A) ABSTRACT / HEADNOTE

This case examines the legality of an auction sale under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The appellants, originally tenants of the auctioned property, purchased it in an auction conducted by the Bank. However, the sale was set aside by the Debt Recovery Tribunal (DRT) due to the Bank’s failure to comply with the statutory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The Supreme Court upheld this decision, directing the Bank to refund the auction money with 12% compound interest. It also restored the appellants’ tenancy rights, leaving any eviction proceedings to the legal remedies available to the borrower.

Keywords:

SARFAESI Act, Security Interest Rules, Mandatory Notice, Auction Sale, Refund with Interest.

B) CASE DETAILS

i) Judgement Cause Title:
Govind Kumar Sharma & Anr. v. Bank of Baroda & Ors.

ii) Case Number:
SLP (C) No. 24155 of 2018

iii) Judgement Date:
18 April 2024

iv) Court:
Supreme Court of India

v) Quorum:
Hon’ble Justices Vikram Nath and Satish Chandra Sharma

vi) Author:
Justice Vikram Nath

vii) Citation:
[2024] 4 S.C.R. 633; 2024 INSC 326

viii) Legal Provisions Involved:

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• Security Interest (Enforcement) Rules, 2002
  • Rule 8(6)
  • Rule 8(7)

ix) Judgments overruled by the Case:
None.

x) Case is Related to which Law Subjects:
Property Law, Banking and Finance Law, Contract Law.

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case emerged from the appellants’ challenge to the auction sale of a tenanted property where they transitioned from tenants to owners. The Bank’s procedural lapses under the SARFAESI Act’s mandated procedures led to the appellants’ predicament. This analysis explores the procedural lapses, the Bank’s obligations, and the judiciary’s interpretation of borrower and purchaser rights.

D) FACTS OF THE CASE

1. The appellants were tenants in a property owned by the borrowers who had defaulted on a loan taken from the Bank.
2. The Bank auctioned the property under the SARFAESI Act, and the appellants emerged as the highest bidders.
3. A sale certificate was issued to the appellants on 30 March 2009.
4. Borrowers contested the sale, alleging non-compliance with Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002, requiring a 30-day notice to the borrower.
5. The DRT set aside the sale due to admitted procedural lapses by the Bank and ordered a refund of the auction money with interest applicable to fixed deposits.
6. Appeals to the DRAT and High Court were dismissed, leading to the Supreme Court hearing.

E) LEGAL ISSUES RAISED

1. Whether non-compliance with mandatory notice requirements invalidates the auction sale under the SARFAESI Act.
2. Whether the auction purchaser can retain possession until a refund is processed.
3. Whether compensation for improvements and investments made by the purchaser can be claimed.

F) PETITIONER/APPELLANT’S ARGUMENTS

1. The appellants argued they were bona fide purchasers and had adhered to the auction process in good faith.
2. They emphasized their significant investment of ₹60 lakhs in developing the property.
3. They contended that any procedural lapses on the Bank’s part should not prejudice their ownership rights post-auction.

G) RESPONDENT’S ARGUMENTS

1. The Bank admitted to non-compliance with Rule 8(6) and Rule 8(7), justifying the setting aside of the sale.
2. The borrowers argued that they had fully repaid the Bank, and the sale was legally infirm due to lack of proper notice.
3. The Bank and borrowers opposed additional compensation to the appellants, arguing the appellants had already benefited from possession of the property.

H) JUDGEMENT

a. Ratio Decidendi

1. The failure to provide a mandatory 30-day notice under Rules 8(6) and 8(7) rendered the auction sale invalid.
2. The appellants could not retain possession of the property as owners but retained tenancy rights.

b. Obiter Dicta

1. Procedural lapses by financial institutions must not prejudice the rights of any party, including borrowers and purchasers.
2. Financial institutions must face consequences for failing to adhere to statutory requirements.

c. Guidelines

1. The Bank was directed to refund the auction money with 12% compound interest, from the date of deposit to the date of payment.
2. The appellants’ tenancy rights were restored, leaving eviction subject to due legal process.
3. Borrowers were instructed to reconcile accounts with the Bank for closure of dues and the issuance of a “No Dues Certificate.”

I) CONCLUSION & COMMENTS

The judgment underscores the importance of procedural compliance under the SARFAESI Act, balancing the rights of borrowers, lenders, and third-party purchasers. It highlights the judiciary’s role in ensuring fairness when statutory lapses occur.

J) REFERENCES

a. Important Cases Referred

1. Mardia Chemicals Ltd. v. Union of India, AIR 2004 SC 2371.
2. Transcore v. Union of India, AIR 2007 SC 712.

b. Important Statutes Referred

1. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
2. Security Interest (Enforcement) Rules, 2002.