'Not Unknown to Law': Telangana High Court Upholds Reserve Price Reduction After Repeated Failed SARFAESI Auctions

The Telangana High Court has recently upheld the phased reduction of the reserve price fixed for the auction sale of a mortgaged immovable property under the SARFAESI Act and dismissed writ petitions filed by the borrower.

A Division Bench of Justice Moushumi Bhattacharya and Justice Gadi Praveen Kumar affirmed the order of the Debts Recovery Appellate Tribunal and observed that “the process of marking down of the Reserve Price is not unknown to law.”

The Bench examined Rule 8(5) of the Security Interest (Enforcement) Rules, 2002, which requires the authorised officer to obtain valuation from an approved valuer and fix the reserve price in consultation with the secured creditor before sale.

The Court clarified that the Rule does not stipulate any time period between valuation and sale. It held, “Rule 8(5) does not mention any time period between obtaining valuation of the property and sale thereof. The only stipulation is that the property must be valued by an approved Valuer and only thereafter be sold after fixing of the Reserve Price in consultation with the Secured Creditor.”

The Bench further stated that “Rule 8(5) does not contemplate a fresh valuation preceding successive auctions for the same property.”

The borrower had availed credit facilities of about Rs.10.50 crore from Union Bank of India by mortgaging immovable property. The account was classified as a non-performing asset in May 2017.

The Bank issued demand and possession notices under the SARFAESI Act and obtained a valuation report dated May 8, 2018. Between March 2018 and October 2019, five auctions of the secured asset were conducted. Each failed due to lack of bidders. The reserve price was reduced in phases by 10 percent after successive failed auctions.

In the sixth auction held on January 10, 2020, the fifth respondent emerged as the highest bidder with a bid of Rs.5.35 crore and deposited the entire sale consideration.

The Debts Recovery Tribunal set aside the auction on the ground that the price fetched was less than the distress value reflected in the valuation report. The Debts Recovery Appellate Tribunal reversed that decision, which led to the present writ petitions.

Before the High Court, the borrower argued that the auction was invalid because it was conducted on the basis of the 2018 valuation report and that the reduction of the reserve price in successive auctions was impermissible.

The bank and the auction purchaser contended that Rule 8(5) does not require a fresh valuation for each auction, that the reserve price was reduced only after repeated failed attempts and committee deliberations, and that no fraud or collusion had been pleaded or established.

While upholding the auction sale of the secured asset, the Court drew support from the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Referring to Clause 1(4) of Schedule I, the Bench recorded,

“Clause 1(4) of Schedule-I, inter alia, provides that the Reserve Price shall be the value of the asset arrived at in accordance with Regulation 35 ('Valuation of Assets or Business Intended to be sold') and where an auction fails, the Reserve Price in subsequent auctions may further be reduced by not more than ten percent at a time. The proviso to Clause 1(4) contemplates a situation where the Reserve Price of the failed auction of the asset was fixed as per the valuation under Regulation 35(1) and the Liquidator may, on the advice of the Consultation Committee, reduce the Reserve Price up to twenty-five percent, once during the process..”

The bench then held that “the necessary statutory allowance for gradual reduction of the Reserve Price may be imported from the 2016 Regulations to Rule 8(5) of the 2002 Rules where the Secured Creditor is forced to hold multiple and successive auctions by reason of lack of bidders and is consequently compelled to mark-down the Reserve Price to ensure success of the auction.”

The Court also found that there was no evidence of fraud, collusion or material irregularity in the conduct of the auction. It reiterated that sale pursuant to a public auction can be set aside only where the property was “frittered away on a wholly inadequate/unrealistic consideration or by reason of fraud/collusion or on any material irregularity/illegality in conducting the public auction.”

Finding no such ground, the High Court dismissed the writ petitions and upheld the auction sale.