Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an economic legislation which, inter alia, provides for a scheme for and regulates the enforcement of security interest on secured assets by banks and financial institutions. Chapter III of the Act read with the Security Interest (Enforcement) Rules, 2002 (Rules) provide for the overall legal framework regarding enforcement of security interest by secured creditors without the intervention of courts and tribunals1.
Upon serving the borrower with a demand notice seeking repayment of dues (in respect of which a default has been committed)2, considering its representation in respect thereof3, if any, and taking physical possession of the secured asset4, the secured creditor is vested with the right to proceed with effecting a sale of the secured asset.
In terms of Rule 8(5) of the Rules, the secured creditor can adopt the following modes for sale of the secured asset i.e. in the case of immovable property, in whole or in part, for realisation of dues in respect of which a default has been committed:
(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or
(b) by inviting tenders from the public; or
(c) by holding public auction (including e-auction); or
(d) by private treaty.
Sale by way of private treaty
While a reading of Rule 8(5) of the Rules read with surrounding provisions, appears to reserve a choice with the secured creditor, to opt for a preferred means of sale as it may deem fit in its discretion and no such mandatory prescription is provided for under the Act or the Rules as to which means of sale is to be adopted or any chronology of process required to be followed while dealing with sale of immovable secured assets, the following indicators and jurisprudence provide necessary guidance in this regard:
- The scheme of the SARFAESI envisages maximisation of value of the secured asset at the time of sale for the benefit of the borrower.Various provisions of the SARFAESI and the Rules, including sub-sections (2)5, (3)6,(3-A)7 and (8)8 of Section 13 and Rules 89 and 910 of the Rules, govern the procedure for sale of immovable secured assets.A reading of such provisions indicate that the legislative intent was to secure and protect the interests of the borrower, including its constitutional right to property and towards ensuring that proper realisation of asset value [no less than the reserve price determined by an approved valuer, save in the case as envisaged under the provisos to Rule 9(2) of the Rules, in which case obtaining the consent of the borrower becomes mandatory] is ensured during the sale process – which must be in proportion to the size and market value of the underlying secured asset. Compliance with such provisions/rules has also been held to be of mandatory nature, unless waived by the party on whom such provisions/rules place a benefit or advantage.The overall scheme of the SARFAESI was therefore to, while allowing certain flexibility to secured creditors towards undertaking easier enforcement, also ensure that sufficient safeguards are available in law and fetters placed on the powers/actions of creditors, which must not be arbitrary or unreasonable or based on unguided discretion.
- Sale by private treaty is required to be necessarily preceded by an attempt to sell by way of a public auction or public tender.A sale of secured asset by way of a private treaty is generally considered to be a non-transparent process, considering the same is basis of a private arrangement for sale between an intending purchaser and the seller i.e. the secured creditor. The same is seen as a preferable mode of sale when the land parcel is of a very large size, not economically attractive and may therefore not fetch multiple potential buyers, thereby justifying the practice of looking away from undertaking a competitive bidding process to discover the most attractive saleable price11.Rule 8(8) of the Rules requires that a private treaty sale must be as per terms settled between the secured creditor and the proposed purchaser in writing. Prior to the amendment of Rule 8(8) by the Security Interest (Enforcement) (Amendment) Rules, 2002, vide Notification No. GSR 1046(E) dated 3-11-201612, the rule envisaged such terms of sale to be entered “between the parties in writing”. Such parties included the secured creditor, the auction-purchaser, and the borrower13. The amended rule therefore works to exclude the borrower from being involved in determining the terms of sale, however, the rule does not proceed to suggest that such terms as agreed are required to be kept undisclosed or unknown to other stakeholders.Considering the implication of amended Rule 8(8) and its bearing on the rights of the borrower to remain involved in the sale process, the constitutional validity of the rule was put to test before the High Court of Bombay in Prateek Pradeep Agarwal v. Union of India14. While reading down and reading into the said rule, it was held that for effecting a sale of the secured asset by way of a private treaty, the same can only be done after conducting a tender/auction process and upon failure of such process. Therefore, enforcement action against a secured asset cannot be done by way of sale under a private treaty at the first instance. In the interest of discovery of the best and maximum possible value of the secured asset, it is advisable to adopt more objective and competitive mechanisms which include wide public participation involving bidding and outbidding, as are inherent in tender and auction processes15.Various internal circulars/memo of banks and financial institutions also prescribe that sale by public treaty should be resorted as a last measure, after when other more transparent methods of obtaining quotations/inviting tenders or public auction, etc., have failed and caused the secured asset not being sold at the best possible value16.
