SARFAESI auction disclosure duties: failure to reveal encumbrances and title defects justified sale cancellation and refund.

A secured creditor conducting a SARFAESI auction must disclose known encumbrances and material title defects, including where the auctioned asset is only an undivided and undemarcated portion of a larger plot. The court found that the bank was not a passive seller and could not rely on an as-is-where-is or caveat emptor position when material defects were within its knowledge or ought to have been ascertained. It held that failure to make proper disclosure justified cancellation of the sale and refund of the consideration. The writ petition was also held maintainable despite an alternative remedy plea, as the complaint involved clear statutory violation and no disputed factual issues.

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Issues: (i) whether the secured creditor was bound to disclose known encumbrances and the undivided nature of the auctioned property, and whether failure to do so entitled the auction purchaser to cancellation of the sale and refund of the consideration; (ii) whether the writ petition was maintainable notwithstanding the plea of alternative remedy.

Issue (i): whether the secured creditor was bound to disclose known encumbrances and the undivided nature of the auctioned property, and whether failure to do so entitled the auction purchaser to cancellation of the sale and refund of the consideration

Analysis: The sale notice and sale certificate were found not to have disclosed that the property formed only an undivided and undemarcated portion of a larger plot. The statutory scheme under the Security Interest (Enforcement) Rules, 2002 requires disclosure of the description of the property and the encumbrances known to the secured creditor, and also obliges delivery of the secured asset free from encumbrance. The Court held that the secured creditor is not a passive seller, must exercise due diligence, and cannot rely on an as is where is or caveat emptor position where material defects, encumbrances, or title issues were within its knowledge or ought to have been ascertained.

Conclusion: The bank breached its statutory obligations, and the auction purchaser was entitled to refund of the sale consideration in lieu of delivery of unencumbered title and possession.

Issue (ii): whether the writ petition was maintainable notwithstanding the plea of alternative remedy

Analysis: The petitioner was a third party auction purchaser complaining of the bank's failure to deliver possession and of non-disclosure of material defects in the auction process. In the absence of disputed questions of fact and in view of the alleged clear statutory violation, the existence of an alternative remedy was held not to bar writ relief.

Conclusion: The plea of alternative remedy was rejected.

Final Conclusion: The auction sale was cancelled and the bank was directed to refund the full consideration amount to the auction purchaser.

Ratio Decidendi: A secured creditor conducting a SARFAESI auction must disclose known encumbrances and material title defects, and where it fails to do so and cannot deliver unencumbered possession, the auction purchaser may seek cancellation of the sale and refund notwithstanding the plea of alternative remedy.

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