TMI Blog2018 (5) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... whereupon their right of redemption under the amended Section 13(8) of the SARFAESI Act stood prematurely extinguished. The writ petition is accordingly allowed holding that the sale held by the bank on 30-11-2016 stands vitiated on grounds more than one. Consequently, the sale certificate dated 13-01-2017 shall also stand cancelled - petition allowed. - Writ Petition No. 36677 of 2017 - - - Dated:- 6-4-2018 - MR. SANJAY KUMAR AND MR. P. KESHAVA RAO, JJ. For The Petitioner : C. B. Ram Mohan Reddy For The Respondent : M. Narender Reddy, M. Srikanth Reddy and P. Nagendra Reddy ORDER Sanjay Kumar, J. By way of their amended prayer in this writ petition, Venshiv Pharma Chem (P.) Limited and its Managing Director, the petitioners, assail the auction sale of their properties by the State Bank of India (hereinafter, the bank) on 30-11-2016 (wrongly shown as 30-11-2017 in the prayer) pursuant to the e-auction sale notice dated 21-10-2016 (wrongly shown as 23-09-2017 in the prayer). They seek a consequential direction to set aside the said sale. 2. At the outset, it may be noted that the petitioners herein already filed S.A.No.513 of 2016 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same issue is pending consideration before the Tribunal. He would rely on case law in support of his contention that the writ petition should be dismissed on this short ground. 5. On the contrary, Sri C.B. Ram Mohan Reddy, learned counsel for the petitioners, would argue that the writ petition is maintainable as the statutory alternative remedy proved to be ineffective and that pendency of the same would not bar his clients from invoking the extraordinary jurisdiction of this Court under Article 226 of the Constitution. He would further submit that his clients would withdraw the pending securitization application, if necessary, and that this Court may adjudicate upon the merits of this case. 6. It is no doubt true that the Supreme Court has time and again cautioned High Courts not to entertain writ petitions arising under the SARFAESI Act, given the hierarchy of statutory remedies provided under the enactment itself. However, it must be remembered that refusal by High Courts to entertain writ petitions due to availability of alternative remedies is a self-imposed restraint and discretion in this regard has to be exercised judiciously on a case-to-case basis depending upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the SARFAESI Act and invocation of the extraordinary power of the High Court under Article 226 of the Constitution to challenge the actions taken thereunder. The observations made therein were to the effect that the High Court would ordinarily not entertain a petition under Article 226 of the Constitution if an effective remedy is available to the aggrieved person and that, in all such cases, the High Court must insist that a person aggrieved must exhaust the remedies available under the relevant statute before availing the remedy under Article 226 of the Constitution. It may however be noted that after saying so, the Supreme Court, in SATYAWATI TONDON 3, (supra) also observed as under: 44. While expressing the aforesaid view, we are conscious that the powers conferred upon the High Court under Article 226 of the Constitution to issue to any person or authority, including in appropriate cases, any Government, directions, orders or writs including the five prerogative writs for the enforcement of any of the rights conferred by Part III or for any other purpose are very wide and there is no express limitation on exercise of that power but, at the same time, we cannot be obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (part) and 1215 (part), Mega Industrial Park (APIIC-IALA), Kopparthy, Y.S.R. District, Andhra Pradesh. 13. The petitioners also filed I.A.No.3189 of 2016 in the S.A. seeking stay of all further proceedings, including the auction sale to be held on 30-11-2016. By Docket Order dated 30-11-2016 passed therein, the Tribunal noted their contention that the impugned sale notice was not in accordance with the statutory scheme but opined that the issue required to be examined in the main S.A. However, the Tribunal granted interim stay of the sale scheduled to be held on 30-11-2016 subject to the petitioners depositing 30% of the reserve price of ₹ 8,03,00,000/-, fixed for the properties, in two equal instalments. The first instalment of 15% was to be paid by 4.00 PM on 30-11-2016 and the second instalment of 15% was to be paid within three weeks. The Tribunal also made it clear that failure to make the deposit of either of the instalments would enable the bank to proceed with the sale in accordance with law. In effect, the petitioners had to deposit a sum of ₹ 1,20,45,000/- by 4.00 PM on the very same day so as to have the benefit of the stay order. 