Supreme Court Upholds Auction Sale Despite Minor Property Description Error: Varimadugu Obi Reddy vs. B. Sreenivasulu & Ors. (2022)

Date of the Judgment: 16 November 2022

Citation: 2022 INSC 1118

Judges: Justices Ajay Rastogi and C.T. Ravikumar

Can a minor typographical error in a property description during an auction invalidate the entire sale process? The Supreme Court of India recently addressed this critical question in a case arising from the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This judgment clarifies the importance of substantial compliance over strict adherence to minor details in auction proceedings. The bench comprised Justices Ajay Rastogi and C.T. Ravikumar, with Justice Rastogi authoring the judgment.

Case Background

The case involves a dispute over the auction of a mortgaged property after the borrowers defaulted on their loans. The borrowers, respondents 1-3, had taken three loans from the respondent bank, secured by a mortgage on a property owned by respondent no. 4. When the borrowers failed to repay the loans, the bank initiated proceedings under the SARFAESI Act, 2002. The bank issued a demand notice on November 15, 2012, and later, a possession notice on February 14, 2013, after the loan accounts were classified as Non-Performing Assets (NPAs) on September 30, 2012. The bank eventually obtained an order from the District Collector on June 23, 2013, to take physical possession of the property.

Timeline

Course of Proceedings

The borrowers initially challenged the bank’s actions by filing a Securitization Application (SA) before the Debts Recovery Tribunal, which was dismissed on December 12, 2014. No appeal was filed against this order. After taking possession, the bank issued an e-auction notice on February 25, 2015. The borrowers challenged this notice before the Tribunal, which allowed the auction to proceed on March 28, 2015, but directed that the sale certificate not be issued if the borrowers deposited Rs. 6 lakhs within 15 days. The borrowers failed to deposit the amount within the stipulated time and sought an extension, which was granted until April 17, 2015. However, the auction was finalized, and the sale certificate was issued on April 15, 2015, to the appellant (auction purchaser), who had deposited the full amount by then.

The borrowers raised objections before the Tribunal, primarily arguing that there was an error in the property description in the e-auction notice (Door No. “12-3-393” instead of “12-3-39”) and that the auction purchaser had not deposited the full amount within the 15-day period as required by Rule 9(4) of the Security Interest (Enforcement) Rules, 2002. The Tribunal rejected these objections. However, the High Court, in its judgment dated November 20, 2019, reversed the Tribunal’s decision, holding that the error in property description and the delay in payment by the auction purchaser were serious infirmities that invalidated the sale.

Legal Framework

The judgment primarily revolves around the interpretation and application of the following legal provisions:

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002): This act provides the legal framework for secured creditors to recover their dues by enforcing security interests without the intervention of the court.
• Section 13(2) of the SARFAESI Act, 2002: This section allows secured creditors to issue a demand notice to the borrower to repay the outstanding dues within 60 days.
• Section 13(4) of the SARFAESI Act, 2002: This section allows the secured creditor to take possession of the secured assets if the borrower fails to repay the dues after the demand notice period.
• The Security Interest (Enforcement) Rules, 2002: These rules provide the procedure for enforcing security interests under the SARFAESI Act, 2002.
• Rule 8(5) and 8(6) of the Security Interest (Enforcement) Rules, 2002: These rules deal with the valuation of the property and the notice to be given to the borrower before the sale.
• Rule 9(4) of the Security Interest (Enforcement) Rules, 2002: This rule stipulates that the balance amount of the purchase price must be paid by the purchaser within 15 days of the confirmation of the sale or within such extended period as agreed upon in writing between the parties.
  
  “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 sale of the immovable property or such extended period as may be agreed upon in writing between the parties.”
• Rule 9(5) of the Security Interest (Enforcement) Rules, 2002: This rule states that if the payment is not made within the period mentioned in sub-rule (4), the deposit shall be forfeited, and the property shall be resold.
  
  “In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited 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 which it may be subsequently sold.”

Arguments

Appellant’s (Auction Purchaser) Arguments:

• The error in the door number of the property was a minor typographical error and did not cause any ambiguity or confusion regarding the identity of the mortgaged property. The boundaries, measurements, and other details were correctly mentioned in the auction notice.
• There was no other property in the vicinity with the incorrectly mentioned door number (“12-3-393”).
• The appellant was ready to deposit the balance 75% of the auction bid before April 11, 2015, but the intervention of the Debts Recovery Tribunal caused confusion. The delay of four days in depositing the balance amount was not a significant breach of Rule 9(4) of the Rules, 2002.
• The conduct of the respondent borrowers showed that they were only trying to frustrate the auction proceedings. They failed to deposit Rs. 6 lakhs as directed by the Tribunal.

