SARFAESI auction disclosure duties: failure to reveal encumbrances and litigation justified refund with interest to the purchaser.

In a SARFAESI sale of secured assets, the secured creditor must disclose known encumbrances, pending litigations and other material facts in the auction notice, and must deliver the asset free from known encumbrances. Where the bank knew of pending civil proceedings and a cloud on title but did not disclose them, the auction purchaser was not bound to complete a transaction materially different from what was represented. The purchaser was therefore entitled to refund of the sale consideration, and because the bank retained the money for years without completing delivery, interest on the refunded amount was also payable.

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Issues: (i) Whether the auction purchaser was entitled to refund of the sale consideration on the ground that the secured creditor failed to disclose known encumbrances and pending litigations in the auction notice and did not deliver vacant possession within a reasonable time; (ii) Whether the purchaser was entitled to interest on the refunded amount.

Issue (i): Whether the auction purchaser was entitled to refund of the sale consideration on the ground that the secured creditor failed to disclose known encumbrances and pending litigations in the auction notice and did not deliver vacant possession within a reasonable time.

Analysis: The sale notice was issued under the SARFAESI framework, but the secured creditor had a statutory duty under Rule 8(6)(a) and Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002 to disclose the description of the property, known encumbrances, and other material facts relevant to the purchaser. Rule 9(9) also required delivery of the secured asset free from encumbrances known to the secured creditor. The record showed that pending civil proceedings and a cloud on title were within the bank's knowledge, yet they were not disclosed in the auction notification. The plea of prior knowledge was not established, and the purchaser could not be compelled to proceed with a transaction materially different from what was represented in the sale notice. The objection based on alternate remedy was rejected on the facts, as the dispute arose from the bank's failure to comply with mandatory statutory obligations.

Conclusion: The purchaser was entitled to refund of the sale consideration, and the bank was directed to return the amount.

Issue (ii): Whether the purchaser was entitled to interest on the refunded amount.

Analysis: The purchaser had deposited the entire sale consideration in 2008 and the bank retained the money for years without delivering possession. Since the money remained with the bank during the prolonged delay caused by the bank's non-disclosure and failure to complete delivery, equity and fairness required payment of interest on the refunded sum.

Conclusion: The purchaser was entitled to interest at 12% per annum on the refunded sale consideration.

Final Conclusion: The writ petition succeeded because the bank had not complied with the mandatory disclosure obligations governing sale of secured assets, and the purchaser was therefore entitled to refund with interest.

Ratio Decidendi: In a sale of secured assets under SARFAESI, failure to disclose known encumbrances and material pending litigations in the sale notice, coupled with failure to deliver possession, entitles the auction purchaser to avoid the transaction and recover the sale consideration with interest.

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