Sale by Private Treaty in Indian Law

An Analysis of Sale by Private Treaty in Indian Law: Balancing Efficiency, Fairness, and Value Maximisation

Introduction

The disposition of property, whether in the course of enforcing a security interest, liquidating a company's assets, or through a private transaction, can be effected through various methods. While public auction is widely regarded as the most transparent and competitive method, the 'sale by private treaty'—a negotiated sale between the seller and a specific buyer outside a public bidding process—presents a distinct alternative. This article provides a comprehensive legal analysis of the concept of sale by private treaty within the Indian legal framework. It examines the statutory recognition of this method, the stringent procedural safeguards imposed by the judiciary, and the inherent tension between the flexibility of private negotiation and the paramount objectives of transparency, fairness, and the maximisation of asset value. The analysis draws upon key statutory provisions, particularly under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the Companies Act, 1956, and the Transfer of Property Act, 1882, as interpreted through a series of landmark judicial pronouncements.

The Legal Framework for Private Treaties

The legitimacy and operational mechanics of a sale by private treaty are governed by the specific legal context in which the sale occurs. The requirements under the SARFAESI regime differ from those in a corporate liquidation, yet both are underpinned by fundamental principles of property law and natural justice.

Under the SARFAESI Act, 2002

The SARFAESI Act, 2002, and the Security Interest (Enforcement) Rules, 2002 ("the Rules") provide a detailed mechanism for the enforcement of security interests by secured creditors. Rule 8(5) of the Rules explicitly permits the sale of an immovable secured asset by private treaty as one of four authorised methods, alongside obtaining quotations, inviting tenders, and holding a public auction. However, this permission is not absolute and is subject to a critical and mandatory procedural safeguard.

The proviso to Rule 8(8) of the Rules stipulates that a "sale by any method other than public auction or public tender, shall be on such terms as may be settled between the parties in writing." The interpretation of the phrase "between the parties" has been the subject of definitive judicial scrutiny. The Madras High Court in J. Rajiv Subramanian v. Mrs. Nirmala Jayabalan (2011) and subsequently the Supreme Court in the appeal, J. Rajiv Subramaniyan And Another v. Pandiyas And Others (2014), clarified this position unequivocally. The courts held that the term "parties" necessarily includes the borrower (mortgagor). Therefore, a valid sale by private treaty under the SARFAESI Act requires a written agreement between the secured creditor, the purchaser, and the borrower, detailing the terms of the sale. In J. Rajiv Subramaniyan (SC, 2014), the Court noted, "It is not disputed by any of the parties that there is no agreement between Respondents 1 and 2 [borrowers] and Respondent 3 Bank, in writing, to effect the sale by private treaty," and on this basis, found the sale to be vitiated.

This requirement of the borrower's written consent is crucial as it protects the borrower's valuable right of redemption under Section 13(8) of the SARFAESI Act. As established in Mathew Varghese v. M. Amritha Kumar (2014), this right subsists until the moment of sale. A private treaty conducted without the borrower's knowledge or consent would effectively extinguish this right arbitrarily. While the doctrine of waiver has been considered, the Supreme Court in Vasu P. Shetty v. Hotel Vandana Palace (2014) held that the waiver of such mandatory procedural safeguards cannot be lightly inferred from the borrower's conduct and must be clear and unequivocal. The case of Icici Bank Ltd. v. P. Veerendar Chordia (2010) illustrates a compliant process, where a Memorandum of Understanding for a private treaty was signed by the bank, the purchaser, and the borrower.

This strict requirement is further justified by the judiciary's consistent preference for transparent sale methods. The Supreme Court in Kerala Financial Corporation v. Vincent Paul (2011) observed that "inviting tenders from the public or holding public auction is the best method for disposal of the properties" as the dominant consideration is to secure the best price, which is best achieved through maximum public participation. A private treaty, by its nature, lacks this public element, making the borrower's consent a vital check against potential undervaluation.

In Corporate Liquidation and Public Asset Disposal

When a company is in liquidation, the Official Liquidator, acting under the supervision of the Company Court, is tasked with selling the company's assets. The primary duty in this context is to act as a trustee for all stakeholders, including creditors and contributories, and to realise the maximum possible value from the assets. While private treaties are not prohibited, they are subject to intense judicial scrutiny to ensure this objective is met.

