Bid Below Reserve Price under Indian Law: Procedural Legitimacy and Judicial Oversight

Bid Below Reserve Price under Indian Law: Procedural Legitimacy and Judicial Oversight

Introduction

The fixation of a reserve (or upset) price is a ubiquitous feature of asset-sale processes conducted by courts, liquidators, and secured creditors in India. Whether a bid that falls below that reserve can ever be accepted and, if so, under what conditions, has repeatedly occupied the attention of the Supreme Court, High Courts, and specialised tribunals. This article critically analyses the legal architecture governing bids below reserve price, drawing upon leading authorities such as Mathew Varghese[1], Navalkha and Sons[4], Divya Manufacturing[5], and recent tribunal decisions, with a primary focus on the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) and the Code of Civil Procedure, 1908 (“CPC”). The discussion highlights the delicate balance between maximising realisation, preserving borrower/owner rights, and ensuring procedural integrity.

Conceptual Framework: Reserve Price, Upset Price and Valuation

Indian courts consistently distinguish three inter-related yet distinct notions:

  • Valuation – an expert assessment of market worth; a question of fact reviewable for patent error only[7].
  • Reserve/Up-set Price – a limit on the discretion of the seller or auctioneer; bids below this threshold cannot ordinarily be accepted[18].
  • Bid – an offer that becomes binding only upon acceptance, unless modified by statutory provisions or sale conditions[14].

While the expressions “reserve” and “upset” price are often used interchangeably, jurisprudence recognises nuanced differences, especially where the decree-holder/mortgagee is permitted to bid (Order 21 Rule 72-A CPC) – a context in which a distinct “reserve price” is mandatory[21].

Statutory Regimes Governing Acceptance of Sub-Reserve Bids

1. Security Interest (Enforcement) Rules, 2002

Under Rule 8(5) an authorised officer shall obtain a valuation and “may fix a reserve price” before an auction of immovable property. Rule 9(2) stipulates:

“No sale shall be confirmed if the amount offered is less than the reserve price...”

yet introduces a second proviso allowing confirmation of a bid below reserve “with the consent of the borrower and the secured creditor”. The 2007 amendment inserting this proviso embodies legislative recognition that strict adherence to reserve price may frustrate recovery efforts where market appetite is weak[10].

2. Code of Civil Procedure, 1908

Order 21 Rule 72-A requires the executing court, when granting leave to a mortgagee-decree-holder to bid, to fix a reserve price not less than the decretal amount unless directed otherwise. Absence of such fixation constitutes a material irregularity rendering the sale vulnerable[20]. Unlike the SARFAESI Rules, the CPC does not contain an express mechanism permitting confirmation below reserve, reinforcing the mandatory character of the threshold in court sales.

3. Companies Act, 1956 and Court-Supervised Liquidations

Although the Act is silent on reserve pricing, judicial practice – exemplified by Navalkha and Sons[4] and Divya Manufacturing[5] – demands adequate publicity and a sale price commensurate with market value. Bids below reserve (or inadequately low bids even if above reserve) are liable to be rejected or the sale set aside in exercise of the company court’s supervisory jurisdiction.

Jurisprudential Trajectory

Early Doctrine: Adequacy and Publicity

In Navalkha and Sons the Supreme Court stressed that courts are “custodians of the company’s assets” and must ensure optimal realisation; inadequate publicity that depresses price mandates a re-sale[4]. Although the bid there exceeded the earlier informal offers, it was set aside because the process did not inspire confidence that best price was achieved. Any acceptance of a sub-optimal bid – reserve price aside – was therefore impermissible.

Introduction of Borrower Consent Exception (SARFAESI)

The Madras High Court in K. Raamaselvam[2] furnished an authoritative exposition of Rule 9(2): three scenarios arise – bids above, equal to, or below reserve. Only in the third can the sale proceed, and then solely upon joint consent of borrower and secured creditor. This interpretive approach was recently affirmed in Charan Kamal v. PNB[10] and Assets Reconstruction Co.[11], underscoring that borrower consent is jurisdictional; its absence vitiates confirmation.

Procedural Safeguards Strengthened

The Supreme Court’s decision in Mathew Varghese crystallised the constitutional underpinning of these safeguards. Interpreting Section 13(8) SARFAESI, the Court treated the borrower’s right of redemption as subsisting until completion of sale in compliance with Rules 8 and 9; any deviation – including truncated notice or confirmation at a depressed price – offends Article 300-A and invalidates the transfer[1].

