Note: This blog only provides the views on the complicated issues under the Recovery Laws in India and no part of publication be reproduced or used without the expression persmission from the author and the views can not be taken as authoritative.

1/17/11

Procedure for Sale or Auction Sale of ‘Secured Asset’ under the provisions of SARFAESI Act, 2002?

While everybody appreciates the legislative intention behind enacting special legislations like RDDB Act, 1993 and SARFAESI Act, 2002, when it comes to the sale of mortgaged property through auction, many interesting points would emerge for consideration. If it is a sale of mortgaged property pursuant to the Recovery Certificate issued by the Debt Recovery Tribunal in an Application filed by the Bank under Section 19 of RDDB Act, 1993, the Recovery Officer or the Bank shall have to follow the provisions contained in Schedule II and III of Income Tax Act with such modifications as may be necessary. On the same footing, the Bank should follow the provisions of SARFAESI Act, 2002 and SARFAESI Rules meticulously while selling the ‘secured asset’ through Public Auction or through a Private Treaty. It is settled that the Bank or the Public Financial Institution should follow the relevant SARFAESI Rules strictly while selling the ‘Secured Asset’. There is one interesting point in this regard. Initially, the Bank was not allowed to pursue proceedings under the provisions of SARFAESI Act, 2002 without first withdrawing the pending application before the DRT under Section 19 of RDDB Act, 1993 if any. The legal position has changed thereafter and the Bank is now allowed to proceed simultaneously. As it is considered that the Bank will take recourse to SARFAESI Act, 2002 to enforce the Secured Asset, the borrower may neglect the proceedings under the RDDB Act, 1993 and there can be some ex-parte issuance of Recovery Certificate and the Recovery Officer may initiate execution proceedings. If the ‘Secured Asset’ is sought to be sold under the provisions of SARFAESI Act, 2002 and SARFAESI Rules, then, the borrower can question the Sale under section 17 of the Act in view of the settled proposition now that the cause of action continues under the provisions of SARFAESI Act, 2002 and pursuant to issuance of notice under section 13 (4). It is not the case when it comes to sale of mortgaged property belonging to the borrower or the guarantor by the Recovery Officer under RDDB Act, 1993. If the borrower or the owner of the property intends to question the sale proceedings under RDDB Act, 1993, they have approach the Recovery Officer and for questioning the sale, the borrower may have to deposit the amount shown in the proclamation notice as per Rule 60 and the scope for questioning the sale is very narrow under Schedule – II of Income Tax Act. Thus, the scope of challenge to Sale Proceeding under RDDB Act, 1993 is narrow while the scope of questioning the Auction Sale under the provisions of SARFAESI Act, 2002 very wide according to me. These are the complications when it comes to proceeding simultaneously against the Bank and the Bank may ultimately be in an advantageous position than the borrower. Borrower is duty bound to pay the debt and at the same, if there is a genuine grievance, he should have an effective remedy against the Bank or the Public Financial Institutions.

Dealing with the bidding process or the sale of ‘Secured Asset’ under the provisions of SARFAESI Act, 2002 and the rules, the Hon’ble Madras High Court, in K. Raamaselvam & Others Vs. Indian Overseas Bank & Another, 2009 (5) CTC 385, 2009 (5) LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, was pleased to observe as follows:

“9. A bare reading of Rule 9(2) makes it clear that three contingencies can arise when an auction takes place. Those are, (i) the bidder offers an amount, which is more than the upset price, (ii) the bidder offers an amount, which is less than the reserve price, and (iii) the bidder offers an amount, which is neither less nor more than the upset price. If the amount offered by the highest bidder is more than the upset price fixed under Rule 8(5) the sale shall be confirmed in favour of such higher bidder. This however, is subject to confirmation by the Secured Creditor. If the bid amount is less than the upset price, no sale shall be confirmed as contemplated under the first proviso to Rule 9(2). The second proviso makes it clear that if the authorised officer fails to obtain a price higher than the reserve price, the sale can be confirmed only with the consent of the borrower and the secured creditor. It is thus obvious that if the price offered is same as the reserve price, it cannot be said that the Authorised Officer has obtained a price higher than the reserve price. A combined reading of all the provisions contained in Rule 9(2) makes it clear that if the price offered is higher than the reserve price, it shall be confirmed by the Authorised Officer, but such confirmation is subject to the further confirmation by the Secured Creditor. If however, price offered is not higher than the reserve price, which means it may be on par with the reserve price or less than the reserve price, the auction can be confirmed only with the consent of the borrower and the Secured Creditor and not otherwise. Learned counsel for the Bank by relying upon the decision of the Supreme Court, has submitted that in normal circumstances, reserve price is fixed to indicate the minimum price at which property can be sold. We do not think that such a contention can be accepted in view of second proviso to Rule 9(2) is to the effect that if the Authorised Officer fails to obtain a price higher than the reserve price it can be confirmed only with the consent of the Secured creditor as well as the borrower and not bereft of such consent. But the learned counsel for the Bank as well as purchaser had submitted that since the proceeding under Section 17 is pending, the question now raised in the writ petition as well raised in the proceedings and in view of such existence of such alternative remedy, the writ petition should not be entertained.

10. It is no doubt true, that any illegality in the auction can be raised in a proceeding under Section 17.

We do not think that such a plea should be countenanced, in the present case, as the question now raised depends purely on a question of interpretation of the Statutory Rule. The existence of alternative remedy is not considered as an absolute bar for entertaining a writ petition. This is more so, in view of the fact that the Bank, a public sector undertaking and even considered as State under Article 12 of the Constitution of India, is expected to act strictly in accordance with the Statute and Rules.

22. A fair reading of the provisions contained in Rule 9 makes it clear that if the highest bid is higher than the upset price, such highest bid shall be confirmed by the authorised officer in favour of the highest bidder, which, however, is subject to confirmation by the secured creditor. This provision is apparent from the provisions contained in Rule 9(2). At that stage, obviously discretion is given to the secured creditor to accept the highest bid or even go in for a fresh bid.

For example, if the secured creditor, on the basis of the relevant materials, comes to a conclusion that the highest bid offered, even though higher than the reserve price, does not reflect the true market value and there has been any collusion among the bidders, the secured creditor in its discretion may refuse to confirm such highest bid notwithstanding the fact that the highest bid is more than the upset price. This is because the secured creditor is not only interested to realise its debt, but also expected to act as a trustee on behalf of the borrower so that the highest possible amount can be generated and surplus if any can be refunded to the borrower. The first proviso in no uncertain terms makes it clear that no sale can be confirmed by the authorised officer, if the amount offered is less than the reserve price specified under the Rule 8(5). However, the subsequent proviso gives discretion to the authorised officer to confirm such sale even if the bid is less than the reserve price, provided the borrower and the secured creditor agree that the sale may be effected at such price which is not above the reserve price. This is obviously so because the property belongs to the borrower and as security for the secured creditor and both of them would be obviously interested to see that the property is sold at a price higher than the reserve price. However, if both of them agree that the property can be sold, even it has not fetched a price more than the reserve price; the authorised officer in its discretion may confirm such auction.”

Note: the views expressed are personal and a view point only.

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