The Supreme Court has held that an entity which did not exist when bids were invited and received in a SARFAESI auction could not subsequently be made the beneficiary of the sale by issuance of a sale certificate in its favour.

A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed while setting aside the Madras High Court's decision to uphold the auction sale of Sterling Holiday Resorts Limited's “The Fernhill” resort in Ooty, which was concluded in defiance of the Security Interest (Enforcement) Rules, 2002 (“the Rules”).

The Court noted that the auction bid had been submitted by one-Rukmani Khemchand in her individual capacity, and she was declared the successful bidder. However, the sale certificate was subsequently issued in favour of M/s P.M. Associates, a partnership firm comprising Khemchand and her brother.

Significantly, P.M. Associates itself came into existence only on September 12, 2011, the very day on which the bids were opened.

The Court held that the entity could not have been assessed for eligibility at the time the bids were invited and received because it did not then exist.

“An entity which did not exist when bids were invited and received could neither have been assessed for eligibility nor have participated in the auction.”, the Court said.

The Court further held that permitting the sale certificate to be issued in favour of such an entity would effectively allow indirectly what could not have been done directly.

“To allow the certificate to issue in its favour is to permit, indirectly, what could not have been done directly, a course the law does not countenance.”, the Court said.

The Court also noted that the auction notice specifically contemplated the purchaser as the successful tenderer/bidder himself. There was no provision permitting a successful bidder to subsequently nominate another entity, much less an entity that did not exist when the auction process commenced.

The defect was therefore not merely a question of the name appearing on the sale certificate. It went to the identity and eligibility of the purchaser in the statutory auction process.

The Court ultimately found the auction vitiated by several cumulative illegalities, including receipt of bids despite a DRAT restraint order, breach of the mandatory 30-day period under Rule 9(1) of the Security Interest (Enforcement) Rules, 2002, absence of notice to the borrower when the bids were opened after a substantial delay, and failure to produce proper auction records.

Also from the judgment - SARFAESI | Bids Received In Defiance Of Restraint Order Cannot Form Foundation Of Valid Sale: Supreme Court

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.