SARFAESI | Supreme Court Allows Borrower's Tenants, Who Bid For Property, To Remain In Possession After Auction Sale Was Set Aside

The Supreme Court observed that after setting aside of the auction sale of the property the banks cannot automatically claim physical possession over the property held in the possession of the tenant who was the successful bidder in the auction sale. 

The Bench comprising Justices Vikram Nath and Satish Chandra Sharma set aside that direction of the Debts Recovery Tribunal( DRT) whereby while setting aside the auction sale proceedings, the DRT directed the return of the auction sale proceeds to the successful bidder only after the actual possession of the property is delivered to the Bank.

“Once the sale is set aside, the status of the appellants as owners would automatically revert to that of tenants. The status of possession at best could have been altered from that of an owner to that of tenants but Bank would not have any right to claim actual physical possession from the appellants nor would the appellants be under any obligation to handover physical possession to the Bank.”, the Judgment authored by Justice Vikram Nath reasoned.

In the present case, when the sale was set aside the successful bidders were the tenants of the property owned by the borrower for which the auction sale was conducted pursuant to the default committed by the borrower in repayment of the debt owed to the bank.

Another fault committed by the bank was that the auction sale proceedings under the SARFAESI Act were initiated by the bank without serving 30 days prior notice to the borrower. The borrower's tenant/appellant emerged as the successful bidder and the sale certificate was issued to the appellant.

In the meantime, during the auction sale proceedings, the borrower had deposited the debt amount with the bank, thus the sale certificate granted in favor of the appellant was challenged before the Debt Recovery Tribunal (DRT).

In effect, the DRT, after setting aside the sale, further proceeded to direct the Bank to refund the auction money with interest as applicable to fixed deposits only after receiving possession of the property from the auction purchaser within 15 days thereof.

When the matter reached the Supreme Court after the Debt Recovery Appellate Tribunal (DRAT) and the High Court conceded the opinion of the DRT, the court held that the DRT committed an error in setting aside the sale as setting aside of the sale will revert the purchaser's position to the tenant, and the banks have no right to claim the physical possession of the property from the tenant for returning the auction sale proceeds to the purchaser.

Instead, the court directed the bank to return the entire auction/sale money lying with the Bank to the appellants along with compound interest @12 percent per annum to be calculated from the date of deposit till the date of payment.

Mandatory Notice of 30 Days Should Be Given To Borrower Before Initiating Auction Sale Proceedings

The Court held that the Bank had failed to follow the statutory provisions of notice under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002  as the bank hadn't served the mandatory notice 30 days before the auction sale proceedings.

"In view of the concurrent finding based on the admission by the Bank that mandatory notice of 30 days was not given to the Borrower before holding the auction/sale, the setting aside of the auction/sale cannot be faulted with. The same has to be approved.", the court said

Counsels For Petitioner(s) Mr. R. P. Shukla, Adv. Mr. Dhruv Shukla, Adv. Ms. Upasena Shukla, Adv. Ms. Aeishwarya Sharma, Adv. Mr. Gaurav Chauhan, Adv. Ms. Megha Gaur, Adv. Mr. Piyush Kumarendra, Adv. Mr. Vibhav Mishra, AOR Mr. Vijay K. Jain, AOR

Counsels For Respondent(s) Mr. Arun Aggarwal, AOR Ms. Anshika Agarwal, Adv. Mr. Deepti Jain, Adv. Mr. Shivam Saini, Adv. Mr. Praful Rawat, Adv. Mr. Pramod Kumar Singh, Adv. Mr. Vijay Pal, Adv. Mr. Shiv Dutt Sharma, Adv. Ms. Rekha Agarwal, Adv. Mr. Rajvir Singh, Adv. Mr. Bikash Chandra, Adv. Mr. Rameshwar Prasad Goyal, AOR

Case Title: GOVIND KUMAR SHARMA & ANR. VERSUS BANK OF BARODA & ORS.

Citation : 2024 LiveLaw (SC) 325

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