14. Be it noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in a wholly undeserving case, the Tribunal grants interim relief conditionally and on the other hand, in a deserving case also, where the actions of the secured creditor are demonstrably unsustainable in law, being in violation of the statutory procedure, the Tribunal still puts the applicants/borrowers on terms, though they may be justifiably entitled to unconditional protection. 16. It must be remembered that the secured creditor is armed with the power of recovering its dues under the SARFAESI Act without intervention of the normal judicial process and such great power would invariably bring with it the responsibility of scrupulously adhering to the procedure prescribed under the enactment. If, in a particular case, the secured creditor does not do so, the proper corrective measure is for the jurisdictional Tribunal to interfere at the stage of the first hearing of the securitization application for consideration of interim relief, so as to sensitize the secured creditor of the error in its ways. However, this is not happening as the Tribunals deal with all applications routinely. 17. The failure on the part of the Tribunals to distinguish between a deserving and an un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal was neither in the interest of the petitioners nor in the interest of the bank and the auction purchaser, who would come into the picture, as the very validity of the sale notice was in question. 20. This Court therefore finds no merit in the contention of Sri M.Narender Reddy, learned senior counsel, that the writ petition should not be entertained on the ground that the petitioners have already invoked the statutory remedy under Section 17 of the SARFAESI Act. We find from the very fact that the Tribunal failed to recognize the merit in their contentions and put them on terms while granting a conditional order, incapable of compliance due to time constraints, and also the fact that the said application is still pending though it was instituted in November, 2016, despite the mandate of Section 17(5) of the SARFAESI Act, that the S.A. has not proved to be an effective alternative remedy. Further, we find merit in the contentions urged as to fatal defects in the sale notice and the procedure followed by the bank, in the context thereof and thereafter. Lastly, legal issues of far reaching impact and consequence have been raised which need to be addressed by this Court for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed on 01-11-2017. In the course of the recovery proceedings, the bank issued sale notice dated 16-06-2016, fixing the date of sale of the same secured assets now brought to sale, as 29-08-2016. The reserve price was fixed at ₹ 8.90 crore. However, the said auction failed for want of bidders. Thereafter, the bank issued notice dated 23-09-2016 under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002 (for brevity, the Rules of 2002) informing the petitioners that the sale of the secured assets would be held on 30-11-2016. This notice was served on the petitioners on 01-10-2016. The subject sale notice dated 21-10-2016 under Rule 9(1) of the Rules of 2002 was published in newspapers on 23-10-2016. Aggrieved thereby, the petitioners filed S.A.No.513 of 2016 before the Tribunal. However, though an interim order of stay was granted therein on 30-11-2016, subject to conditions, the petitioners failed to deposit the amount by 4.00 PM on that day, as directed. Pursuant to the liberty granted by the Tribunal, if the petitioners failed to deposit the said amount, the bank held the sale on 30-11-2016 and the secured assets were sold to Hetero Labs Limited, the third res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale stipulated thereunder was 30-11-2016, beyond the required 30 days gap, and all would have been well in terms of the law laid down by the Supreme Court in CANARA BANK 8, (supra) but for an intervening amendment to Section 13(8) of the SARFAESI Act, with effect from 01-09-2016, which assumes fatal significance in this context, as will be demonstrated hereinafter. 27. Secondly, it may be noted that the third respondent company, the highest bidder in the auction sale held on 30-11-2016, made an earnest money deposit of 10% of the reserve price on 24-11-2016 and was required to deposit, in all, 25% of the bid amount on the date of the sale itself, i.e., on 30-11-2016. However, it paid the balance due to make good 25% of the bid amount only on 01-12-2016. To compound matters further, the balance 75% of the bid amount, which should have been paid by the third respondent company within 15 days from the date of confirmation of the sale, was paid long thereafter on 17-01-2017. 28. Addressing the second issue first, it may be noted that in terms of Rule 9 of the Rules of 2002, as it stood prior to its amendment with effect from 04-11-2016, the sale of immovable property had to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be paid to the bank on the same day. It was paid on the next day, i.e., 01-12-2016. 