Supreme Court Upholds Setting Aside of Auction Sale Due to Procedural Lapses: Govind Kumar Sharma vs. Bank of Baroda (2024)

Date of the Judgment: April 18, 2024
Citation: 2024 INSC 326
Judges: Justice Vikram Nath and Justice Satish Chandra Sharma
Can a bank’s failure to follow mandatory procedure during an auction sale lead to its annulment, even if the highest bidder has already been issued a sale certificate? The Supreme Court of India recently addressed this question in a case concerning a property auction under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The Court examined whether the Debt Recovery Tribunal (DRT), the Debt Recovery Appellate Tribunal (DRAT), and the High Court were correct in setting aside the auction sale due to procedural lapses by the bank. This judgment, authored by Justice Vikram Nath, clarifies the importance of adhering to statutory procedures in such sales and the rights of both the borrower and the auction purchaser.

Case Background

The case revolves around a loan taken by a firm (respondent no. 3) from Bank of Baroda (respondent no. 1). When the firm defaulted on the loan, the Bank initiated recovery proceedings under the SARFAESI Act. An open auction was conducted by the Recovery Officer, where Govind Kumar Sharma and another (the appellants) emerged as the highest bidders. They completed the deposit as per the auction terms and were issued a sale certificate on March 30, 2009. Notably, the appellants were tenants of the borrower in the premises that was auctioned. Thus, their status changed from tenants to owners upon the sale confirmation.

Timeline

Course of Proceedings

The borrower (respondent nos. 3 and 4) filed a securitization application under Section 17 of the SARFAESI Act, challenging the sale. They argued that the Bank had not followed the mandatory procedure under the Security Interest (Enforcement) Rules, 2002, specifically Rules 8(6) and 8(7), which require a 30-day notice to the borrower. The DRT found that the Bank had indeed failed to comply with these rules and set aside the sale on April 21, 2015. The DRT also directed the Bank to refund the auction money with interest, but only after receiving possession of the property from the auction purchaser (appellants). The borrower was given 15 days to pay the dues, failing which the Bank could proceed under the SARFAESI Act. The appellants’ appeal to the DRAT was dismissed on April 19, 2018. Subsequently, the Allahabad High Court also dismissed their writ petition on July 2, 2018, which led to the current appeal before the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation and application of the Security Interest (Enforcement) Rules, 2002, specifically:

• Rule 8(6) of the Security Interest (Enforcement) Rules, 2002: This rule mandates that the authorized officer shall serve a notice of 30 days for sale of the immovable secured assets, on the borrower.
• Rule 8(7) of the Security Interest (Enforcement) Rules, 2002: This rule specifies the contents of the notice to be given to the borrower regarding the sale of immovable secured assets.

These rules are framed under the SARFAESI Act, which was enacted to provide a mechanism for banks and financial institutions to recover their dues by enforcing security interests without court intervention. The Act and its rules are designed to balance the interests of the lenders and the borrowers, ensuring that the recovery process is fair and transparent.

Arguments

Arguments of the Appellants (Govind Kumar Sharma and Another):

• The appellants argued that they were bonafide purchasers for value and that the DRT, DRAT, and the High Court erred in setting aside the sale. They contended that as legitimate purchasers, their rights should be protected.
• They further argued that after the sale certificate was issued, they had invested approximately Rs. 60 lakhs in developing the property. They claimed that if the sale was to be set aside, they should be compensated not only for the auction money with interest but also for the improvements they made.

Arguments of the Respondent Bank (Bank of Baroda):

• The Bank admitted that it had not followed the procedure prescribed under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. They conceded that the mandatory 30-day notice was not given to the borrower before the auction.
• The Bank argued that the appellants, having enjoyed the property as they were already in possession, could not claim additional compensation for the improvements. They stated that the appellants were aware of the litigation initiated by the borrower and made improvements at their own risk.