- The scheme of the SARFAESI seeks to ensure no collusion between secured creditors and auction-purchasers in the sale process.It cannot be ruled out that an adverse inference of fraud or collusion in the sale process may be drawn if sale of the secured asset is done at the first instance by way of a private treaty17. Such issues may be more prevalent in instances where there may be pending litigations and contesting/conflicting third-party claims concerning rights, title and interest over the secured asset, and sale of the asset under the SARFAESI is proceeded with without due regard to such claims and litigations18. In such a situation, it may also be argued that the title conferred on the purchaser through sale under SARFAESI is not an absolute or a clean title.
Best practices
While the market and industry practices being adopted appear to indicate that private treaty sales are being undertaken at the first instance without first attempting sale under a public auction or a tender process, the same becomes amenable to judicial challenge and the rendering of the sale process as void. This is especially so, considering the impugned sale process under SARFAESI may be challenged by “any person” (including the borrower) under Section 17 of the Act who may be “aggrieved by any of the measures” taken by the secured creditor, including sale of the secured asset19, and the law as explained in Prateek Pradeep20. The Punjab and Haryana High Court in Jai Shri Ram Enterprises v. SBI21, also observed that though it is not so provided in the Act or in Rule 8(5) of the Rules, that sale of the secured asset must first be necessarily undertaken by public auction or tender, sale through other modes at the first instance would not be in conjunction with other settled principles of sale of public property which require securing maximum participation of bidders (including the borrower) in order to discover the maximum price of property, which may then effectively be sold for the purpose of discharging the dues owed to the bank/financial institution to the maximum extent possible.
Even while undertaking a sale by way of a private treaty, ideally upon failure of at least one round of tender or auction process, as suggested in Prateek Pradeep22, the process/arrangement can be tailored to build in a Swiss challenge mechanism. The process can be formulated in a manner to as to, while also keeping the borrower notified vide notice of such sale [as also envisaged under Rule 9(1) of the Rules], while identifying and designating the anchor bid and the anchor bidder (being the pre-identified interested buyer with whom pre-sale private negotiations may have been undertaken by the secured creditor), the process be opened to other potential bidders (including parties that may have been identified by the borrower itself) to submit bids quoting more than the anchor bid amount. The process will run its course while recognising the right of the anchor bidder to match the highest bid amount as may have been received from other bidders. The sale of the secured asset will be confirmed in favour of the highest bidder (including the anchor bidder basis exercise of its right to match the highest offer), in compliance with other prescriptions contained in Rule 9 of the Rules.
The above process is a more immaculate approach to undertake a sale by way of a private treaty under the SARFAESI, aligned with the principles on which enforcement action under the SARFAESI has evolved and therefore more immune from third-party claims in litigation. The bottom line is that there should be ample measures in place to ensure that secured creditor has taken efforts for value maximisation of the secured asset.
† Partner, Shardul Amarchand Mangaldas & Co.
†† Associate, Shardul Amarchand Mangaldas & Co.
1. With respect to enforcement to actions by a secured creditor, S. 13 of the SARFAESI Act envisages measures to be taken without the intervention of any court or tribunal.
2. Sub-sections (2) and (3) of the SARFAESI read with R. 3 of the Rules envisage serving of a notice by the secured creditor to the debtor/guarantors informing of the dues liable to be discharged in respect of which a default has been committed and in the event of failure to repay the same, the exercise of rights under S. 13(4) of the Act read with applicable rules in respect of secured assets.
3. S. 13(3-A) of the Act read with Rule 3-A of the Rules confers a right on the borrower to submit a representation/objection to the demand notice and due consideration of such representation/objections by the secured creditor and communicating reasons for accepting or rejecting such objections.
4. With respect to immovable secured assets, S. 13(4)(a) of the Act read with R. 8(1) of the Rules requires the secured creditor to take or cause to be taken, physical possession of the secured assets.
5. SARFAESI Act, 2002, S. 13
“(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).”
6. SARFAESI Act, 2002, S. 13
“(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.”
7. SARFAESI Act, 2002, S. 13
“(3-A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate [within fifteen days] of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower:
Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.”
8. SARFAESI Act, 2002, S. 13
“(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets,—
(i) the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and
(ii) in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.”
9. Security Interest (Enforcement) Rules, 2002, R. 8
“(1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.
(2) The possession notice as referred to in sub-rule (1) shall also be published, as soon as possible but in any case not later than seven days from the date of taking possession, in two leading newspapers, one in vernacular language having sufficient circulation in that locality, by the authorised officer.
(2-A) All notices under these rules may also be served upon the borrower through electronic mode of service, in addition to the modes prescribed under sub-rules (1) and (2) of R. 8.
(3) In the event of possession of immovable property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar circumstances, take of such property.
(4) The authorised officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed off.