31. It appears that the bank issued sale confirmation advice to the third respondent company on 01-12-2016. This advice demonstrates that the third respondent company was informed thereunder that it was the successful bidder in the auction held on 30-11-2016 for the properties at Kadapa. The bank acknowledged receipt of ₹ 2,45,00,000/-, in all, towards 25% of the bid amount and advised the third respondent company to remit the sum of ₹ 7,35,00,000/-, the balance due, within 15 days from 30-11-2016. The bank also informed the third respondent company that sale of the property was subject to the final outcome of S.A.No.513 of 2016 filed by the borrowers. The bank cautioned the third respondent company that if it failed to remit the balance within the specified period, i.e., on or before 14-12-2016, the amount remitted by it would stand forfeited. 32. The third respondent company then addressed letter dated 05-12-2016 to the bank informing it that it was ready to remit the balance of ₹ 7,35,00,000/-, subject to the readiness of the bank to register the property without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance sale consideration had to be by taking the borrower into confidence and by obtaining his consent. 36. In the present case, it is an admitted fact that the petitioners, being the borrowers, were not even consulted before extension of time by a further period of 45 days was granted by the bank to the third respondent company, on 14-12-2016. The contention of Sri M.Narender Reddy, learned senior counsel, is that the regime of the un-amended Rule 9(4) of the Rules of 2002 would not apply to the case on hand as the auction sale was held on 30-11-2016, well after the amended Rule 9(4) came into operation on 04-11-2016. 37. We, however, find this argument to be specious. 38. If the argument of Sri M. Narender Reddy, learned senior counsel, is to be accepted that the amended Rules of 2002 should be made applicable to the subject sale, the amended rules would have to be made applicable to the entire transaction, i.e., right from its initiation by issuance of the notice under Rule 8(6) of the Rules of 2002. Doing so, would entail the amendments made under G.S.R.No.1046(E) dated 03-11-2016, which came into effect from 04-11-2016, being given effect to cover a sale process which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the SARFAESI Act would apply to pre-existing loans and it could not be said to be retrospective. 42. A similar view was taken by the Supreme Court recently in M.D.FROZEN FOODS EXPORTS (P.) LTD. v. HERO FINCORP LTD AIR 2017 SC 4481 One of the issues framed for consideration by the Supreme Court in this case was whether resort could be had to Section 13 of the SARFAESI Act in respect of debts which had arisen out of a loan agreement/mortgage created prior to application of the SARFAESI Act to the said institution. A linked question thereto was whether a lender could invoke the SARFAESI Act when the notification of it being a financial institution under Section 2(1)(m) thereof was issued after the account became a non-performing asset under Section 2(1)(o) thereof. Observing that the SARFAESI Act was brought into force to solve the problem of recovery of large debts locked in non-performing assets, the Supreme Court held that the very rationale for the said Act to be brought into force was to provide an expeditious procedure where there was a security interest. Pointing out that it did not apply retrospectively from the date when it came into force, the Supreme Court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h ensued under Section 132 or a requisition was made under Section 132A of the Income-tax Act, 1961. Two co-ordinate Benches of the Supreme Court had taken different views on the character of this proviso and the matter accordingly came up for consideration before the Constitution Bench. On the issue of retrospectivity of legislation, the Constitution Bench observed that a legislation, be it a statutory Act or a statutory Rule or a statutory Notification, may physically consist of words printed on papers but conceptually, it would be a great deal more than ordinary prose. Of the various rules guiding how a legislation has to be interpreted, the Supreme Court found that one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have retrospective operation and the idea behind the rule is that a current law should govern current activities. It was further observed that the obvious basis of the principle against retrospectivity is the principle of fairness, which must be the basis of every legal rule. Thus, legislations which modify accrued rights or which impose obligations or impose new duties or attach a new disability have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of their publication in the Official Gazette. Therefore, these rules cannot be given retrospective effect going even by the explicit intendment, as set out in the Gazette Notification itself. There is no indication in G.S.R.No.1046 (E) dated 03-11-2016, even by implication, that the amendments brought about by it in the Rules of 2002 should be given effect retrospectively. This is obviously because, as stated supra, various changes were made thereby, which had the effect of denuding vested rights that stood crystallized under the un-amended rules, if given retrospective effect. 