Arguments of the Respondent Borrowers (Respondent nos. 3 and 4):

• The borrowers submitted that they had already paid the entire outstanding dues of the Bank, without adjusting the auction money, which was lying separately in an escrow account due to the litigation.
• They argued that the Bank had conducted the auction without following due procedure, and therefore, the DRT was correct in setting aside the sale.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section but the issues that can be culled out from the arguments and the judgment are:

1. Whether the auction sale was rightly set aside by the DRT, DRAT, and the High Court due to non-compliance of mandatory procedure under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002?
2. Whether the auction purchasers (appellants) are entitled to compensation for the improvements made to the property, in addition to the refund of the auction money with interest?
3. What should be the appropriate rate of interest on the refund of the auction money to the auction purchasers?

Treatment of the Issue by the Court

Authorities

The Supreme Court did not cite any previous case laws or books in the judgment. However, the following legal provisions were considered:

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): The primary legislation that empowers banks and financial institutions to recover their dues by enforcing security interests.
• Section 17 of the SARFAESI Act: This section provides the borrower the right to challenge the measures taken by the bank under the SARFAESI Act before the Debt Recovery Tribunal.
• Security Interest (Enforcement) Rules, 2002: These rules prescribe the procedure for enforcing security interests, including the conduct of auction sales.
• Rule 8(6) of the Security Interest (Enforcement) Rules, 2002: Mandates a 30-day notice to the borrower before the sale of immovable secured assets.
• Rule 8(7) of the Security Interest (Enforcement) Rules, 2002: Specifies the contents of the notice to be given to the borrower.

Judgment

How each authority was viewed by the Court?

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI Act]: The Court recognized the SARFAESI Act as the governing law for the recovery of dues by banks and financial institutions. The Court emphasized the need to adhere to the procedures prescribed under this Act and its associated rules.
• Section 17 of the SARFAESI Act: The Court acknowledged the provision of Section 17, which allows borrowers to challenge the measures taken by the bank before the Debt Recovery Tribunal. This provision highlights the importance of the legal recourse available to borrowers.
• Security Interest (Enforcement) Rules, 2002: The Court highlighted the importance of these rules in ensuring a fair and transparent process for enforcing security interests. The Court specifically emphasized the mandatory nature of the notice requirements under these rules.
• Rule 8(6) of the Security Interest (Enforcement) Rules, 2002: The Court gave significant weight to this rule, emphasizing that the mandatory 30-day notice to the borrower is a crucial procedural step that cannot be overlooked. The failure to comply with this rule was the primary reason for setting aside the auction sale.
• Rule 8(7) of the Security Interest (Enforcement) Rules, 2002: The Court recognized the importance of the contents of the notice as prescribed under this rule, which ensures that the borrower is fully informed about the sale.

What weighed in the mind of the Court?

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

• Procedural Non-Compliance: The most significant factor was the Bank’s admitted failure to adhere to the mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The Court emphasized that such procedural lapses could not be overlooked, as they undermine the fairness and transparency of the auction process.
• Protection of Borrower’s Rights: The Court underscored the importance of protecting the rights of the borrower, who is entitled to receive proper notice before the sale of their property. The Court noted that the borrower had already paid the entire outstanding dues, further highlighting the injustice of the flawed auction.
• Fairness and Equity: While the Court acknowledged the appellants’ position as auction purchasers, it also noted that they were aware of the ongoing litigation and had made improvements at their own risk. The Court sought to balance the interests of all parties involved while ensuring that the Bank was held accountable for its procedural lapses.
• Public Money: The Court also considered the fact that the Bank’s money is public money and that the interest of justice would be best served by ensuring that the auction money is returned to the appellants with a fair rate of interest.

The Court’s decision was heavily influenced by the legal requirements of the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002. The procedural non-compliance by the Bank was the main reason for the decision, with the Court emphasizing the mandatory nature of the notice requirements. While the factual aspects of the case were considered, the legal framework played a more significant role in the Court’s reasoning.

