Defaulted borrower wins land as buyer delays payment
In 2017, Mr Rama and his family secured a cash credit facility from a public sector bank for his partnership business in Tirupur, Tamil Nadu. This loan was raised by mortgaging four residential and commercial properties, and it was later renewed for a total of Rs 4 crore. Unfortunately, due to some business challenges, he failed to repay the loan.
On November 25, 2018, the loan was classified as non-performing asset (NPA) because it had become irregular. Consequently, the bank began proceedings under the SARFAESI Act on February 10, 2020 by issuing a demand notice under Section 13(2) asking Ramalingam to pay his remaining loan liability. His outstanding liability was Rs 3.89 crore plus interest and cost and the bank asked him to pay this within 60 days.
When Rama couldn't come up with the funds, the bank issued a possession notice on April 21, 2020 to take over his pledged residential and commercial properties. They also took symbolic possession under Section 13(4) also issued a sale notice for these mortgaged properties.
The e-auction was held on September 4, 2020. While the auction was managed as a unified process for four distinct properties, the bidding for each property was handled individually based on their respective reserve prices.
Once the auction was over, the buyers emerged as the highest bidder for all of the four properties, having deposited 25% of the bid amount according to Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 on September 5, 2020.
Seeing this, Rama felt wronged and approached the Debts Recovery Tribunal, Coimbatore and filed a case (SA no. 263/2020).
When the case was ongoing, a series of interim orders came to be passed by the DRT, the Debts Recovery Appellate Tribunal, Chennai, and the Madras High Court in various proceedings, which, at different stages, prevented the confirmation of the auction sale or ordered that status quo be maintained regarding the secured assets.
The bank could not confirm the sale as the auction was blocked by a stay order of the court. Nevertheless, all the three successful bidders, i.e., auction purchasers, sent letters to the bank, showing willingness to deposit 75% only after DRT case (S.A. No. 263 of 2020) was resolved in their favour.
It is important to note that when the case reached the Madras High Court, the court directed the DRT to dispose of S.A. No. 263 of 2020 within three weeks. Significantly, while allowing the bank to accept the remaining sale amount from the auction buyers, the Madras High Court made it clear that no further steps shall be taken until S.A. No. 263 of 2020 was resolved.
On March 31, 2022, the auction buyers paid the remaining 75% of the sale consideration and the bank issued them a sale confirmation letter. On April 18, 2022, the bank handed over the sale certificate to the auction purchasers and registered it in their name in the Office of the Sub-Registrar via document Nos. 2041, 2042, 2043, 2044/2022.
The auction buyers deposited 75% of the money after a 15-month delay (December 2020 ? March 2022).
At the same time, following orders passed before the debt recovery appellate tribunal that followed DRT's proceedings, Rama, his partners and family (borrowers) deposited and subsequently repaid the entire loan outstanding with interest amount.
On April 12, 2023, the Madras High Court ruled that the auction sale was invalid and allowed Mr Rama and his partners and family to redeem their lands and take them back. The high court ordered the bank to give the back money to the auction buyers with interest. The Supreme Court upheld Madras High Court's order and observed that nothing prevented the bank from accepting the balance 75% consideration, not even the restraining order of the Madras High Court.
The Supreme Court said that the high court's order permitted the bank to receive the balance consideration. Whether you call it a failure to collect the balance sale amount or a delay in depositing it, it ultimately benefits the borrowers and undermines the finality of the sale.
Why the auction purchaser lost this case?
Ajay Shaw, partner, DSK Legal said to ET Wealth Online that the auction purchaser lost this case as the Madras High Court clearly held that the stay was on the conclusion of the sale and not on the deposit of the 75% consideration by the auction purchaser and int his case the said amount was deposited after 15 months after the prescribed time line under Rule 9(4) of the SARFESI Rules.
Shaw says: "Hence, having not deposited the monies within the time line prescribed the sale under SARFESI was not compliance with applicable laws, hence the sale to the auction purchaser was set aside and the court allowed the borrower’s right of redemption being an inherent right of the borrower." Accordingly, the Supreme Court upheld the High Court Order.
Shaw from DSK Legal explains that the law says that the secured creditor and the auction purchaser on completing their transaction under SARFESI Act was required to adhere to the timelines in the absence of any specific stay on the deposit of monies.
Shaw says that as per the Supreme Court order the sale process suffers from material irregularities or fails to conform with the mandatory requirements, thus the Supreme Court said that the Madras High Court was justified in passing such orders setting aside the auction process as the borrower had already discharged their outstanding liability till the time the sale process was concluded.