Valuation-Reserve Nexus

Kerala Financial Corporation v. Vincent Paul[3] quashed a tender process where valuation was flawed, holding that an inaccurate valuation infects the reserve price and deters genuine bidders. Although the case did not involve acceptance below reserve, it reinforces that the reserve price must be based on a defensible valuation; otherwise, subsequent consent-based acceptance below that tainted figure may still be struck down for material irregularity.

Court Sales: Limited Latitude

In court-directed executions and company liquidations, judicial discretion to vary reserve or accept a lesser amount is narrow. Kayjay Industries[6] upheld confirmation where the bid was above upset price and due diligence was shown, yet reiterated that courts must vigilantly avoid distress sales. Conversely, in Divya Manufacturing even a confirmed sale was cancelled when significantly higher offers surfaced post-confirmation, illustrating that adequacy, not mere compliance with reserve, is the governing criterion.

Analytical Synthesis

  • Mandatory Threshold v. Flexibility: • CPC/Company Court regime – reserve price is mandatory; no statutory mechanism exists to bypass it. • SARFAESI regime – second proviso to Rule 9(2) introduces conditional flexibility: borrower consent operates as a procedural substitute for the reserve price benchmark.
  • Role of Borrower Consent: Consent is substantive, not ceremonial. Courts have invalidated sales where consent was inferred or coerced, holding that waiver of statutory right must be explicit and informed.
  • Public Interest and Maximisation: Even where statutory consent exists, courts/tribunals may scrutinise whether the bid truly serves the purpose of maximum realisation; a consented sub-reserve bid that is patently low compared to valuation may still attract judicial correction.
  • Time-Value Consideration: Accepting a lower price may be commercially prudent when holding costs, deterioration, or litigation delay erode value. The flexibility built into Rule 9(2) acknowledges this economic reality, subject to safeguards.
  • Constitutional Overlay: Article 300-A safeguards property from deprivation except by “authority of law”. Non-compliance with procedural mandates – including the reserve-price framework – renders the deprivation unconstitutional.

Policy Implications

The evolving jurisprudence reflects a calibrated policy:

  1. Promote speedy recovery and asset disposal (lex specialis principle underpinning SARFAESI and RDB Acts).
  2. Prevent fire-sales that unjustly enrich purchasers at the cost of borrowers, shareholders, or workmen.
  3. Integrate borrower participation as a check against arbitrariness when deviating from reserve price.

Regulatory bodies and financial institutions should therefore:

  • Ensure independent and contemporaneous valuation before fixing reserve.
  • Document unequivocal borrower consent where a sub-reserve bid is contemplated.
  • Maintain transparent audit trails of publicity and bidding to withstand post-sale scrutiny.

Conclusion

Acceptance of bids below reserve price is exceptional in Indian law. Under the CPC and court-supervised contexts, it is effectively proscribed, save for court-approved variations justified on compelling grounds of adequacy. Under the SARFAESI framework, it is permissible only when the borrower and secured creditor consciously elect to accept such bid, and even then, subject to the overarching duty to achieve a fair price. The judiciary’s consistent insistence on procedural fidelity, adequate valuation, and meaningful borrower participation preserves the legitimacy of asset disposals while safeguarding constitutional property rights. Stakeholders disregarding these principles risk nullification of sales, personal liability for losses, and protracted litigation. Ultimately, reserve price operates not merely as an economic benchmark but as a legal bulwark against arbitrary deprivation and undervaluation.

Footnotes

  1. Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610.
  2. K. Raamaselvam v. Indian Overseas Bank, Madras HC, 2009.
  3. Kerala Financial Corporation v. Vincent Paul, (2011) SC.
  4. Navalkha and Sons v. Sri Ramanya Das, (1969) 3 SCC 537.
  5. Divya Manufacturing Co. Ltd. v. Union Bank, Madras HC, 2000.
  6. Kayjay Industries v. Asnew Drums, (1974) 2 SCC 213.
  7. Anil Kumar Srivastava v. State of U.P, (2004) 8 SCC 671.
  8. Rani Aloka Dudhoria v. Goutam Dudhoria, (2009) 13 SCC 569.
  9. State of Punjab v. Bandeep Singh, (2016) 1 SCC 724.
  10. Charan Kamal v. Punjab National Bank, DRT Order 2025.
  11. Assets Reconstruction Company (India) Ltd. v. Union of India, Bombay HC 2024.
  12. SARFAESI Act, 2002, s. 13(8).
  13. Security Interest (Enforcement) Rules, 2002, rr. 8(5) & 9(2).
  14. Code of Civil Procedure, 1908, O. 21 r. 72-A.
  15. Companies Act, 1956, s. 529-A.
  16. Constitution of India, art. 300-A.