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Mercantile Law

Confirmed Sale Cannot be Set Aside under SARFAESI Act

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 16-Dec-2024

Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of Celir LLP v. Ms Sumati Prasad Bafna and other (2024) has held that a sale that is confirmed cannot be set aside merely based on irregularities except when the concerned matter is based on Fraud, Collusion, Inadequate Pricing, Under-bidding etc. 

What was the Background of the Celir LLP v. Ms Sumati Prasad Bafna and others Case?

  • Original Loan and Security 
    • A bank provided a Lease Rental Discounting (LRD) credit facility to a borrower (respondent), initially sanctioning Rs. 100 crore on 03rd July 2017 and later adding Rs. 6.77 crore. 
    • As security for this loan, the borrower created a simple mortgage over a 16,200 sq. meter parcel of industrial land located in Navi Mumbai, Maharashtra.  
  • Loan Default and Initial Recovery Proceedings 
    • The borrower defaulted on the loan, and on 31st March 2021, the loan account was declared a Non-Performing Asset (NPA). 
    • On 7th June 2021, the bank issued a demand notice under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) for repayment. 
    • By 30th April 2023, the total outstanding amount had grown to Rs. 123.83 crore. 
    • On 4th February 2022, the bank took symbolic possession of the secured asset. 
  • Auction Attempts 
    • Between April 2022 and June 2023, the bank attempted eight auctions of the secured asset, all of which failed to receive bids. 
    • The borrower informed the bank they might be able to sell the assets for Rs. 91-92 crore. 
    • On 14th June, 2023, the bank published a notice for a 9th auction with a reserve price of Rs. 105 crores. 
  • Ninth Auction Proceedings 
    • On 27th June 2023, the auction was conducted. 
    • The petitioner (auction purchaser) submitted the highest bid of Rs. 105.05 crore and paid an initial deposit. 
    • The bank sent a sale confirmation letter on 30.06.2023, requesting full payment by 15th July 2023. 
    • The petitioner completed the full payment on 27th July 2023. 
  • Borrower's Redemption Attempt 
    • Realizing the auction's success, the borrower filed an application with the Debt Recovery Tribunal (DRT) to redeem the mortgage by paying the outstanding amount. 
    • Simultaneously, the borrower filed a writ petition in the High Court seeking to redeem the mortgage. 
  • High Court Intervention 
    • On 17th August 2023, the High Court allowed the borrower's petition, permitting them to redeem the mortgage by paying Rs. 25 crore immediately and the balance Rs. 104 crore by 31st August 2023. 
  • Supreme Court Appeals 
    • The petitioner appealed against the High Court's order through Special Leave Petitions. 
    • On 21st September 2023, the Supreme Court set aside the High Court's order and directed the petitioner to pay an additional Rs. 23.95 crore. 
    • The borrower filed a review petition against the Supreme Court's judgment. 

What were the Court’s Observations? 