Respondent Borrowers’ Arguments:

• The error in the description of the scheduled property in the e-auction sale notice was a serious infirmity that could not be overlooked.
• The auction purchaser failed to deposit the balance 75% of the bid amount within the stipulated 15-day period, which expired on April 10, 2015. This was a clear violation of Rule 9(4) of the Rules, 2002.
• The value of the property was much higher than the reserve price indicated by the bank, and the wrong description of the property prevented it from fetching its true value.
• They relied on the judgment of the Supreme Court in General Manager, Sri Siddeshwara Cooperative Bank Limited and Another vs. Ikbal and Others [(2013) 10 SCC 83], which held that the timelines for payment under Rule 9 are mandatory.

Respondent Bank’s (Secured Creditor) Arguments:

• The error in the door number was a factual inadvertent error and did not cause any prejudice to the borrowers.
• The auction purchaser was ready to pay the balance amount on time, but the bank requested the purchaser to wait due to ongoing negotiations with the borrowers.
• The bank had offered the surplus amount of Rs. 16,30,000 to the borrowers, which they failed to accept. The amount is now in FDR with an accumulation of interest of approximately Rs. 18,80,000.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the High Court was justified in setting aside the auction sale due to a minor error in the description of the mortgaged property in the e-auction notice.
2. Whether the High Court was justified in setting aside the auction sale due to the auction purchaser’s failure to deposit the balance 75% of the bid amount within the stipulated time under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court explained the ratio in General Manager, Sri Siddeshwara Cooperative Bank Limited and Another vs. Ikbal and Others [(2013) 10 SCC 83], stating that the period of fifteen days in Rule 9(4) is not sacrosanct and is extendable if there is a written agreement between the parties.
• The Supreme Court referred to United Bank of India vs. Satyawati Tondon & Others [(2010) 8 SCC 110], emphasizing that the High Court should not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available.
• The Court explained Section 13(2) of the SARFAESI Act, 2002, which allows secured creditors to issue a demand notice to the borrower to repay the outstanding dues within 60 days.
• The Court explained Section 13(4) of the SARFAESI Act, 2002, which allows the secured creditor to take possession of the secured assets if the borrower fails to repay the dues after the demand notice period.
• The Court interpreted Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, noting that the balance amount of purchase price must be paid by the purchaser within 15 days of the confirmation of the sale or within such extended period as agreed upon in writing between the parties.
• The Court interpreted Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, stating that if the payment is not made within the period mentioned in sub-rule (4), the deposit shall be forfeited, and the property shall be resold.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The minor nature of the error in the property description, which did not cause any confusion or prejudice to the borrowers or the participants in the auction.
• The fact that the auction purchaser was ready to pay the balance amount on time, but the delay was due to the peculiar circumstances, including the Tribunal’s interim orders and the bank’s request to wait.
• The conduct of the borrowers, who were attempting to frustrate the auction proceedings by seeking extensions and not depositing the required amount.
• The availability of an alternative remedy under the SARFAESI Act, 2002, which the borrowers had not exhausted before approaching the High Court.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• Minor typographical errors in property descriptions during auction proceedings may not invalidate the sale if there is no ambiguity or prejudice caused.
• The time period for depositing the balance amount under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, is not sacrosanct and can be extended under certain circumstances.
• The conduct of the borrowers in attempting to frustrate the auction proceedings can be a factor in determining the validity of the sale.
• High Courts should be cautious in entertaining writ petitions under Article 226 of the Constitution if an effective alternative remedy is available under the relevant statute.

Directions

The Supreme Court directed the respondent bank to transfer the original surplus amount of Rs. 16,30,000, along with the interest accrued, to the account of the borrower/guarantors within eight weeks, with their written consent as to whose account the money is to be transferred.

Development of Law

The Supreme Court clarified that a minor typographical error in a property description during an auction, if it does not cause prejudice or confusion, is not a sufficient ground to invalidate the sale. The Court also reiterated that the time period for payment under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, is not absolute and can be extended under specific circumstances. This judgment reinforces the principle of substantial compliance over strict adherence to minor details in auction proceedings under the SARFAESI Act, 2002. There is no change in the previous position of law.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s judgment and upholding the auction sale. The Court emphasized that minor errors should not invalidate auction proceedings if they do not cause prejudice or confusion. The judgment also highlighted the importance of exhausting alternative remedies before approaching the High Court under Article 226 of the Constitution.