Patna HC Quashes Sale Of Guarantor's Property As Bank Fails To Establish Liability After Loan Restructuring

The Patna High Court has quashed the sale of a guarantor's flat by Canara Bank under the SARFAESI Act.

It held that the Bank failed to establish that the guarantor's liability continued to cover a subsequent financial facility sanctioned after the original loan was restructured.

Justice G. Anupama Chakravarthy observed that the Bank could not rely merely on the fact that the guarantor had never formally sought a discharge from his earlier guarantee. It had to demonstrate that the guarantee also continued to cover the revised financial arrangement.

“The stand of the Bank that the petitioner continued to remain liable merely because he had not sought his discharge does not, in the facts of the present case, satisfactorily answer the specific contention of the petitioner that the subsequent financial facilities were sanctioned on materially altered terms without his consent,” the court observed.

The case concerned Rajani Ranjan Sahu, who had stood guarantor for a loan granted by Canara Bank to Ashok Auto Enterprises Private Limited. He had offered his 2,000 sq. ft. flat on S.P. Verma Road, Patna, as security for the loan.

The loan was later restructured, and fresh financial accommodation was sanctioned. Sahu's case was that the terms of the loan had been substantially changed without his knowledge or consent. He also claimed that he had not renewed or extended his guarantee.

Despite this, the Bank proceeded against the flat under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The property was eventually sold in 2015.

The SARFAESI Act provides a mechanism for secured creditors such as banks to enforce security interests and recover outstanding dues. This can include taking possession of secured property and selling it, subject to the procedure prescribed by the Act.

Sahu alleged that the statutory notice demanding repayment under Section 13(2) and the subsequent possession notice were not duly served on him. He also questioned the valuation of the flat. According to him, it was valued at ₹71.30 lakh in 2011 but was sold for ₹28.60 lakh in 2015, against a reserve price of ₹27.60 lakh.

He further challenged the auction over the payment made by the successful bidder. The auction terms required 25% of the sale consideration to be deposited immediately. Against the ₹28.60 lakh bid, this came to ₹7.15 lakh, but only ₹3 lakh was initially deposited, and the balance was accepted later by the Bank.

Canara Bank maintained that Sahu had never been discharged from his guarantee. It argued that the restructuring of the loan and the fresh guarantees obtained from other persons did not, by themselves, release him from his existing liability. The Bank also relied on a later valuation of the property and maintained that the SARFAESI procedure had been followed.

The court, however, found that the Bank had not produced any fresh guarantee executed by Sahu for the subsequent financial accommodation sanctioned on revised terms. The Bank's own documents showed that the disputed flat continued to be treated as collateral security.

The court also found that the Bank's reliance on Form NF-589 was insufficient to establish Sahu's consent to the revised facilities. The form mentioned him as a guarantor/co-obligant, but that reference by itself did not establish that he had consented to or guaranteed the subsequent enhanced or restructured facilities.

The court noted that the liability of a guarantor is founded upon the terms of the guarantee. Since the Bank was enforcing Sahu's property for the subsequent facility, it had to demonstrate that his guarantee continued to cover that facility.

“In the absence of any cogent document evidencing the petitioner's consent to the altered financial arrangement or extending his guarantee to the subsequent facility, the action of the Bank in enforcing the security against the petitioner's property cannot be sustained merely on the basis of the original guarantee,” the court ruled.

The auction process also came under scrutiny. The court found serious infirmities in the delayed payment of the 25% amount and noted that the Bank had not satisfactorily explained why it accepted the balance after the time prescribed under the auction terms.

The court also took note of Sahu's grievance regarding non-service of the statutory notices. It noted that this had resulted in the alleged denial of an effective opportunity to object to the proposed measures against his property.

The court stressed that strict compliance with the statutory procedure was particularly important in the circumstances. This was because Sahu had disputed the Bank's authority to proceed against the particular property, and the material on record did not satisfactorily establish his continuing consent to the subsequent financial facility.

The Bank had also argued that Sahu should have approached the Debts Recovery Tribunal instead of invoking the writ jurisdiction of the high court. Under the SARFAESI framework, the tribunal is ordinarily the forum for challenging measures taken by a secured creditor.

The court did not accept the availability of that remedy as an absolute bar. It held that writ jurisdiction could still be exercised where the petitioner questioned the Bank's foundational authority to proceed against his property and alleged violations of mandatory statutory requirements and material irregularities in the auction process.

The court ultimately held that the Bank had failed to satisfactorily establish Sahu's continuing liability in respect of the subsequent financial accommodation. It also found that the Bank had failed to dispel the material irregularities pointed out in the sale proceedings.

The writ petition was accordingly allowed. The court quashed the sale proceedings relating to Sahu's property and the consequential sale certificate dated December 14, 2015.

Sahu was held entitled to restoration of possession, subject to further directions necessary to give effect to the order.

For Petitioner: Advocates Nikhil Kumar Agarwal and Aditi Hansaria

For Respondents: Advocates Rajan Goshrave and Sanjay Kumar