non-deposit of the 75% amount after the confirmation of the sale. They further argued that Rule 9(6) stipulates that a sale certificate is issued only after the confirmation of the sale and compliance with the terms of payment.

The borrower, respondent No. 1, contended that the confirmation of sale occurs as soon as the highest bid is accepted by the authorized officer. They argued that the 15-day period for depositing the 75% of the amount should commence from this date, and failure to do so would result in forfeiture of the 25% already deposited and resale of the property.

The innovativeness of the auction purchaser’s argument lies in its emphasis on the distinction between the date of the auction and the date of confirmation of the sale, highlighting the ambiguity in the rules and the potential for misinterpretation.

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. 
   From which date the period of fifteen days would start for making the deposit of remaining 75 percent; from the date of communication of confirmation of sale or from the date of the auction.

Treatment of the Issue by the Court

Authorities

The Supreme Court primarily relied on the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002.

The Court analyzed Rule 9(1), which deals with the timing of the sale, and Rule 9(2), which requires the sale to be confirmed by the secured creditor.

The Court also examined Rule 9(3), which mandates the deposit of 25% of the sale price, and Rule 9(4), which specifies the timeline for the remaining payment.

The Court also referred to Rule 9(5), which deals with the forfeiture of the deposit, and Rule 9(6), which pertains to the issuance of the sale certificate.

Judgment

The Supreme Court held that the 15-day period for depositing the remaining 75% of the auction amount starts from the date of confirmation of sale by the secured creditor, not from the date of the auction itself.

The Court emphasized that Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, clearly states that the balance amount must be paid within 15 days of the confirmation of sale.

The Court also clarified that the forfeiture of the 25% deposit under Rule 9(5) is applicable only if the balance 75% is not deposited within 15 days of the confirmation of sale.

The Court observed that the sale certificate is issued only after the confirmation of sale and compliance with the terms of payment as per Rule 9(6).

The Supreme Court set aside the orders of the lower courts and upheld the auction in favor of the auction purchaser.

The Court directed that possession of the property be delivered to the auction purchaser as expeditiously as possible.

The Supreme Court observed: “Rule 9(4) makes it clear that balance amount of the purchase price payable shall be paid by the purchaser to the authorized officer on or before the fifteenth day of ‘confirmation of sale of the immovable property’ or such extended period as may be agreed upon in writing between the purchaser and the secured creditor.”

The Supreme Court noted: “Rule 9(5) also makes it clear that in default of payment within the period mentioned in sub-rule 9(4), the deposit shall be forfeited.”

The Supreme Court also referred to Rule 9(6), stating: “it is the expression used that on confirmation of sale by the secured creditor and ‘if the term of payment has been complied with’ sale certificate is issued otherwise the forfeiture takes place, this compliance has to be only after the confirmation of sale and not before it.”

What weighed in the mind of the Court?

The Supreme Court’s decision was significantly influenced by the need to ensure a fair and clear interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002. The Court aimed to prevent arbitrary forfeiture of deposits and to uphold the rights of auction purchasers who comply with the rules.

The Court focused on the specific language of Rule 9(4), which clearly states that the balance amount is to be paid within 15 days of the “confirmation of sale of the immovable property.” This emphasis on the plain language of the rule was central to the Court’s reasoning.

The Court also considered the implications of a contrary interpretation, which could lead to forfeiture of deposits even before the sale is confirmed by the secured creditor. This would be unfair to the auction purchaser and would not be in line with the intent of the rules.

The Court’s reasoning was also guided by the need to ensure that the auction process is transparent and that all parties are aware of their rights and obligations. The Court aimed to avoid any ambiguity that could lead to disputes or arbitrary actions.

Logical Reasoning:

Dissenting Opinion (if any)

There was no dissenting opinion in this case. The judgment was delivered by a two-judge bench comprising Justice Arun Mishra and Justice Uday Umesh Lalit, and both judges concurred with the decision.

Conclusion

The Supreme Court’s judgment in Rakesh Birani vs Prem Narain Sehgal provides a crucial clarification on the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002. The Court unequivocally stated that the 15-day period for depositing the remaining 75% of the auction amount commences from the date of confirmation of sale by the secured creditor, and not from the date of the auction itself.

This judgment provides much-needed clarity for both auction purchasers and secured creditors regarding the timeline for payment in property auctions under the SARFAESI Act. It ensures that auction purchasers are not penalized for delays caused by the secured creditor’s confirmation process.

The judgment emphasizes the importance of adhering to the plain language of the rules and ensuring fairness in the auction process. It also highlights the need for clear communication between the secured creditor and the auction purchaser regarding the confirmation of sale.

The judgment also reinforces the principle that forfeiture of deposits should only occur when there is a clear default in payment after the confirmation of sale, preventing arbitrary actions.

The judgment has significant implications for future property auctions under the SARFAESI Act, ensuring a more transparent and equitable process for all parties involved. It also provides a clear guideline for the interpretation of Rule 9 of the Security Interest (Enforcement) Rules, 2002.