SARFAESI auction notice compliance leads to sale invalidation and restitution for auction purchasers

Strict compliance with the mandatory notice requirements under the SARFAESI Rules is necessary for a valid auction sale; admitted non-service of the prescribed notice justified setting aside the sale, even though it had been confirmed and a sale certificate issued. Once the sale was annulled, the auction purchasers could not be treated as owners and their status reverted to tenants. The auction money retained by the Bank had to be refunded without making prior delivery of possession a condition precedent, and restitution was ordered with higher interest because of the Bank's procedural default and prolonged retention of funds. Any remaining mutual dues between the Bank and the borrower were also directed to be adjusted.

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Issues: (i) Whether the auction sale conducted under the SARFAESI regime was liable to be set aside for non-compliance with the mandatory notice requirements under the Security Interest (Enforcement) Rules, 2002; (ii) what consequential relief should follow after the sale was set aside, including the status of the auction purchasers and return of the auction money.

Issue (i): Whether the auction sale conducted under the SARFAESI regime was liable to be set aside for non-compliance with the mandatory notice requirements under the Security Interest (Enforcement) Rules, 2002.

Analysis: The Bank had admitted non-compliance with the mandatory notice requirements before the auction sale. The concurrent findings of the tribunals and the High Court were based on this admitted breach of the statutory procedure. Where the prescribed notice was not issued or served, the auction process could not be sustained merely because the sale had been confirmed and a sale certificate issued.

Conclusion: The setting aside of the auction sale was upheld.

Issue (ii): What consequential relief should follow after the sale was set aside, including the status of the auction purchasers and return of the auction money.

Analysis: Once the sale was annulled, the auction purchasers could not be treated as owners and their status reverted to that of tenants. The auction money lying with the Bank had to be returned, but the condition that refund would arise only after delivery of possession to the Bank was incorrect. Considering the Bank's failure to follow the mandatory procedure and the prolonged retention of the auction money, interest at a higher rate than fixed deposit interest was warranted. The Court also directed adjustment of any remaining mutual dues between the Bank and the borrower.

Conclusion: The auction money was directed to be refunded to the appellants with 12% compound interest, the tenants' status was restored, and no prior delivery of possession to the Bank was required.

Final Conclusion: The impugned order was modified to affirm the invalidation of the sale while granting consequential monetary relief to the auction purchasers and preserving lawful remedies between the borrower and the Bank.

Ratio Decidendi: Mandatory statutory procedure in SARFAESI auction sales, including notice requirements, must be strictly complied with, and breach of such procedure justifies setting aside the sale with appropriate consequential restitution.

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