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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
Judges
  • HON'BLE R. S. KULHARI
Acts
  • Security Interest Act, 2002 (for Short SARFAESI Act)
  • provision of Rule 8(6) of the SARFAESI Rules
  • Rule 8 (6) and 9 (1) of the SARFAESI Rules,
  • section 13 (2) of the SARFAESI Act, 2002
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
Judges
  • HON'BLE R. S. KULHARI
Acts
  • Security Interest Act, 2002 (for Short SARFAESI Act)
  • provision of Rule 8(6) of the SARFAESI Rules
  • Rule 8 (6) and 9 (1) of the SARFAESI Rules,
  • section 13 (2) of the SARFAESI Act, 2002
See more information ...
Smart Summary

Concise Structured Summary of the Opinion (R. S. Kulhari, Chairperson — 28.01.2020)

Factual and Procedural Background

The appeal arises under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) against the order dated 27.05.2019 of the Presiding Officer, Debts Recovery Tribunal (DRT), Patna, which dismissed the Securitisation Application (SA) filed by the appellants.

The respondent Bank had granted a Cash Credit facility to the appellant firm (through its proprietor), secured by mortgage of immovable property belonging to the guarantors/owners. The borrowers defaulted, and the Bank issued a Demand Notice dated 25.07.2017 under Section 13(2) of the SARFAESI Act demanding Rs. 71,76,962/-. Symbolic possession of the secured property was taken on 06.10.2017 and physical possession on 26.12.2017 pursuant to an order of the District Magistrate.

The borrowers previously challenged the Bank's proceedings by filing SA No. 58/2018 which was dismissed on 01.06.2018; an appeal against that dismissal was also dismissed by this Tribunal on 29.08.2018 (with liberty to challenge a fresh auction dated 25.07.2018). The fresh auction of 25.07.2018 resulted in sale of the property to respondent No.4. The borrowers thereafter filed the present SA before the DRT challenging the auction dated 25.07.2018 on grounds that: (a) the sale notice was not served, (b) the property was not properly valued, and (c) the sale price was not deposited in time. During proceedings the appellants offered to liquidate dues and later deposited a Fixed Deposit Receipt (FDR) of Rs. 82,32,500/- before the Tribunal. The DRT dismissed the SA, leading to the present appeal.

Legal Issues Presented

  1. Whether the sale notice for auction of secured property was properly served in compliance with Rule 8(6) (and Rule 9(1)) of the SARFAESI Rules, and if failure to serve notice vitiates the auction.
  2. Whether the sale and auction dated 25.07.2018 should be set aside on account of defective service of sale notices despite publication and affixation.
  3. Whether the appellants, having deposited funds (FDR) and offered to liquidate dues, are entitled to redeem the property upon payment of outstanding amounts and costs.
  4. What protection or compensation (if any) should be afforded to the auction purchaser who deposited the sale price in time but whose purchase was affected by the setting aside of the sale.

Arguments of the Parties

Appellants' Arguments

  • The Bank failed to serve the mandatory 30-day sale notice under Rule 8(6) of the SARFAESI Rules to the appellants and the guarantors/owners; tracking reports show the postal items were returned due to "insufficient address" and were not redelivered.
  • Because no fresh notices were sent after returns, the appellants had no opportunity to redeem the property by depositing the required amount prior to sale, and hence the sale is liable to be set aside.
  • The appellants remained willing to liquidate outstanding dues; they had offered drafts before the DRT and deposited an FDR of Rs. 82,32,500/- with this Tribunal which is sufficient to liquidate the dues determined by the DRT in the O.A., together with interest and costs.

Respondent Bank's Arguments

  • The Bank's position was that sale notices were sent to known addresses of the appellants and guarantors and were delivered; the appellants/guarantors had knowledge of the sale (including because an earlier auction had been attempted).
  • Had the appellants been truly interested in repayment, they would have deposited the amount before issuance of sale notices; they did not do so, and the auction purchaser deposited the sale price in time, thereby extinguishing the appellants' right of redemption.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal first observed that proceedings up to the stage of taking possession had attained finality because the appellants had unsuccessfully challenged those steps earlier; therefore, the current controversy was limited to the legality of the sale/auction procedure, particularly service of sale notices.

The court examined the Bank's procedural compliance: while the Bank had obtained a fresh valuation report dated 10.06.2018 and the sale notice had been affixed on the premises and published in two newspapers, scrutiny of the postal tracking reports undermined the Bank's claim of effective service.

