SARFAESI | Bids Received In Defiance Of Restraint Order Cannot Form Foundation Of Valid Sale: Supreme Court

The Supreme Court on Wednesday (September 30) set aside an auction sale concluded in defiance of the Security Interest (Enforcement) Rules, 2002, noting that bids had been received in violation of a restraint order on the auction sale and that the sale had taken place before the expiry of the 30-day notice period to the borrower.

Amongst other things, a major violation occurred of the Debt Recovery Appellate Tribunal's order, as despite the operation of a restraint order on the auction sale proceedings, the bids were received by the secured creditor in defiance of the DRAT's restraint order. The Supreme Court set aside the Madras High Court's decision to uphold the auction sale in the secured creditor's writ petition.

A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe heard a case where the borrower, Sterling Holiday Resorts, had availed loans from Industrial Finance Corporation of India Limited (“IFCI”) and Tourism Finance Corporation of India Limited (“TFCI”), secured by a mortgage over its “The Fernhill” resort at Ooty.

Following default, IFCI initiated SARFAESI proceedings and issued an auction notice fixing a reserve price of Rs 20 crore.

However, the DRAT subsequently restrained IFCI from proceeding under SARFAESI after directing the borrower to deposit Rs 1 crore. Despite the restraint order having passed after the borrower deposited Rs. 1 crore, IFCI received bids, though it did not open them at that stage.

Subsequently, a writ petition was filed before the Madras High Court against the DRAT's decision, which had set aside the DRT's decision to order symbolic possession.

After the Madras High Court allowed IFCI's writ petition, IFCI opened the bids before the actual expiry of the 30-day notice period under Rule 9 of the 2002 Rules, which says that “No sale can take place before the expiry of thirty days from the date of publication of the public notice or service of notice upon the borrower…”.

Moreover, the sale was conducted behind the back of the borrower, as the borrower was entirely kept in the dark about the revival of a sale process that had remained frozen for over a year.

Aggrieved, the borrower moved to the Supreme Court.

Allowing the appeal, the judgment authored by Justice Aradhe several defects in the process.

First, the bid itself had been received in violation of the DRAT's restraint order. The Court held that receiving the bid and earnest money was a step in the SARFAESI sale process and could not be retrospectively validated by the subsequent High Court judgment.

Second, the mandatory 30-day period under Rule 9(1) was not complied with. The Court held that the period during which the restraint order operated had to be excluded, but even after the High Court's, the borrower was not given the full statutory period before the bids were opened.

Third, the borrower was not given notice that the bids were being opened after a gap of about 17 months. The Court held that revival of the auction process behind the borrower's back was inconsistent with the statutory safeguards.

The Court held that Rules 8 and 9 contain mandatory safeguards attached to the exercise of the extraordinary power available to secured creditors under SARFAESI.

The Court also noted that the borrower had subsequently discharged the entire IFCI liability, while the purchaser had accepted the refund of the sale consideration along with interest. Possession of the property had also remained with the borrower.

The Court therefore held that “no sanctity in law can be attached to such an auction process”, set aside the Madras High Court's judgment upholding the sale, and allowed the borrower's appeals.

“The cumulative effect of the foregoing infirmities is unmistakable. The bid was received in defiance of a subsisting restraint; the sale was concluded before the expiry of the mandatory thirty days' period; the certificate was issued to an entity that neither submitted the bid nor existed on the date of the auction; and the record of the auction, if any, was withheld from the court. The sale has thus taken place in violation not only of the Rules but also of the terms and conditions of the auction notice. No sanctity in law can be attached to such an auction process.”, the Court observed.

Appearance:

For Appellant(s) : Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Rakesh Dwivedi, Sr. Adv. Mr. Guru Krishna Kumar, Sr. Adv. Mr. K. K. Mani, AOR Ms. T.archana, Adv. Mr. Rajeev Gupta, Adv. Ms. Haripriya Padmanabhan, Sr. Adv. Mr. Amit Pawan, AOR Mr. Anand Nandan, Adv. Mr. Hassan Zubair Waris, Adv. Mr. Udai V.s. Rathore, Adv. Mr. Udai Vs Rathore, Adv. Ms. Aastha Shrestha, Adv. Mr. Vishesh Goel, Adv. Ms. Shivangi Singh Rawat, Adv. Mr. Suchit Singh Rawat, Adv. Mr. Pushkar Karni Sinha, Adv. Mr. V. Shyamohan, Adv. Mr. V Shyamohan, Adv. Ms. Aditi Gupta, Adv. Mr. Tushar, Adv. Ms. Anshika Bajpai, Adv.

For Respondent(s) : Mr. Guru Krishna Kumar, Sr. Adv. Ms. Haripriya Padmanabhan, Sr. Adv. Ms. Shalini Kaul, AOR Mr. Amit Pawan, AOR Mr. Anand Nandan, Adv. Mr. Hassan Zubair Waris, Adv. Mr. Udai Vs Rathore, Adv. Ms. Aastha Shrestha, Adv. Mr. Vishesh Goel, Adv. Ms. Shivangi Singh Rawat, Adv. Mr. Suchit Singh Rawat, Adv. Mr. Pushkar Karni Sinha, Adv. Mr. V Shyamohan, Adv. Ms. Aditi Gupta, Adv. Mr. Tushar, Adv. Ms. Anshika Bajpai, Adv. Mr. Kush Chaturvedi, AOR Ms. Prerna Priyadarshini, Adv. Mr. Syed Faraz Alam, Adv. Ms. Ayesha Choudhary, Adv. Mr. Pramothesh Mukherjee, Adv. Ms. Sonali Kumari, Adv. Ms. Ishita Singh Tomar, Adv.