2014 (6) TMI 17 - SC - Indian Laws

Supreme Court upholds High Court decision on SARFAESI Act violation, sets aside asset sale

The Supreme Court upheld the High Court's decision, setting aside the sale of secured assets due to non-compliance with the SARFAESI Act, 2002, and the ... Cancellation of sale made to petitioner - Challenge to auction sale - Failure to to follow the mandatory provisions of Rules 8(5), 8(6) and 9(2) of the Security Interest (Enforcement) Rules, 2002 - Held that:- Single Judge of the High Court after holding that the sale in question was invalid, directed making of payments by respondent Nos. 1 and 2 to respondent No.3 bank with clear direction that on such payment, insofar as the bank is concerned its dues shall stand settled. Not only respondent Nos. 1 and 2 made the payment as directed which was accepted by respondent No.3 bank, insofar as respondent No.3 bank is concerned it even accepted the said judgment and did not file any appeal thereagainst. Only the appellant filed the appeal. Though the order of the learned Single Judge about the validity of the sale had been affirmed, the Division Bench interfered with the other direction of the learned Single Judge which should not have been done as bank had not challenged the order of the learned Single Judge. We are, therefore, of the opinion that in the facts of this case, once the payment is made to the appellant by respondent Nos.1 and 2 in the manner stated hereinafter, the possession of the property shall be delivered to the respondent Nos.1 and 2 with no further liability towards the bank. sale in favour of the appellants dated 18th December, 2006 and the subsequent delivery of possession to the appellants is null and void. The sale is accordingly set aside. The appellants are directed to deliver the possession of the property purchased by them under the Sale Deed dated 20th December, 2006 to Respondent Nos. 1 and 2 immediately upon receiving the entire amount as directed - Decided in favour of appellants. Issues Involved:1. Maintainability of the writ petition.2. Classification of assets as non-performing assets (NPA).3. Compliance with SARFAESI Act, 2002 and Security Interest (Enforcement) Rules, 2002.4. Validity of the sale of secured assets through private treaty.5. Equitable relief and compensation to the appellants.Issue-wise Detailed Analysis:1. Maintainability of the Writ Petition:The appellants initially contested the maintainability of the writ petition on the grounds that an alternative remedy was available under the SARFAESI Act, 2002, and that the respondents had previously withdrawn a similar writ petition without liberty to file afresh. However, this point was not pressed further by the appellants' counsel, as the entire issue was before the Supreme Court on merits.2. Classification of Assets as Non-Performing Assets (NPA):Respondent Nos. 1 and 2 had taken loans from Respondent No. 3-Bank, and upon their failure to repay, the assets were classified as NPAs. Notices under Section 13(2) and 13(4) of the SARFAESI Act, 2002, were issued. Various writ petitions were filed challenging these notices, but no sale occurred due to the absence of bidders. Subsequently, the respondents sought permission to sell the secured assets by private treaty.3. Compliance with SARFAESI Act, 2002 and Security Interest (Enforcement) Rules, 2002:The High Court found that the sale in favor of the appellants was vitiated due to non-compliance with mandatory provisions of Rules 8(5), 8(6), and 9(2) of the Security Interest (Enforcement) Rules, 2002. The Supreme Court upheld this finding, emphasizing that the sale of secured assets must strictly conform to the SARFAESI Act, 2002, and the Rules, 2002. The Court cited the Mathew Varghese case, which underscored the necessity of informing the borrower about the sale to protect their constitutional rights under Article 300A.4. Validity of the Sale of Secured Assets through Private Treaty:The sale was declared null and void due to the absence of written terms settled between the parties for a private treaty, as required by Rule 8(8). The borrowers were not involved in the joint meeting where the sale was decided, constituting a clear violation of the Rules, 2002. The Court emphasized that secured creditors must ensure maximum benefit from the sale of secured assets, which was not observed in this case.5. Equitable Relief and Compensation to the Appellants:The appellants, being bona fide purchasers, sought to retain the property or receive adequate compensation. The Court acknowledged the appellants' substantial losses and the bank's role in the transaction. Ultimately, the Court directed the refund of the sale consideration with interest and the return of possession to Respondent Nos. 1 and 2. The appellants were to receive the proceeds of the FDR with accrued interest, and Respondent Nos. 1 and 2 were to refund the sale amount with 18% simple interest and stamp duty by a specified date.Conclusion:The Supreme Court upheld the High Court's judgments, setting aside the sale in favor of the appellants due to violations of the SARFAESI Act, 2002, and the Rules, 2002. The appellants were directed to return the property upon receiving the refunded amount, ensuring compliance with legal provisions and equitable relief. The appeals were disposed of with no order as to costs.