The analysis of tracking records showed that notices addressed to the three owners (Smt. Vidhyawati Devi, Shri Sanjay Kumar Rai and Shri Ajay Kumar Rai) were dispatched but marked "insufficient address" at the destination Arrah H.O., returned to Patna GPO and ultimately returned undelivered to the Bank on 05.07.2018. The court concluded the Bank misconstrued the postal "item delivered" status: delivery to Patna GPO did not equal delivery to the addressees at Arrah.

Similarly, the sale notice sent to the appellant firm to Lohianagar, Patna, was also not delivered to the addressee and was returned to Patna GPO. The DRT was faulted for having relied on the Bank's characterization of the tracking entries as "delivered" without appreciating that the entries actually evidenced return due to insufficient address.

The Tribunal relied on the mandatory nature of Rule 8(6) (and Rule 9(1)) of the SARFAESI Rules, which require service of a 30-day sale notice to borrowers and guarantors so as to afford them an opportunity to redeem the property. Because the Bank failed to effect proper service and did not take further steps to serve the notices after returns, it failed to comply with Rule 8(6). The court concluded that all subsequent steps taken pursuant to the defective sale notice, including the auction of the property, were not sustainable.

The court also noted: although the auction purchaser had deposited the sale price, no sale certificate had been issued nor had a sale deed been executed because of an interim stay. Further, the auction purchaser was not at fault (having deposited money in time and having taken a loan to arrange funds); accordingly, the purchaser merited compensation in the form of reasonable interest on the deposited amount.

Given the appellants' demonstrated willingness to redeem (including the FDR deposited before the Tribunal) and the legal infirmity in service of sale notices, the Tribunal exercised remedial discretion to allow the appellants an opportunity to liquidate the outstanding dues (including costs and expenses) and to redeem the property upon full payment.

Holding and Implications

APPEAL ALLOWED; IMPUGNED ORDER DATED 27.05.2019 SET ASIDE.

Direct consequences and specific directions issued by the Tribunal (as provided in the opinion):

  • The sale notice dated 14.06.2018 and the auction sale dated 25.07.2018 are set aside.
  • The respondent Bank shall return the sale price of Rs. 2,03,03,000/- to the auction purchaser within one month from the date of the order, along with interest at 12% per annum (simple) from the date of deposit until repayment.
  • The proceeds of the FDR deposited by the appellants with the Registrar of the Tribunal shall be handed over to the appellants for onward transmission to the Bank, and the Bank shall adjust that amount towards the outstanding in the borrowers' loan account.
  • The borrowers remain liable to pay the entire outstanding as determined by the Tribunal below, including up-to-date interest, costs, and SARFAESI expenses. After adjustment of the FDR proceeds, if any amount remains due, the Bank must inform the borrowers of the outstanding within 7 days; the borrowers must clear such outstanding within 15 days thereafter, failing which the Bank may proceed in accordance with law to recover remaining dues.
  • On payment in full of the outstanding (including costs and expenses), the Bank shall deliver possession of the property to the owners and release the property documents unless required/mortgaged for any other loan.
  • No orders were made as to costs.

The opinion does not articulate broader precedent or a general change in law beyond the application of the mandatory service requirement of Rule 8(6) and Rule 9(1) of the SARFAESI Rules in the facts of this case; the ruling effects the parties directly as set out above.

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    M S VIDYAWATI SALES CORPORATION v. CANARA BANK

    Decided on 28.01.2020 R. S. KULHARI, CHAIRPERSON This appeal has been preferred under section 18 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for Short SARFAESI Act) against the order dated 27.05.2019 passed by

    2 of 9 the P. O., Debts Recovery Tribunal, (DRT for short) Patna whereby the S. A. filed by the appellants was dismissed.

    2. Brief facts of the matter giving rise to this appeal are that the respondent Bank granted Cash Credit Facility to the appellant firm through its proprietor which was secured by the mortgage of immovable property belonging to the guarantors. The borrowers defaulted in repayment hence, the Bank issued Demand Notice dated 25.07.2017 under section 13 (2) of the SARFAESI Act, 2002 demanding a sum of Rs. 71,76,962/-. Thereafter, symbolic possession of the secured property was taken on 06.10.2017 and physical possession was obtained on 26.12.2017 pursuant to the order of the District Magistrate.

