2013 (9) TMI 216 - SC - Companies Law

SC rules borrower cannot bypass SARFAESI Act remedies under Rule 9 for challenging sale certificate

GM, Sri Siddeshwara Co-operative Bank Ltd. & Another Versus Sri Ikbal & Others

The SC set aside the orders of the Single Judge and Division Bench that had allowed the borrower to challenge the sale certificate and notice under Rule 9 ... Compliance with Rule 9 of the Security Interest (Enforcement) Rules, 2002 - violation of borrower's right to livelihood - invoking extraordinary jurisdiction under Article 226 - borrower failed to make payment of the outstanding loan amount as demanded in the notice - Bank levied execution of the ex parte award - It was then that the borrower challenged the sale certificate issued in favour of the auction purchaser and the notice. Held that:- The facts were eloquent and indicated that the observations made by the Single Judge that borrower was victimized and a fraud was practiced upon, have no basis - The finding by the Single Judge that the sale of secured interest had been in violation of borrower's right to livelihood and the observation of the Division Bench that non-compliance of Rule 9 hads violated, the borrower's right to property were misconceived - there was no justification whatsoever for the learned Single Judge to allow the borrower to by-pass the efficacious remedy provided to him under Section 17 and invoke the extraordinary jurisdiction in his favour when he had disentitled himself for such relief by his conduct - The Single Judge was clearly in error in invoking his extraordinary jurisdiction under Article 226 in light of the peculiar facts indicated above - The Division Bench also erred in affirming the erroneous order of the Single Judge SARFAESI Act lays down the detailed and comprehensive procedure for enforcement of security interest created in favour of a secured creditor without intervention of the court or tribunal - Section 13(2) required the secured creditor to issue notice to the borrower in writing to discharge his liabilities within 60 days from the date of the notice - Such notice must indicate that if the borrower failed to discharge his liabilities, the secured creditor shall be entitled to exercise its rights in terms of Section 13(4) - A reading of sub-rule (1) of Rule 9 makes it manifest that the provision was mandatory - As regarded balance amount of purchase price, sub-rule (4) provided that the said amount shall be paid by the purchaser on or before the fifteenth day of confirmation of sale of immovable property or such extended period as may be agreed upon in writing between the parties - The period of fifteen days in Rule 9(4) was not that sacrosanct and it was extendable if there was a written agreement between the parties for such extension. There was no doubt that Rule 9(1) is mandatory but this provision was definitely for the benefit of the borrower - Similarly, Rule 9(3) and Rule 9(4) were for the benefit of the secured creditor (or in any case for the benefit of the borrower) - It was settled position in law that even if a provision was mandatory, it can always be waived by a party (or parties) for whose benefit such provision had been made - The provision in Rule 9(1) being for the benefit of the borrower and the provisions contained in Rule 9(3) and Rule 9(4) being for the benefit of the secured creditor (or for that matter for the benefit of the borrower), the secured creditor and the borrower can lawfully waive their right - These provisions neither expressly nor contextually indicate otherwise – Order set aside. ISSUES: Whether non-compliance with Rule 9 of the Security Interest (Enforcement) Rules, 2002 (2002 Rules) renders the sale of immovable property under the SARFAESI Act invalid.Whether the time period of 30 days between publication of public notice and auction under Rule 9(1) is mandatory and can be waived by the borrower.Whether the purchaser's failure to pay the balance sale price within 15 days as prescribed under Rule 9(4) results in forfeiture of deposit and resale of property.Whether a written agreement extending the time for payment of balance sale price under Rule 9(4) can be constituted by a letter from the borrower to the secured creditor.Whether the borrower's failure to exhaust the alternative remedy of appeal under Section 17 of the SARFAESI Act bars the High Court's exercise of extraordinary jurisdiction under Article 226 of the Constitution.Whether the borrower's rights under Article 21 and right to livelihood are violated by the sale conducted under the SARFAESI Act despite procedural non-compliance. RULINGS / HOLDINGS: The Court held that Rule 9(1) of the 2002 Rules is mandatory but is for the benefit of the borrower and can be waived by him; thus, non-compliance with the 30-day period does not invalidate the sale if waived.The Court found that the borrower's letter dated 13.11.2006 constituted a valid 'written agreement between the parties' under Rule 9(4), extending the time for payment of the balance sale price, and thereby curing the purchaser's delay.The Court ruled that the purchaser's failure to pay the balance amount within 15 days as per Rule 9(4) does not mandate forfeiture of deposit and resale if there is a written agreement extending the payment period.The Court held that the borrower waived his rights under Rule 9(1), Rule 9(3), and Rule 9(4) by his conduct and express written consent, and therefore the sale certificate issued in favour of the auction purchaser was valid.The Court emphasized that the remedy of appeal under Section 17 of the SARFAESI Act is an 'efficacious remedy,' and the borrower's failure to avail this remedy before invoking extraordinary jurisdiction under Article 226 was improper.The Court rejected the High Court's findings that procedural non-compliance violated the borrower's constitutional rights under Article 21 or right to livelihood, holding such findings to be 'misconceived' and without basis. RATIONALE: The Court applied the provisions of the SARFAESI Act, 2002 and the Security Interest (Enforcement) Rules, 2002, particularly Rule 9, which sets out mandatory procedures for sale of immovable property including timelines for auction and payment.The Court interpreted Rule 9(4)'s phrase 'written agreement between the parties' to mean a mutual assent in writing between the secured creditor, borrower, and auction purchaser, which can be established by a letter from the borrower consenting to extension of payment time.The Court recognized that mandatory procedural provisions enacted for the benefit of parties can be waived by those parties, and such waiver must be assessed on the facts of each case.The Court relied on settled precedent that where an effective statutory remedy exists (here, appeal under Section 17), courts exercising extraordinary jurisdiction under Article 226 should ordinarily require exhaustion of such remedy before interference.The Court rejected the High Court's reliance on Article 21 and right to livelihood as grounds to bypass statutory remedies, reiterating that statutory procedures cannot be circumvented on misplaced considerations.No dissent or doctrinal shift was noted; the Court reaffirmed established principles regarding procedural compliance, waiver, and exhaustion of remedies under the SARFAESI Act framework.