Supreme Court of India. (IANS Photo)
New Delhi, June 10 (IANS): The Supreme Court has set aside the auction sale of a mortgaged property conducted by Indian Bank in 2010, holding that the sale was vitiated due to non-compliance with mandatory provisions of the Security Interest (Enforcement) Rules, 2002, and granted the legal heir of the deceased guarantor a one-time opportunity to redeem the property.
A Bench of Justices Dipankar Datta and AG Masih allowed in part an appeal filed by M.R. Vasumathi, daughter of deceased guarantor G. Ramanujam, challenging the auction sale of the secured asset conducted under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
The dispute arose from a loan availed by a sole proprietorship in 1984, for which Ramanujam had stood as guarantor and mortgaged his immovable property.
After the borrower defaulted and a preliminary decree was passed in favour of Indian Bank in 1997, the secured creditor initiated proceedings under the SARFAESI Act in 2009, culminating in an auction sale held on March 11, 2010.
The successful bidder purchased the property for Rs 2.11 crore. In its order, the apex court recorded that while the auction purchaser had deposited 25 per cent of the bid amount on the date of sale, the balance 75 per cent was paid only on March 31, 2010, beyond the statutory 15-day period prescribed under Rule 9(4) of the Security Interest (Enforcement) Rules.
Examining the legal framework, the Justice Datta-led Bench said that the provisions governing auction sales under Rule 9 were mandatory and not merely procedural.
“Even upon a cursory perusal of Rule 9 of the SARFAESI Rules that existed at the time of the impugned sale, it is clear that these provisions are neither ornamental nor directory; they are couched in mandatory terms and go to the root of the validity of the sale,” the judgment said.
The apex court found no material on record to show that any written agreement extending the payment period had been entered into between the secured creditor and the auction purchaser.
“Nothing is borne out of the record to demonstrate that there was any prayer for extension of time made by the auction purchaser at any time prior to 31.03.2010 or that any written agreement extending the time was entered into by and between the secured creditor and the auction purchaser,” it observed.
Rejecting the contention that the sale should be protected merely because it had been confirmed, the Justice Datta-led Bench held that statutory non-compliance could not be cured by equitable considerations.
“The object of proceedings under the SARFAESI Act is not the mere culmination of a sale in a mechanical manner, but the lawful realisation of the secured asset through a process that is fair, transparent and strictly compliant with the prescribed rules,” the top court said.
The judgment further said that although courts ordinarily protect the rights of a bona fide auction purchaser, such protection cannot override a sale process found to be legally infirm.
“Such protection is by no means absolute. It must yield where the very process engendering the sale is demonstrated to be legally infirm or to be incongruous with the statutory framework,” the Justice Datta-led Bench said. Setting aside the judgments of the Madras High Court, the Debts Recovery Appellate Tribunal (DRAT) and the Debts Recovery Tribunal (DRT), the Supreme Court quashed the auction sale.
At the same time, it directed Indian Bank to refund the entire auction amount to the purchaser along with interest at 7 per cent per annum from the respective dates of deposit within six weeks.
Invoking its powers under Article 142 of the Constitution to ensure "complete justice", the Supreme Court granted the appellant an opportunity to redeem the mortgage and reclaim the property by paying Rs 95.42 lakh -- the amount specified in the demand notice issued under Section 13(2) of the SARFAESI Act — together with interest at 5 per cent per annum from the date of issuance of the demand notice until payment.
The Justice Datta-led Bench directed that the appellant may approach the bank within two weeks to ascertain the amount payable and complete the payment within the period stipulated by the bank. It further clarified that if the appellant fails to avail of the one-time opportunity, the bank would be free to auction the property afresh after obtaining a fresh valuation report from a government-empanelled valuer.
The apex court said the directions were being issued as a “one-time measure intended to balance the equities of the parties in the peculiar facts of the present case”.
In view of its findings on the validity of the auction sale, the top court left open the larger question of limitation concerning initiation of SARFAESI proceedings nearly 12 years after the preliminary decree. “The same is, accordingly, left open,” the judgment said.