    3. The borrowers challenged the proceedings of the Bank by filing SA No. 58/2018 however, the same was dismissed vide order dated 01.06.2018 and the appeal filed against the said order was also dismissed by this Tribunal on 29.08.2018 with liberty to the appellants to challenge the fresh auction dated 25.07.2018 before the DRT whereby the property was sold to respondent No. 4. Thus, the proceedings upto the stage of the taking possession of the subject property had attained finality. In the meantime, the Bank filed an O.A. which was also decided.

    4. Thereafter, the borrowers challenged the auction dated 25.07.2018 by filing the present SA before the DRT

    3 of 9 on the grounds that the sale notice was not served; the property was not properly valued and the sale price was not deposited in time. During the proceedings, the appellants also offered to liquidate the dues by presenting some drafts before the DRT. The Tribunal below vide impugned order, observed that the Bank has followed the procedure as laid down under SARFAESI Act and accordingly, dismissed the SA. Hence, the present appeal.

    5. The learned counsel for the appellants submitted that the Bank was required to serve 30 days sale notice under Rule 8 (6) of the SARFAESI Rule but no such notice was ever served to the appellants and the guarantors- owners of the property. The tracking report submitted by the Bank demonstrates that the notices sent by the Bank were not delivered to the appellant-guarantors because of insufficient address and the same were returned to the Bank but no fresh notices were sent to the appellants therefore, there was no occasion for the appellants to deposit the amount with the Bank in order to redeem the property before the sale. Thus, the sale is liable to be set aside on this ground.

    6. The learned counsel has further contended that the appellants were always ready to repay the dues of the Bank and they have offered the amount before the DRT but their proposal was not considered. Now they have deposited FD for Rs. 82,32,500/- before this Tribunal which is sufficient to liquidate all the outstanding dues as

    4 of 9 determined by DRT in O.A. alongwith interest, costs etc. incurred in the proceedings. So this amount may be remitted to the Bank for adjustment in loan account and if there remains any outstanding after such adjustment, the appellants are ready to deposit the same within stipulated period as deem appropriate by this Tribunal.

    7. On the contrary, the learned counsel for the respondent Bank submitted that the notices were sent to the appellants and guarantors at their known addresses which were delivered to them. Otherwise also the appellants/guarantors were having knowledge of sale as the earlier auction could not be materialized. Had they been interested in repayment of loan, they would have deposited the amount before issuances of sale notices but no such step was taken by the appellants. Now, the property has been sold to the auction purchaser who has deposited complete sale price within time therefore, the appellants have lost their right of redemption of property.

    8. I have considered the rival contentions and perused the record.

    9. Admittedly, the appellants had challenged the proceedings upto possession of the property in earlier SA and remained unsuccessful therefore, the proceedings upto the stage of taking possession have attained finality and require no consideration. The controversy in the present appeal revolves only around the services of sale notices because the Bank has obtained fresh valuation

    5 of 9 report on 10.06.2018 and the borrowers have not placed on record any alternate valuation report. Further, the sale notice was properly affixed on premises and published in two leading newspapers and the auction purchaser has deposited 25% of the sale price on the date of auction and remaining 75% sale price on 08.08.2018 within 15 days. Thus, the Bank has not committed any error on these aspects.

    10. It is settled preposition of law that as per Rule 8 (6) and 9 (1) of the SARFAESI Rules, the authorized officer is required to serve a notice of 30 days for sale of secured assets to the borrowers as well as guarantors-owners of the property. This provision is mandatory in nature so as to provide an opportunity to the borrowers/guarantors to arrange the funds for redemption of their property. If the secured creditor fails to comply with this provision, the sale conducted in pursuance of such sale notice is liable to be set aside and the status quo ante may be granted by the Tribunal.

