SARFAESI resort auction set aside for defying tribunal restraint and issuing sale certificate to a non-bidder nominee

Sterling Holiday Resorts Limited (“the Borrower”) mortgaged its Ooty resort to IFCI and defaulted on the loan.

IFCI initiated enforcement under the SARFAESI Act and issued an auction notice on 25 March 2010, fixing the reserve price at ₹20 crore.

On 7 April 2010, the DRAT restrained IFCI from taking further steps under the Act, subject to the Borrower depositing ₹1 crore; the Borrower deposited that sum the next day.

After the High Court set aside the DRAT’s order on 6 September 2011, IFCI opened the bids on 12 September 2011 and declared an individual bidder successful.

The sale consideration was paid by M/s P.M. Associates, a partnership firm formed on that same date, and the sale certificate was issued to the firm.

The Borrower later paid IFCI’s dues in full, after which IFCI cancelled the certificate and refunded the consideration with interest.

The Madras High Court set aside the cancellation and upheld the sale; both the Borrower and the Purchaser appealed.

1. Whether the auction initiated by the notice dated 25 March 2010 and culminating in the sale certificate dated 16 September 2011 complied with the SARFAESI Act, the Security Interest (Enforcement) Rules, 2002, and the auction terms.

2. Whether, in light of the alleged defects in the auction, the Purchaser acquired an enforceable right to the resort.

Section 13(8) of the SARFAESI Act, as it stood before its substitution in 2016, prohibited sale or transfer of the secured asset if the dues, costs, charges and expenses were tendered before the date fixed for sale or transfer.

Rules 8(5)–(8) and 9(1)–(6) of the Security Interest (Enforcement) Rules, 2002 required, among other things, valuation and fixation of a reserve price, prescribed notice and publication, expiry of the applicable thirty-day period before sale, confirmation in favour of the highest bidder, timely payment, and issuance of the sale certificate to that purchaser.

The Court held that these statutory safeguards are mandatory and that a statutory power must be exercised in the prescribed manner; a sale in breach of them cannot be sustained.

It also applied the principle that an act done in violation of a subsisting court or tribunal order is bereft of legal effect, and distinguished the finality generally accorded to auction sales by limiting that protection to sales conducted in accordance with law.

The Court found multiple, independent defects in the sale process.

IFCI received a bid and earnest money while the DRAT’s restraint was in force; the subsequent High Court judgment could not retrospectively validate that step.

The Court also excluded the period of restraint when calculating the thirty-day period under Rule 9(1), leaving seventeen days after the restraint ended; the bids were opened and the sale concluded before that period expired.

The Borrower was not notified that the bids would be opened after the lengthy interruption.

Further, the sale certificate was issued to a firm that had not bid and was formed only on the date the bids were opened, contrary to the Rules and auction terms identifying the successful bidder as the purchaser.

IFCI also failed to produce the original sale records or evidence of the inter se bidding required by the notice.

Taken cumulatively, these defects invalidated the auction, so the Purchaser acquired no enforceable right under it.

The Court therefore did not decide the separate questions concerning the Authorised Officer’s power to cancel a certificate, registration of the certificate, or the precise point at which redemption was extinguished.

The Borrower’s appeals were allowed and the Purchaser’s appeals dismissed.

The Court declined to proceed with the contempt petitions; the Purchaser’s SLP concerning the scheme of amalgamation was dismissed as no longer requiring consideration.

There was no order as to costs.