The court emphasised that “process of sale, once initiated is either brought to fruition within a defined outer limit or falls through with statutory consequences”.
Supreme Court order
The Supreme Court upheld the Madras High Court's ruling which had annulled the auction after finding that the borrowers had discharged the entire outstanding liability and that the sale suffered from statutory irregularities.
The Supreme Court said that while the rights of a bona fide auction purchaser and the sanctity of a confirmed sale ordinarily merit protection, such protection is not absolute and must yield where the sale process itself is shown to be legally infirm or incongruous with the extant statutory framework.
The Supreme Court also observed that proceedings under the SARFAESI Act are aimed not at mechanically completing a sale but at ensuring lawful realisation of secured assets, as reported by LivelawBiz.
The Supreme Court saw that the dispute arose from cash credit facilities availed from the bank on November 3, 2017, with the loan account classified as a non-performing asset on November 25, 2018. Even though recovery proceedings were initiated in February 2020, and an e-auction was conducted on September 4, 2020, in which the auction purchasers emerged as successful bidders and deposited 25% of the bid amount. However, the confirmation of the sale took time and remained stalled for a prolonged period due to a series of interim orders passed by the Debts Recovery Tribunal (DRT), Debts Recovery Appellate Tribunal (DRAT), and the Madras High Court.
The Supreme Court said that even though the auction buyers eventually paid the balance 75% of the sale consideration on March 31, 2022, this was far beyond the statutory timeline prescribed under Rule 9(4) of the SARFAESI Rules. Thus such delay, not attributable to the borrowers, rendered the sale inchoate and open to judicial scrutiny.
In the meantime, Rama and his partners and family (borrowers) continued to pursue legal remedies and following court directions, made substantial deposits before ultimately remitting the entire outstanding dues of over Rs 2.29 crore on December 2, 2022.
The Supreme Court observed that if they allow the sale to stand despite full repayment, it would result in disproportionate deprivation of property.
The Supreme Court said that the if the auction process suffers from material irregularities or fails to conform to mandatory requirements, thereby rendering the sale inchoate, the Court would be justified in intervening, particularly where the borrower has, in the interregnum, discharged the outstanding liability, so as to obviate disproportionate deprivation of property and uphold substantive justice."
Agreeing with the Madras High Court's findings that the sale had not attained finality in accordance with law and that the borrowers, having discharged the entire liability, could not have been divested of the secured assets, the Supreme Court upheld the setting aside of the auction. The appeals were accordingly dismissed.
On November 25, 2018, the loan was classified as non-performing asset (NPA) because it had become irregular. Consequently, the bank began proceedings under the SARFAESI Act on February 10, 2020 by issuing a demand notice under Section 13(2) asking Ramalingam to pay his remaining loan liability. His outstanding liability was Rs 3.89 crore plus interest and cost and the bank asked him to pay this within 60 days.
When Rama couldn't come up with the funds, the bank issued a possession notice on April 21, 2020 to take over his pledged residential and commercial properties. They also took symbolic possession under Section 13(4) also issued a sale notice for these mortgaged properties.
The e-auction was held on September 4, 2020. While the auction was managed as a unified process for four distinct properties, the bidding for each property was handled individually based on their respective reserve prices.
Once the auction was over, the buyers emerged as the highest bidder for all of the four properties, having deposited 25% of the bid amount according to Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 on September 5, 2020.
Seeing this, Rama felt wronged and approached the Debts Recovery Tribunal, Coimbatore and filed a case (SA no. 263/2020).
When the case was ongoing, a series of interim orders came to be passed by the DRT, the Debts Recovery Appellate Tribunal, Chennai, and the Madras High Court in various proceedings, which, at different stages, prevented the confirmation of the auction sale or ordered that status quo be maintained regarding the secured assets.
The bank could not confirm the sale as the auction was blocked by a stay order of the court. Nevertheless, all the three successful bidders, i.e., auction purchasers, sent letters to the bank, showing willingness to deposit 75% only after DRT case (S.A. No. 263 of 2020) was resolved in their favour.
It is important to note that when the case reached the Madras High Court, the court directed the DRT to dispose of S.A. No. 263 of 2020 within three weeks. Significantly, while allowing the bank to accept the remaining sale amount from the auction buyers, the Madras High Court made it clear that no further steps shall be taken until S.A. No. 263 of 2020 was resolved.
On March 31, 2022, the auction buyers paid the remaining 75% of the sale consideration and the bank issued them a sale confirmation letter. On April 18, 2022, the bank handed over the sale certificate to the auction purchasers and registered it in their name in the Office of the Sub-Registrar via document Nos. 2041, 2042, 2043, 2044/2022.
