DRAT Allahabad Upholds Quashing Of SBI SARFAESI Auction Over First Sale At Distress Value

The Debts Recovery Appellate Tribunal (DRAT) at Allahabad has upheld an order setting aside a SARFAESI auction sale after finding that the State Bank of India fixed the reserve price of the secured asset at its distress value for what was legally the first sale.

It also held that the bank failed to establish compliance with the mandatory requirements relating to service, affixation and publication of the auction notice.

The tribunal was presided over by Chairperson Justice R. D. Khare.

It dismissed an appeal filed by auction purchaser Om Prakash Chandravanshi against the Debts Recovery Tribunal (DRT), Jabalpur's order setting aside the auction sale, sale certificate and sale deed.

“Thus the present sale was the first sale, therefore, the reserve price could not be fixed at the distress value of the property in question as assessed by the valuer, as the property has been sold by the Bank on the said price, thus the property has been sold at the distress value for the first time,” the tribunal observed.

The dispute arose after SBI initiated recovery proceedings under the SARFAESI Act against borrowers Ritesh Kumar Malviya and Salakram Yadhuvanshi. The borrowers had earlier challenged the bank's recovery measures before the DRT.

While disposing of those proceedings in November 2019, the DRT set aside an earlier auction sale notice and permitted the bank to issue a fresh sale notice if the borrowers failed to comply with specified conditions.

After the borrowers failed to comply, the bank issued a fresh sale notice dated February 7, 2020, and auctioned the secured property on March 16, 2020. Chandravanshi emerged as the successful bidder.

He was issued a sale certificate, following which a sale deed was executed. The borrowers then challenged the auction before the DRT, Jabalpur. The tribunal allowed their application and set aside the auction sale along with all consequential actions.

Before the appellate tribunal, Chandravanshi argued that the DRT had wrongly treated the March 2020 auction as the first sale. He also contended that the DRT had incorrectly concluded that the reserve price had been fixed at the distress value. He argued that there was no violation of the Security Interest (Enforcement) Rules, 2002. According to him, the sale consideration had been deposited in accordance with Rule 9 and the auction could not be set aside unless fraud or material illegality was established.

SBI defended the auction. It maintained that it had obtained a valuation from an approved valuer and fixed the reserve price accordingly. The bank also contended that the sale notice had been served through registered post and published in newspapers in compliance with the statutory requirements.

Examining the record, the tribunal observed that although an earlier auction process had been initiated, it had already been set aside by the DRT in the earlier securitisation application. The March 2020 auction, therefore, constituted the first sale of the secured asset.

The tribunal noted that the approved valuer had assessed the property's market value at Rs. 23.50 lakh, realisable value at Rs. 21 lakh and distress value at Rs. 18.80 lakh. SBI nevertheless fixed the reserve price at Rs. 18.80 lakh.

“Thus it can be said that the property has been sold at a throwaway price, which cannot be permitted to be done by the Bank. On this count alone, the auction sale conducted by the Bank on 16.03.2020 is liable to be quashed and its subsequent actions also,” the tribunal held.

The tribunal also found deficiencies in the bank's compliance with the mandatory procedure governing service of the sale notice. Although SBI relied on a dispatch register to show that notices had been sent, it failed to produce postal receipts to establish service on the borrowers.

The tribunal further found that the affixation document did not mention the date or place of affixation. It also accepted the DRT's finding regarding defects in the publication of the sale notice.

“Thus the filing of the copy of the dispatch register is not sufficient to infer that the said notice was ever served upon the borrowers, which violates Rule 8(6) of the Security Interest (Enforcement) Rules, 2002,” the tribunal observed.

Holding that the bank's initial actions leading to the auction were contrary to the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002, the tribunal ruled that all subsequent actions flowing from the defective auction, including the sale certificate and sale deed, could not survive. Finding no infirmity or illegality in the DRT's order, it dismissed the appeal.

For Appellant: Advocate Katyayini,

For Respondent no. 3 (State Bank of India): Advocate Abhishek Kapariya, Advocate holding the brief of Shri Р. Srivastava