Borrower Consent Mandatory For SARFAESI Sale At Reserve Price: Andhra Pradesh High Court

The Andhra Pradesh High Court has recently held that a bank cannot confirm the sale of a secured asset in a SARFAESI auction when the highest bid matches the reserve price unless the borrower consents.

“The sale of the secured asset in the auction exactly at the reserve price cannot be confirmed by the Authorised Officer without the consent of the borrower,” the Court held.

A Division Bench of Justice Cheekati Manavendranath Roy and Justice V. Gopala Krishna Rao dismissed writ petitions filed by Union Bank of India and the auction purchaser, upholding orders of the Debts Recovery Tribunal, Visakhapatnam, and the Debts Recovery Appellate Tribunal, Kolkata, which had set aside the sale.

The dispute turned on the interpretation of Rule 9(2) of the Security Interest (Enforcement) Rules, 2002, which governs confirmation of auction sales of secured assets.

The case arose from credit facilities availed by partnership firm Best Sai Enterprises from Union Bank of India, for which an immovable property was mortgaged as security. After the firm defaulted, the bank initiated recovery proceedings and brought the secured asset, a school building, to auction after fixing the reserve price at ₹3.48 crore.

Only one bidder participated in the auction held on April 12, 2023. The bidder offered exactly ₹3.48 crore, matching the reserve price, and the bank confirmed the sale in the bidder's favour.

The borrowers challenged the sale before the DRT, arguing that when the authorised officer failed to secure a price higher than the reserve price, the second proviso to Rule 9(2) required borrower consent before the sale could be confirmed. The DRT accepted this contention and set aside the sale, while permitting the bank to proceed afresh in accordance with law. The DRAT later affirmed that decision.

Before the High Court, the bank and the auction purchaser argued that borrower consent was not required where the highest bid matched the reserve price.

Rejecting the contention, the Bench held:

“After perusing the said judgments and Rule 9(2) of the Rules, we are of the considered view that the consent of the borrower is required to be obtained by the Authorised Officer to confirm the sale exactly at the reserve price when he failed to obtain a price higher than the reserve price. We agree with the law laid down by the Division Benches of the Madras High Court in K. Raamaselvam's case (4 supra) and the Division Bench of the Delhi High Court in Mahipal Singh Yadav's case (3 supra)..”

The Court observed that three situations may arise in such auctions, where the highest bid is above the reserve price, below the reserve price, or exactly equal to it. It held that while a sale above the reserve price can be confirmed, a sale exactly at the reserve price requires borrower consent.

Explaining the rationale, the Court said:

“The secured asset is the property of the principal borrower or his guarantor. If the Authorised Officer could obtain a sale price more than the reserve price, it enures to the benefit of the owner of the property and after clearing the debt, he can enjoy the balance sale proceeds for his purpose. If the Authorised Officer could not obtain a sale price higher than the reserve price, then the Parliament has given option to the borrower to give consent either to confirm the sale exactly at the reserve price or to reject the same. ”

The bench agreed with the views taken by the Madras and Delhi High Courts, and disagreed with contrary rulings of the Calcutta and Kerala High Courts. It held that the statutory requirement had to be strictly followed and found no infirmity in the tribunal orders.

For Petitioners: CKR Associates and Advocate V Dyumani

For Respondents: Advocate S Satyanarayana Moorthy