(5) Before effecting sale of the immovable property referred to in sub-rule (1) of R. 9, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:
(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or
(b) by inviting tenders from the public;
(c) by holding public auction including through e-auction mode; or
(d) by private treaty:
Provided that in case of sale of immovable property in the State of Jammu and Kashmir, the provisions of Jammu and Kashmir Transfer of Property Act, 1977 shall apply to the person who acquires such property in the State.
(6) The authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5):
Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in the Form given in Appendix IV-A to be published in two leading newspapers including one in vernacular language having wide circulation in the locality.
(a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor;
(b) the secured debt for recovery of which the property is to be sold;
(c) reserve price, below which the property may not be sold;
(d) time and place of public auction or the time after which sale by any other mode shall be completed;
(e) depositing earnest money as may stipulated by the secured creditor; and
(f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property.
(7) Every notice of sale shall be affixed on the conspicuous part of the immovable property and the authorised officer shall upload the detailed terms and conditions of the sale, on the web-site of the secured creditor, which shall include:
(a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor;
(b) the secured debt for recovery of which the property is to be sold;
(c) reserve price of the immovable secured assets below which the property may not be sold;
(d) time and place of public auction or the time after which sale by any other mode shall be completed;
(e) deposit of earnest money as may be stipulated by the secured creditor; and
(f) any other terms and conditions, which the authorised officer considers it necessary for a purchaser to know the nature and value of the property.
(8) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the secured creditor and the proposed purchaser in writing.”
10. Security Interest (Enforcement) Rules, 2002, R. 9
“(1) No sale of immovable property under these rules, in first instance shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of R. 8 or notice of sale has been served to the borrower:
Provided further that if sale of immovable property by any one of the methods specified by sub-rule (5) of R. 8 fails and sale is required to be conducted again, the authorised officer shall serve, affix and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale.
(2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor:
Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of R. 8:
Provided further that if the authorised officer fails to obtain a price higher than the reserve price, he may, with the consent of the borrower and the secured creditor effect the sale at such price.
(3) On every sale of immovable property, the purchaser shall immediately i.e. on the same day or not later than next working day, as the case may be, pay a deposit of twenty five per cent. of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorised officer conducting the sale and in default of such deposit, the property shall be sold again.
(4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months.
(5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.
(6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the form given in Appendix V to these rules.
(7) Where the immovable property sold is subject to any encumbrances, the authorised officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him:
Provided that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of the money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen days from the date of finalisation of the sale.
(8) On such deposit of money for discharge of the encumbrances, the authorised officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly.
(9) The authorised officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7) above.
(10) The certificate of sale issued under sub-rule (6) shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.”
11. Observed in V. Raman v. SBI, order dated 28-2-2020 (Debt Recovery Tribunal, Kolkata).
12. [Noti. No. G.S.R. 1046(E)], available at <http://www.scconline.com/DocumentLink/Ob9Z8e5Y>.
13. Unamended R. 8(8) was interpreted to mean as such in Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610 and Sri Siddheshwara Coop. Bank Ltd. v. Ikbal, (2013) 10 SCC 83.
14. 2022 SCC OnLine Bom 9185.
15. The Supreme Court in Karnataka State Industrial Investment & Development Corpn. Ltd. v. Cavalet India Ltd., (2005) 4 SCC 456, observed that in the matter of sale of public property, the dominant consideration must be to achieve best price, which can be ensured when there is maximum public participation in the process of sale and every party has an opportunity to make an offer – through modes such as public auction, tender and negotiations.
16. Internal circulars/memo of banks and notices published for sale of secured asset, by banks such as the Bank of Maharashtra and the State Bank of India, prescribe that offer of sale by way of private treaty can be resorted to upon failure of sale by tender/auction process and multiple bidders are invited to participate in the private treaty sale process as well.
17. As observed by the Supreme Court in Ram Kishun v. State of U.P., (2012) 11 SCC 511.
18. The High Court of Bombay in ITC Ltd. v. Blue Coast Hotels Ltd., (2018) 15 SCC 99, had held that it may be inferred the sale of the secured asset was basis of fraud and collusion between the secured creditor and the auction-purchaser, considering sale measures taken were in breach of applicable laws and the purchaser bid for the asset despite being aware that a dispute relating to title between the parties was pending. This finding was however set aside by the Supreme Court in appeal while observing that since the property was eventually sold on the fourth auction and all the auctions were duly advertised, an inference of fraud and collusion could not have been made.
19. Under S. 17(1) of the Act, any person aggrieved by the measures adopted by the secured creditor can challenge the same before the jurisdictional Debts Recovery Tribunal. Such “persons” may include competing/interested bidders in the sale process, tenants have interest in the subject land parcel, the auction-purchaser, etc.
20. 2022 SCC OnLine Bom 9185.
22. 2022 SCC OnLine Bom 9185.