Case Note & Summary
The appellants, Govind Kumar Sharma and another, were tenants in a property that was auctioned by the Bank of Baroda under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) due to default by the borrower (respondent nos. 3 and 4). The appellants were the highest bidders, their bid was accepted, and a sale certificate was issued on 30.03.2009, converting their status from tenants to owners. The borrower filed an application under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal (DRT) challenging the sale on the ground that the Bank failed to comply with the mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, which require a 30-day notice to the borrower before auction. The DRT, by order dated 21.04.2015, set aside the sale, noting the Bank's admission of non-compliance, and directed the Bank to refund the auction money with interest at fixed deposit rate only after receiving possession from the auction purchaser. The borrower was directed to pay the dues within 15 days. The appellants' appeal before the Debt Recovery Appellate Tribunal (DRAT) was dismissed on 19.04.2018, and their writ petition before the Allahabad High Court was dismissed on 02.07.2018. The Supreme Court granted leave and heard the appeal. The appellants argued that they were bona fide purchasers and had invested Rs. 60 lakhs in improvements, seeking compensation. The Bank conceded non-compliance but opposed additional compensation. The borrower stated that they had paid the entire outstanding dues, which were lying separately from the auction money. The Supreme Court held that the concurrent finding of non-compliance with mandatory notice was correct and affirmed the setting aside of the sale. However, it modified the relief: the auction purchaser's status reverts to tenant, and the Bank cannot claim possession; the Bank must refund the auction money with compound interest at 12% per annum from the date of deposit till payment, instead of fixed deposit rate, due to the Bank's default. The Bank and borrower were directed to settle accounts and issue a No Dues Certificate. The appeal was disposed of accordingly.
Headnote
A) SARFAESI Act - Auction Sale - Mandatory Notice - Non-Compliance - Setting Aside - The auction sale was set aside due to the Bank's failure to issue mandatory 30-day notice under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The Supreme Court affirmed the concurrent findings of DRT, DRAT, and High Court that the sale was rightly set aside. (Paras 4-6, 12(i)) B) Auction Purchaser - Status - Reversion to Tenant - Upon setting aside of sale, the auction purchaser's status as owner reverts to that of tenant. The Bank cannot claim physical possession from the auction purchaser; the borrower as owner must evict the tenant in accordance with law. (Paras 12(ii), 13(b)) C) Bank's Liability - Interest on Refund - Enhanced Rate - Since the Bank's default caused the litigation, the auction money must be refunded with compound interest at 12% per annum from the date of deposit till payment, instead of fixed deposit rate. (Paras 12(iii)-(iv), 13(c)) D) Borrower's Dues - Settlement - No Dues Certificate - The borrower having paid the entire outstanding dues, the Bank and borrower shall settle accounts and the Bank shall issue a No Dues Certificate. (Paras 11(iii), 13(d))
Issue of Consideration
Whether the auction sale conducted under the SARFAESI Act can be set aside for non-compliance of mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, and what relief should be granted to the auction purchaser.
Final Decision
The Supreme Court affirmed the setting aside of the auction sale but modified the relief: (a) setting aside of auction sale affirmed; (b) status of appellants as tenants restored, leaving it open for borrower to evict them in accordance with law; (c) Bank to return auction money with compound interest @12% per annum from date of deposit till payment; (d) Bank and borrower to settle accounts and Bank to issue No Dues Certificate. The appeal was disposed of accordingly.
Law Points
- Non-compliance of mandatory notice under Rules 8(6) and 8(7) of Security Interest (Enforcement) Rules
- 2002 renders auction sale void
- Auction purchaser's status reverts to tenant upon setting aside of sale
- Bank liable for enhanced interest for its own default
