SARFAESI Auction Timelines Are Mandatory, Not Directory; Unjustified Deviation Vitiates Sale: Supreme Court

The Supreme Court on Tuesday set aside a SARFAESI auction sale of a mortgaged property after finding that the successful bidder paid the balance sale consideration five days after the deadline fixed for payment and that there was no written agreement extending the time.

Holding that the lapse constituted a "material irregularity going to the root of the matter," the court quashed the sale.

A bench of Justice Dipankar Datta and Justice Augustine George Masih observed that the auction purchaser paid the balance 75% of the bid amount on March 31, 2010, although the period fixed for payment expired on March 26, 2010.

“The object of proceedings under the SARFAESI Act is not the mere culmination of a sale in a mechanical manner, but the lawful realisation of the secured asset through a process that is fair, transparent and strictly compliant with the prescribed rules. In the present case, the non-adherence to the timeline that the SARFAESI Rules contemplate constitutes a material irregularity going to the root of the matter. The mere factum that the sale stood confirmed cannot, therefore, foreclose judicial scrutiny,” the bench held.

The dispute arose from a loan availed by a borrower from Indian Bank in 1984. G. Ramanujam stood as guarantor and mortgaged his immovable property as security for the loan.

After the borrower defaulted, the bank instituted a recovery suit and obtained a preliminary mortgage decree in 1997. Ramanujam died in 2001, leaving behind several legal heirs, including the appellant.

According to the judgment, attempts at an amicable settlement between the bank and Ramanujam's heirs did not fructify. In September 2009, nearly 12 years after the preliminary decree, the bank issued a demand notice under the SARFAESI Act. It later took possession measures and issued a sale notice for the mortgaged property.

The property was auctioned on March 11, 2010. The second respondent emerged as the successful bidder with a bid of ₹2.11 crore.

Ramanujam's daughter challenged the SARFAESI proceedings and the auction sale before the Debts Recovery Tribunal. After failing before the Tribunal, the Debts Recovery Appellate Tribunal and subsequently the Madras High Court, she approached the Supreme Court.

Before the Court, the appellant contended that the auction sale was conducted in violation of the mandatory procedure governing SARFAESI sales. Among other contentions, she argued that the successful bidder had not complied with the prescribed timelines for payment of the sale consideration.

The bank defended the sale. It contended that the auction had been conducted transparently and that any deviation from the payment timeline was regularized by a valid exercise of extension or waiver.

Examining the record, the Court noted that the successful bidder had deposited 25% of the sale consideration. However, the remaining 75% was paid only on March 31, 2010.

The bench noted that the communication issued by the bank on March 11, 2010 required payment of the balance amount within 15 days. The period expired on March 26, 2010.

The Court further found that there was no material on record showing that any written agreement extending the time for payment had been entered into.

“Even upon a cursory perusal of Rule 9 of the SARFAESI Rules that existed at the time of the impugned sale, it is clear that these provisions are neither ornamental nor directory; they are couched in mandatory terms and go to the root of the validity of the sale. A conjoint reading of the relevant sub-rules of Rule 9 underscore the mandatory character of these provisions, particularly accentuating the requirement of balance deposit under sub-rule (4), which is integral to the sanctity and credibility of the auction mechanism. Any deviation therefrom, absent legally sustainable justification, would render the process vitiated.” the bench observed.

Rejecting the contention that the appellant's failure to clear the dues could validate the sale, the Court held:

“However, in our considered opinion, the failure to repay without being informed of an extension being granted to the auction purchaser, by itself, cannot validate proceedings that are otherwise vitiated in law.”

The bench observed that while the rights of an auction purchaser ordinarily deserve protection, such protection is not absolute where the process leading to the sale is legally infirm.

Allowing the appeal, the court set aside the orders of the High Court, the DRAT and the DRT. It consequently quashed the auction sale.

The court directed the bank to refund the entire amount deposited by the auction purchaser together with interest at 7% per annum from the respective dates of deposit until payment.

At the same time, it granted the appellant a one-time opportunity to redeem the mortgage and seek restoration of the property. The Court directed that she would be entitled to redeem the mortgage upon payment of ₹95,42,372.52 together with interest at 5% per annum from the date of the demand notice until payment.

The bench clarified that if the appellant failed to avail of the opportunity, the bank would be at liberty to auction the property again after obtaining a fresh valuation report.

The court left open the larger question of limitation. It observed that, in view of its conclusion on the validity of the auction sale, it was unnecessary to render a conclusive determination on whether the SARFAESI proceedings initiated years after the preliminary decree were barred by limitation.

For Appellant: Advocate S Thananjayan

For Respondents: Advocates Rakesh Sharma, R.Nedumaran, Brijesh Kumar Tamber, Senthil Jagadeesan, Gaurav Dhingra and Promila