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SARFAESI Act | Bank Can Auction Property With Encumbrances But Bidders Must Be Informed, 'As Is Where Is' Clause Not Sufficient: JKL High Court

Basit Amin Makhdoomi
10 Dec 2022 9:00 AM GMT
The Karnataka High Court Has Held Section 14 (1) Of The Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 Is Not Ultra Vires To The Constitution.

The Jammu and Kashmir and Ladakh High Court recently ruled that a Bank can auction the property even with encumbrances attached to property under the SARFAESI Act but it is incumbent upon the Bank to disclose the encumbrances and litigations attached to the property to all the persons who want to participate in the same and to the successful bidder.

A bench comprising Justice Sindhu Sharma observed,

"By including a clause of" as is where is‟ it would not be sufficient for respondent bank from disclosing encumbrances or handing over the property to the petitioner".

The observations came on a petition whereby the petitioner sought direction to the respondent PNB Bank to put him into physical possession of the property being a double storey commercial building at Narwal Jammu.

In his plea the petitioner submitted that the Bank had issued an e-auction sale notice in the newspaper as per SARFAESI Act with respect to auction of Double Storey Commercial Building at Narwal Jammu. The petitioner participated and was declared as a successful auction purchaser whereafter he deposited the entire bid amount with the bank.

The contention of the petitioner was that the sale certificate of the property was issued to the petitioner which stated handing over the delivery of possession but, in fact the physical possession of the property was not given to the petitioner.

The petitioner immediately approached the respondents for handing over the physical possession of the property to him but he was informed that some trespassers had taken possession of the said property and the Bank had initiated the proceedings against them. Hence the respondent failed to deliver the actual possession of the property.

Contesting the plea the respondent countered that the property was intended to be transferred or conveyed on "as is where is‟ basis as per the terms and conditions of e-auction notice without any warranties by the respondent and their particulars were given in the notice and hence the respondent would not be responsible as the Bank fulfilled its obligations.

Respondent further submitted that the physical possession of the property was delivered to the petitioner free from all encumbrances on the strength of sale certificate, as such, they had discharged their duties.

Adjudicating upon the matter Justice Sindhu observed that as per Section 13(4) of the SARFAESI Act read with Clause 9 & 10 of Rule 9 of the Security Interest (Enforcement) Rules, 2002, it was incumbent upon the authorized officer/respondent No. 1 to deliver the property to the purchaser free from all encumbrances on deposit of money in the Bank.

Deliberating further on the matter the bench pointed that in terms of the Security Interest (Enforcement) Rules, 2002, specifically Rule 9(9) which states that the authorized officer had to deliver the property to the purchaser free from encumbrances, known to the secured creditor on deposit of the money as specified in Sub-Rule 7 but in fact respondent No. 1 has suppressed all litigations and encumbrances relating to the auction property.

The bench recorded that the respondent had categorically in the notice as well as in the sale certificate stated that the property is free from all encumbrances, therefore, respondent No. 1 was bound to deliver the physical possession of the property to the purchaser. The petitioner despite paying a huge amount in the auction has not been delivered the property, rather entire auction proceedings have lost their value and come to naught, said the court.

The bench further observed that the petitioner being a bona fide purchaser was entitled not only to the sale certificate but also to the physical possession of the property which was to be provided to him by the respondents under the Security Interest (Enforcement) Rules, 2002. Though, the physical possession of the property need not be taken before being put to auction but the respondents cannot shirk from their duty to hand over the physical possession of the property to the auction purchaser. If respondent No. 1 was not in a position to take the physical possession of the same before the sale, then they had to adopt course under Section 14 of the Act, the bench underscored.

Expounding on the Legislative intent behind SARFAESI Act the bench observed that the third party who comes forward to purchase the secured asset, must have a confidence that he would get the title to the property at the earliest. If the transferring of the property by way of title is going to be delayed endlessly, then the object of the Act which is meant for speedy recovery would be defeated as a whole, the bench emphasized.

Accordingly the bench allowed the petition and directed Respondent PNB to deliver the clear physical possession of the double story commercial building, Narwal, Jammu at the earliest to the petitioner by taking any measures available to them as per law.

Case Title : S. K. Bakshi Vs Punjab National Bank & Ors.

Citation : 2022 LiveLaw (JKL) 241

Coram : Justice Sindhu Sharma

Click Here To Read/Download Judgment

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