    11. In the instant case, the sale notice was issued on 14.06.2018 in the name of three owners of the property namely Smt. Vidhyawati Devi, Shri Sanjay Kumar Rai and Shri Ajay Kumar Rai fixing the date of auction on 25.07.2018. The copy of the postal receipts placed at page No. 60 of the Memo reflects that the notices were sent through Registered post on 15.06.2018. The Bank has also filed tracking report at pages No. 61 to 64 of the Memo of Appeal to substantiate their version with regard

    6 of 9 to the delivery of sale notices. However, a close scrutiny of track report demolishes the case of the Bank on the basis of these track reports itself. The consignment number RF078376412IN was sent to Smt. Vidhyawati Devi at its Arrah H.O. and said letter was dispatched from Patna. The tracking report suggests that it was dispatched to Arrah HO from Patna on 17.06.2018 and further shows that on 20.06.2018 the item delivery attempted Insufficient address at Arrah HO. Thereafter, the item was returned back through the same route and ultimately, it was delivered at Patna GPO. Thus, it is clear that the item was not delivered at Arrah to the addressee but it was returned back to the sender through Patna GPO. As such, the item was returned undelivered to the Bank on 05.07.2018 because of the insufficient address of the guarantor. The Bank has misconstrued the term item delivered with regard to the guarantor. Similarly, the consignment No.-------390IN sent to Shri Sanjay Kumar Rai was also returned back on 05.07.2018 and the notice sent to Shri Ajay Kumar Rai bearing consignment No.------372IN returned at Patna on 05.07.2018 because of insufficient addresses. Needless, to say that the sale notices sent to all these three co-owners of subject property were addressed to Arrah district, Bhojpur and there is no proof on record that any other notice was sent to the borrowers/guarantors at their any other addresses.

    12. The sale notice sent to the appellant firm was also not delivered. It was sent at the address of Lohianagar,

    7 of 9 Patna by consignment No. ------386IN. The track report indicates that the bag was dispatched to the Lohianagar, Patna on 17.06.2018 but was not delivered there and it was returned back to Patna GPO through same route. As such it cannot be said that the item was delivered at Lohianagar rather it was delivered back at Patna GPO wherefrom, the item was dispatched. The learned Presiding Officer, DRT, has not considered the tracking report in right perspective and has relied upon the term item delivered which was actually delivered to the Bank.

    13. Thus, there is no room for doubt to infer that the sale notices were not served to the borrowers/guarantors and instead they were received back by the Bank and the Bank had not taken any further step for service before the publication of sale notices and auction of the property. Hence, the Bank has failed to comply with the mandatory provision of Rule 8(6) of the SARFAESI Rules and thereby, all the subsequent steps including the auction of the property are not sustainable so, liable to be set aside.

    14. It is pertinent to mention that although, the auction purchaser has deposited the sale price but neither any sale certificate has been issued nor sale deed has been executed because of the interim stay. Therefore, it cannot be said that the sale has become absolute. However, no fault can be attributed on the part of auction purchaser who had deposited the amount in time and has

    8 of 9 also taken some loan from ICICI in order to arrange the funds. Therefore, the auction purchaser may be compensated by awarding reasonable interest on the deposited amount. Further, the borrowers are interested in redemption of the property and they have deposited substantial amount before this Tribunal and also that the sale in question is bad in law. Therefore, in these circumstances, an opportunity may be given to the borrowers to liquidate the whole outstanding with costs and expenses and thereafter, they may redeem their property.

    15. In view of the aforesaid, the impugned order dated 27.05.2019 is set aside and the appeal is allowed in the following manner:-

    (i) The sale notice dated 14.06.2018 and the auction sale dated 25.07.2018 are set aside.

    (ii) The respondent Bank shall return the sale price of Rs. 2,03,03,000/- to the auction purchaser within a month from today alongwith interest @ 12% per annum simple from the date of deposit till repayment.

    (iii) The proceeds of FDR deposited by the appellants with the Registrar of this Tribunal be handed over to the appellants for onward transmission to the Bank and the Bank will adjust this amount towards the outstanding in the loan account of the borrowers.

    9 of 9

    (iv) The borrowers are liable to pay the whole outstanding as determined by the Tribunal below including upto date interest, costs and expenses of SARFAESI proceedings. So after adjustment of aforesaid amount, if there remains any due, the Bank shall convey it to the borrowers within 7 days and the borrowers shall clear all the outstanding within 15 days thereafter failing which the Bank shall be free to proceed further in accordance with the law for recovery of its remaining dues.

    (v) In case, the whole of the outstanding including costs, expenses etc. in the loan account is cleared by the borrowers, the Bank shall deliver the possession of property to the owners and release the documents of subject property if not required/mortgaged in any other loan. No orders as to costs.

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    M S VIDYAWATI SALES CORPORATION v. CANARA BANK
    (Jan 28, 2020)