46. For instance, Rule 9(4) of the Rules of 2002 has undergone a sea change in as much as, earlier; extension of time to make the balance payment of the purchase price could be only upon the agreement in writing between the parties, viz., the borrower, the auction purchaser and the secured creditor. However, after the amendment, the Rule now reads to the effect that such agreement can be made in writing between the auction purchaser and the secured creditor, without the borrower being taken into confidence. The borrower therefore lost his earlier right. Similarly, Rule 9(5) of the un-amended Rules of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n MATHEW VARGHESE 9 (supra) and reiterated that the provisions of the Section 13(8) of the SARFAESI Act, as it then stood, were specifically for the protection of the borrowers in as much as ownership of the secured asset was a Constitutional right vesting in such borrowers, protected under Article 300A of the Constitution, and therefore, the secured creditor as a trustee of the secured asset cannot deal with the same in any manner it likes and such an asset could be disposed of only in the manner prescribed in the SARFAESI Act. The Supreme Court further observed that the creditor should ensure that the borrower was clearly put on notice as to the date and time, by which either the sale or transfer would be effected, in order to provide the required opportunity to the borrower to take all possible steps for retrieving his property. The Supreme Court noted that such a notice was also necessary to ensure that the secured asset would be sold to provide maximum benefit to the borrower. Earlier, in MATHEW VARGHESE9, the Supreme Court observed as under: 29.2 When we analyse in depth the stipulations contained in the said sub-section (8), we find that there is a valuable right recognis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auction purchaser becomes the absolute owner of the property. 52. Sri M. Narender Reddy, learned senior counsel, would argue that the un-amended Section 13(8) of the SARFAESI Act was similar in its wording to the amended version thereof, as regards the right of redemption being linked to the date fixed for sale or transfer of the secured asset. However, it may be noted that the amended version contains a new insertion to the effect that the tendering of the dues by the borrower to the secured creditor has to be 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. The language of the un-amended version did not contain such a bar and allowed the right of redemption to operate till the date fixed for sale or transfer of the secured asset. 53. Though Sri M. Narender Reddy, learned senior counsel, would point out that Clause (i) in the amended Section 13(8) would indicate that if the dues are tendered by the borrower to the secured creditor, the secured assets should not be transferred by way of lease, assignment or sale by the secured creditor and under Clause (ii), in case any step h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption under Section 13(8) of the SARFAESI Act. Therefore, a clear 30 days would have to be maintained between the date of service of such notice under Rule 8(6) of the Rules of 2002 and the expiry of the right of redemption under the amended Section 13(8) of the SARFAESI Act. 55. This brings us to the first issue of sufficient time not being given to the petitioners to exercise their right of redemption after the Rule 8(6) notice, in terms of the statutory mandate. In MATHEW VARGHESE9, the Supreme Court made it clear that the cycle under the un-amended Rules of 2002 would start afresh with issuance of a notice under Rule 8(6) of the Rules of 2002, if a sale fails for reasons not attributable to the borrower. Therefore, once the bank initiated the sale process again after the earlier sale failed for want of bidders, by issuing a notice under Rule 8(6) of the Rules of 2002 on 23-09-2016, on which date the un-amended Rules of 2002 were still in force, the entire process pursuant thereto necessarily had to be governed by the un-amended Rules of 2002 only. However, as stated supra, by the date of issuance of the notice under Rule 8(6) on 23-09-2016, the amendment to Section 13(8) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E9. 