The auction buyers deposited 75% of the money after a 15-month delay (December 2020 ? March 2022).
At the same time, following orders passed before the debt recovery appellate tribunal that followed DRT's proceedings, Rama, his partners and family (borrowers) deposited and subsequently repaid the entire loan outstanding with interest amount.
On April 12, 2023, the Madras High Court ruled that the auction sale was invalid and allowed Mr Rama and his partners and family to redeem their lands and take them back. The high court ordered the bank to give the back money to the auction buyers with interest. The Supreme Court upheld Madras High Court's order and observed that nothing prevented the bank from accepting the balance 75% consideration, not even the restraining order of the Madras High Court.
The Supreme Court said that the high court's order permitted the bank to receive the balance consideration. Whether you call it a failure to collect the balance sale amount or a delay in depositing it, it ultimately benefits the borrowers and undermines the finality of the sale.
Why the auction purchaser lost this case?
Ajay Shaw, partner, DSK Legal said to ET Wealth Online that the auction purchaser lost this case as the Madras High Court clearly held that the stay was on the conclusion of the sale and not on the deposit of the 75% consideration by the auction purchaser and int his case the said amount was deposited after 15 months after the prescribed time line under Rule 9(4) of the SARFESI Rules.
Shaw says: "Hence, having not deposited the monies within the time line prescribed the sale under SARFESI was not compliance with applicable laws, hence the sale to the auction purchaser was set aside and the court allowed the borrower’s right of redemption being an inherent right of the borrower." Accordingly, the Supreme Court upheld the High Court Order.
Shaw from DSK Legal explains that the law says that the secured creditor and the auction purchaser on completing their transaction under SARFESI Act was required to adhere to the timelines in the absence of any specific stay on the deposit of monies.
Shaw says that as per the Supreme Court order the sale process suffers from material irregularities or fails to conform with the mandatory requirements, thus the Supreme Court said that the Madras High Court was justified in passing such orders setting aside the auction process as the borrower had already discharged their outstanding liability till the time the sale process was concluded.
The court emphasised that “process of sale, once initiated is either brought to fruition within a defined outer limit or falls through with statutory consequences”.
Supreme Court order
The Supreme Court upheld the Madras High Court's ruling which had annulled the auction after finding that the borrowers had discharged the entire outstanding liability and that the sale suffered from statutory irregularities.
The Supreme Court said that while the rights of a bona fide auction purchaser and the sanctity of a confirmed sale ordinarily merit protection, such protection is not absolute and must yield where the sale process itself is shown to be legally infirm or incongruous with the extant statutory framework.
The Supreme Court also observed that proceedings under the SARFAESI Act are aimed not at mechanically completing a sale but at ensuring lawful realisation of secured assets, as reported by LivelawBiz.
The Supreme Court saw that the dispute arose from cash credit facilities availed from the bank on November 3, 2017, with the loan account classified as a non-performing asset on November 25, 2018. Even though recovery proceedings were initiated in February 2020, and an e-auction was conducted on September 4, 2020, in which the auction purchasers emerged as successful bidders and deposited 25% of the bid amount. However, the confirmation of the sale took time and remained stalled for a prolonged period due to a series of interim orders passed by the Debts Recovery Tribunal (DRT), Debts Recovery Appellate Tribunal (DRAT), and the Madras High Court.
The Supreme Court said that even though the auction buyers eventually paid the balance 75% of the sale consideration on March 31, 2022, this was far beyond the statutory timeline prescribed under Rule 9(4) of the SARFAESI Rules. Thus such delay, not attributable to the borrowers, rendered the sale inchoate and open to judicial scrutiny.
In the meantime, Rama and his partners and family (borrowers) continued to pursue legal remedies and following court directions, made substantial deposits before ultimately remitting the entire outstanding dues of over Rs 2.29 crore on December 2, 2022.
The Supreme Court observed that if they allow the sale to stand despite full repayment, it would result in disproportionate deprivation of property.
The Supreme Court said that the if the auction process suffers from material irregularities or fails to conform to mandatory requirements, thereby rendering the sale inchoate, the Court would be justified in intervening, particularly where the borrower has, in the interregnum, discharged the outstanding liability, so as to obviate disproportionate deprivation of property and uphold substantive justice."
Agreeing with the Madras High Court's findings that the sale had not attained finality in accordance with law and that the borrowers, having discharged the entire liability, could not have been divested of the secured assets, the Supreme Court upheld the setting aside of the auction. The appeals were accordingly dismissed.
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