Logical Reasoning

The Court considered the alternative interpretation that the appellants were bonafide purchasers and should be protected, but rejected it because the Bank had not followed the mandatory procedure. The Court also considered whether the appellants should be compensated for the improvements, but rejected it on the basis that the appellants were aware of the ongoing litigation and made improvements at their own risk. The Court concluded that the Bank’s procedural lapses could not be overlooked and the sale was rightly set aside.

The Supreme Court held that the setting aside of the auction sale was correct due to the Bank’s non-compliance with the mandatory notice requirements. The Court also directed that the auction money be returned to the appellants with a 12% per annum compound interest. The Court further clarified that the appellants’ status would revert to that of tenants, and the borrower would have the right to evict them according to law. The Court also directed the Bank and the borrower to streamline their accounts and for the Bank to issue a No Dues Certificate to the borrower.

The following quotes from the judgment highlight the Court’s reasoning:

• “In view of the concurrent finding based on the admission by the Bank that mandatory notice of 30 days was not given to the Borrower before holding the auction/sale, the setting aside of the auction/sale cannot be faulted with. The same has to be approved.”
• “Once the sale is set aside, the status of the appellants as owners would automatically revert to that of tenants.”
• “The entire controversy has arisen because of the Bank not following the prescribed mandatory procedure for conducting the auction sale and, therefore, the Bank must suffer and should be put to terms for unnecessarily creating litigation.”

There were no dissenting opinions in this case. Both judges on the bench agreed on the final judgment.

The judgment clarifies that banks must strictly adhere to the procedures outlined in the SARFAESI Act and its rules, particularly concerning the mandatory notice requirements. It also highlights the importance of protecting the rights of borrowers and ensuring a fair and transparent recovery process. The decision could impact future cases by reinforcing the need for banks to be diligent in following the prescribed procedures during auction sales, and by ensuring that borrowers are given adequate notice and opportunity to protect their interests.

The Court did not introduce any new doctrines or legal principles. The judgment primarily reinforces the existing legal framework and emphasizes the importance of procedural compliance.

Key Takeaways

• Banks must strictly adhere to the mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, when conducting auction sales under the SARFAESI Act.
• Failure to comply with these mandatory procedures can lead to the setting aside of the auction sale, even if a sale certificate has been issued.
• Auction purchasers who make improvements to the property after the sale certificate are issued, do so at their own risk, especially if they are aware of ongoing litigation.
• Borrowers are entitled to a fair and transparent recovery process, and their rights must be protected by ensuring that they receive proper notice before the sale of their property.
• Banks may be held accountable for procedural lapses by being required to pay interest at an enhanced rate on the refund of the auction money.

Directions

The Supreme Court issued the following directions:

1. The setting aside of the auction sale is affirmed.
2. The status of the appellants as tenants shall stand restored, leaving it open for the borrower as owner of the property to evict the appellants in accordance with the law.
3. The entire auction/sale money lying with the Bank shall be returned to the appellants along with compound interest at 12% per annum, calculated from the date of deposit until the date of payment.
4. The Borrower and the Bank would streamline their accounts, and the Bank, upon settlement, will issue a No Dues Certificate to the Borrower.

Development of Law

The ratio decidendi of this case is that non-compliance with the mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, will result in the setting aside of the auction sale. The judgment reinforces the existing legal position and emphasizes the importance of procedural compliance in auction sales under the SARFAESI Act. There is no change in the previous position of law, but the judgment serves as a reminder to banks to follow the procedures strictly.

Conclusion

In conclusion, the Supreme Court upheld the setting aside of the auction sale due to the Bank’s failure to adhere to mandatory procedural requirements. The Court emphasized the need for banks to strictly follow the procedures outlined in the SARFAESI Act and its rules, particularly regarding the notice to the borrower. The decision also clarified the rights of the auction purchasers and the borrower, ensuring a fair and equitable outcome. This judgment serves as a crucial reminder of the importance of procedural compliance and the protection of borrowers’ rights in the context of recovery proceedings.