58. Further, as it is an admitted fact that the bank did not take the petitioners into confidence while extending time under Rule 9(4) of the un-amended Rules of 2002 and did not obtain their consent in writing, the very extension granted by the bank to the third respondent company to make the balance payment stands vitiated. 59. Polisetty Haranadh Muralidhar v. Authorized Officer, Indian Overseas Bank, 2016(6) ALD 409 (DB) was a decision delivered by a Division Bench of this Court in which one of us, SK,J, was a member. That was also a case where the statutory mandate was not followed in so far as payment of the sale consideration was concerned. Leaving aside the fact that the initial 25% of the sale consideration was not paid on the date of the auction, there was an extension of time granted by the bank to the auction purchaser behind the back of the borrower, as in the present case. It was accordingly held that, in the light of the law laid down in IKBAL6, the bank could not have extended time for deposit of the balance sale consideration without taking the borrower into confidence and without obtaining his consent. 60. Therefore, the statutory mandate could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly in the name of the bidder and not in any other name. That being so, it could not have acceded to the request of the third respondent company to issue the sale certificate in the name of its sister concern. 63. In this regard, it may be noticed that in Hemalatha Ranganathan v. Authorised Officer, Indian Bank, 2012 SCC online Mad 3055 the Madras High Court frowned upon the authorized officer of the bank for confirming the sale in the name of a third party after accepting 75% of the sale consideration after a period of 18 months and ultimately selling the property to yet another person. The Madras High Court found that in the sale notification under consideration, there was no provision permitting the authorized officer to issue the order of confirmation in favour of a person other than the successful bidder and observed that the purchaser would mean only a person in whose name the auction was confirmed originally and not a person who offers subsequently, as a nominee of the successful bidder. It was categorically held that the authorized officer has no authority to accept the request of the highest bidder to issue the sale certificate in favour of a third party and that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers at various levels, demonstrates that the competent authority accorded approval for change of validity of valuation reports and conditions for obtaining second valuation report as under: Particulars Existing Instructions Revised Instructions Validity of Valuation Report for fixing Reserve Price and considering compromise settlement proposals. The valuation report should be less than 6 months old based on which the Reserve Price is to be approved and compromise settlement proposals are to be considered. The valuation report should be less than 1 year old for sale of properties under Private Treaty/SARFAESI Act 2002 and Settlement of dues through compromise. Obtention of Second Valuation Two valuation reports should be obtained from Banks approved valuers in case of loans above ₹ 1.00 crore in case of compromise settlement in case of securities of ₹ 1.00 crore above for fixation of Reserve Price. The second valuation report should be obtained only if the value of property is ₹ 1.00 crore and above in case of compromise settlement fixation of Reserve Price under SARFAESI Act 2002. 66. On the strength of the above decision of the Board, Sri M.N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the SARFAESI Act, 2002 against the borrowers are initiated only when the borrower is in dire straits. The provisions of the SARFAESI Act, 2002 and the 2002 Rules have been enacted to ensure that the secured asset is not sold for a song. It is expected that all the banks and financial institutions which resort to the extreme measures under the SARFAESI Act, 2002 for sale of the secured assets to ensure that such sale of the asset provides maximum benefit to the borrower by the sale of such asset. Therefore, the secured creditors are expected to take bona fide measures to ensure that there is maximum yield from such secured assets for the borrowers. In the present case, Mr Dhruv Mehta has pointed out that sale consideration is only ₹ 10,000 over the reserve price whereas the property was worth much more. It is not necessary for us to go into this question as, in our opinion, the sale is null and void being in violation of the provision of Section 13 of the SARFAESI Act, 2002 and Rules 8 and 9 of the 2002 Rules. (emphasis is ours) 69. It is therefore not open to the bank to fall back upon a valuation of over 11 months vintage to fix the reserve price for sale of the ..... 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