The Supreme Court's decision in Mahesh Chandra v. Regional Manager, U.P Financial Corporation (1992) established that public bodies disposing of assets must act with fairness, reasonableness, and in the public interest. The Court emphasized that their actions must not be arbitrary and should be geared towards fetching the best price. This principle directly informs the choice of sale method.

A pivotal case is Divya Manufacturing Company P. Ltd. v. Union Bank of India (2000), where the court set aside a confirmed sale to a party because substantially higher offers were subsequently received. The court reasoned that its duty to protect the interests of creditors and the public by securing a fair market value for the assets overrode the finality of the initial agreement. This stands in contrast to the principle of finality for confirmed *auction* sales, as upheld in Valji Khimji And Company v. Official Liquidator (2008), suggesting that courts afford greater sanctity to transparent, competitive processes than to privately negotiated sales. A private treaty in a liquidation scenario is therefore perpetually vulnerable to being unsettled by a better offer, until the sale is fully consummated and beyond judicial recall.

However, courts have also recognized the utility of private treaties when conducted properly. In Sadhuram Bansal v. Pulin Behari Sarkar (1984), the High Court explicitly ordered that a sale could be conducted by private treaty, provided the Official Receiver obtained the approval of the parties, demonstrating that it is a valid tool when there is consensus and judicial oversight.

General Principles of Property Law and Private Treaties

At its core, a sale by private treaty is a contract for sale governed by the Indian Contract Act, 1872, and the Transfer of Property Act, 1882. Several fundamental principles of property law are pertinent to such transactions.

  • Execution of Conveyance: As clarified by the Supreme Court in Suraj Lamp And Industries Private Limited v. State Of Haryana (2011), an agreement to sell, such as one reached via private treaty, does not itself transfer title or interest in an immovable property. Ownership passes only upon the execution and registration of a deed of conveyance (sale deed).
  • Doctrine of Lis Pendens: A private treaty sale is subject to the doctrine of lis pendens enshrined in Section 52 of the Transfer of Property Act. As held in Muthulakshmi v. A.R Sahasranam (1973), a property that is the subject matter of a pending suit cannot be transferred by private treaty so as to affect the rights of any other party to the suit under the decree that may be passed.
  • Priority of Rights: The principle of nemo dat quod non habet (no one can give what they do not have) and Section 48 of the Transfer of Property Act apply. A purchaser in a private treaty acquires a title that is subject to any rights previously created over the property (Suhail Ahmad And Another v. Deputy Director Of Consolidation, 2024).

Judicial Scrutiny and the Balancing Act

The jurisprudence on sales by private treaty reveals a consistent judicial effort to balance competing interests: the creditor's need for an efficient recovery mechanism against the debtor's rights and the overarching public interest in fair value realisation. The law permits private treaties as a legitimate method of sale, but courts have erected high procedural walls to prevent their misuse. The challenge raised in PRATEEK PARDEEP AGARWAL v. UNION OF INDIA (2022) against an amended rule allowing private treaties captures the essence of this conflict, arguing that such a method confers arbitrary power on the creditor and excludes the borrower, who has a significant stake.

The judicial response has been to insist on two primary safeguards: consent and value. Under the SARFAESI framework, the safeguard is the mandatory written consent of the borrower, which acts as a proxy for fairness. In the liquidation context, the safeguard is the court's own unyielding scrutiny of the sale price, where the finality of a negotiated deal must yield to the possibility of a better offer that benefits the creditors (Divya Manufacturing). The preference for public auction, as articulated in Kerala Financial Corporation, remains the guiding principle, casting the private treaty as an exception that must be rigorously justified by the circumstances, typically by the consent of all stakeholders or a demonstrable failure of public sale methods.

Conclusion

Sale by private treaty is a legally recognised but heavily circumscribed method of asset disposal in Indian law. Its utility lies in its potential for speed and flexibility, but its inherent lack of transparency invites strict judicial oversight. The validity of such a sale, particularly in statutory enforcement and liquidation proceedings, hinges on meticulous procedural compliance. Under the SARFAESI Act, the written consent of the borrower is an indispensable prerequisite, without which the sale is void. In corporate liquidations, a private sale is perpetually assessed against the benchmark of maximum value realisation, making it a less secure method than a public auction. While it remains a viable tool, the high procedural bar and the risk of legal challenges mean that a private treaty is best employed when there is a clear consensus among all parties or when a transparent public process has failed to yield a satisfactory outcome. Ultimately, the jurisprudence confirms that the efficiency of a private treaty cannot be pursued at the expense of fairness, transparency, and the fundamental rights of the parties involved.