  • The Supreme Court made the following observations: 
    • Stance of the Borrower: 
      • The court was perplexed by the Borrower's changing stance throughout the litigation 
      • Initially, the Borrower argued that its right of redemption was dependent on the adjudication of Securitization Application.  
    • Observations about the Writ Petition: 
      • In the writ petition, the Borrower did not challenge the 9th auction notice 
      • The Borrower had challenged earlier auction notices and SARFAESI Act proceedings, but not the specific 9th auction notice 
      • The Borrower effectively abandoned its right to challenge the Bank's actions under SARFAESI Act 
    • High Court's Order: 
      • The High Court held that on passing its order, the entire challenge to the Bank's actions would end 
      • Even if the Borrower failed to redeem the mortgage, no challenge could be laid to the sale of the secured asset 
      • The court treated the Borrower's agreement to withdraw as an undertaking 
      • The court specified that if the Borrower defaulted on payment, the auction purchaser would get the secured asset free from litigation 
    • Subsequent Supreme Court Proceedings: 
      • The petitioner (auction purchaser) challenged the High Court's order 
      • The Borrower claimed it had already redeemed the mortgage during the pendency of the main appeals 
      • The only remaining issue was the refund of the amount deposited by the petitioner 
      • The court essentially observed that the Borrower had multiple opportunities to challenge the auction proceedings but did not do so consistently and had effectively waived its rights to challenge the sale through its actions and agreements in the High Court.   
    • On the Right of Redemption: 
      • The court examined the interpretation of Section 13(8) of the SARFAESI Act after its 2016 amendment. 
      • It held that under the unamended Section 13(8), the borrower's right to redeem the secured asset was available till the sale or transfer of the asset. 
      • Under the amended provisions, the right to redeem is available only till the date of publication of the notice under Rule 9(1) of the SARFAESI Rules.  
    • Application of the Henderson Principle: 
      • The court discussed the Henderson Principle, which mandates that all claims and issues that could and ought to have been raised in a previous litigation should not be relitigated in subsequent proceedings. 
      • This principle embodies procedural fairness, prevents abuse of process, and promotes judicial efficiency. 
    • The core observation was that the Borrower had multiple opportunities to raise challenges to the auction proceedings but chose not to do so and therefore should not be allowed to relitigate the same issues in subsequent proceedings. 
    • Based on the document, here are the key observations of the court regarding the Henderson Principle and the Doctrine of Lis Pendens:  
    • Regarding the Doctrine of Lis Pendens: 
      • The doctrine bars the transfer of a suit property during the pendency of litigation. 
      • Key conditions for applying the doctrine include: 
        • A pending suit in a competent court 
        • The suit must not be collusive 
        • The right to immovable property must be directly in question 
        • The property must be transferred by a party to the litigation  
      • The rationale is to prevent alienations that could defeat the purpose of ongoing legal proceedings and ensure the court can effectively deal with the subject matter of litigation. 
    • In the present case the Special Leave Petitions were already pending when the Assignment Agreement was executed the transfer of the Secured Asset was therefore hit by lis pendens.   
    • Contempt of Court Principles: 
      • Any act of disobedience, defiance, or attempt to malign court authority amounts to contempt 
      • Contempt jurisdiction exists to preserve the sanctity of law and protect judicial institutions 
      • Judicial decisions must remain unimpaired and free from external pressures 
      • The court noted several actions by the Borrower and Subsequent Transferee that attempted to undermine the court's judgment, including: 
        • Writing letters to MIDC and Sub-Registrar to prevent asset transfer. 
        • Filing stay applications. 
        • Lodging police complaints. 
      • Filing a suit seeking to invalidate the sale certificate.  
    • Regarding the 9th Auction: 
      • The Borrower did not allege any collusion or fraud in the 9th auction. 
      • The only irregularity noted was the lack of a 15-day gap between the notice of sale and auction notice. 
      • The Borrower did not demonstrate any prejudice caused by this procedural irregularity. 
      • Despite eight previous auctions from April 2022 to June 2023, the Borrower never expressed desire to redeem the mortgage. 
    • On Sale/Auction Principles: 
      • Public auctions once confirmed should not be set aside lightly 
      • Interference is warranted only for fundamental issues like: 
        • Collusive or fraudulent conduct 
        • Inadequate pricing 
        • Underbidding 
      • Mere procedural irregularities don't invalidate the foundation of such sales. 
      • Courts should avoid entertaining challenges that could have been raised earlier. 
  • The Supreme Court upheld the validity of the 9th auction proceedings and allowed the Subsequent Transferee to pursue legal remedies against the Borrower for recovery of amounts paid 

Case Laws 

  • Janak Raj v. Gurdilal Singh (1956) 
    • In this case it was concluded that even if a decree is set aside, the auction purchaser's rights remain protected 
  • V.S. Palanivel v. P. Sriram (2024) 
    • In this case it was held that unless there are some serious flaws in the conduct of the auction as for example perpetration of a fraud/collusion, grave irregularities that go to the root of such an auction, courts must ordinarily refrain from setting them aside keeping in mind the domino effect such an order would have. 

What is Section 13 of the SARFAESI Act? 

  • General Provision 
    • Enforcement without court intervention permitted for security interests 
    • Overrides sections 69 and 69A of Transfer of Property Act, 1882 
  • Default and Notice Process 
    • Initial Notice Requirements 
      • Applies when borrower defaults on secured debt. 
      • Accounts must be classified as non-performing assets. 
      • 60-day notice required for borrower to discharge liabilities. 
  • Exception for Debt Securities 
    • NPA classification is not required for debt securities. 
    • Debenture trustees can enforce security interest. 
  • Notice Contents and Response 
    • Must detail payable amount and secured assets. 
    • Borrowers can make representations/objections. 
    • Secured creditors must respond within 15 days. 
  • Enforcement Measures 
    • Right to possess secured assets. 
    • Authority to transfer via lease/assignment/sale.  
    • Can manage borrower's business. 
    • Severable management possible. 
    • Authority to appoint manager for secured assets. 
  • Payment Collection 
    • Can demand payment from third parties who owe borrower. 
  • Property Sale Provisions 
    • Reserve Price Rules 
      • Officers can bid on behalf of secured creditors. 
      • Purchase price adjustable against claim. 
      • Banking Regulation Act provisions apply. 
  • Rights and Recovery 
    • Transfer Rights 
      • Transferee gets full rights as if from owner 
      • Valid for possession or management takeover 
  • Cost Recovery 
    • All reasonable costs recoverable from borrower 
    • Funds held in trust 
    • Priority order: costs → dues → residue 
  • Pre-auction Settlement 
    • Tender of Dues 
      • If full amount tendered before auction notice: 
      • Asset transfer prohibited. 
      • Includes all costs and expenses. 
  • Joint Financing 
    • Requires 60% creditor agreement by value. 
    • Binding on all secured creditors. 
    • Special provisions for company liquidation. 
  • Additional Rights 
    • Can proceed against guarantors 
    • Officers authorized to exercise rights 
    • Borrower restricted from transferring assets after notice