DRT & SARFAESI: ‘SARFAESI Auctions’ & the need of fairness?

It may be true that Banks do face numerous difficulties in recovering the dues despite having ‘security’. But, there can not be any difficulty for the Banks in recovering their dues under SARFAESI Act, 2002. It is alleged that even the Debt Recovery Tribunals and Appellate Tribunal do favour Banks and keep on insisting on making substantial payment to the Bank without looking into the merits or demerits in the Appeal filed by the borrower under the Act. According to me, earlier, the High Courts used to discourage the borrowers filing Writ Petitions and Civil Revision Petitions under Article 227 either during the pendency of the Appeal before the Tribunal or before filing the Appeal. The High Courts say that the borrower can avail the alternative remedy before the Debt Recovery Tribunal. In pending cases, there used to be directions for disposal of a particular application or appeal in a prescribed time. But, there will be difficulties in prescribing the time-frame for the DRT or DRAT to dispose of a particular application or Appeal. It is true that some borrowers do approach the Tribunal in order to delay the recovery process and in some cases, there can be genuine grievance and each case should depend upon its own merits. Only with this spirit, the Courts held that the Debt Recovery Tribunals can go into all issues in the Appeal and the Tribunals can even restore the possession of the ‘Secured Asset’ back. In a proceeding like an appeal under section 17 of SARFAESI Act, 2002, if the Debt Recovery Tribunal relies on technicalities, then, the borrower need not even approach the Tribunal seeking justice and that can not be the object or spirit behind SARFAESI Act, 2002. It is complicated for the borrower to pursue his remedy under section 17 of the SARFAESI Act, 2002 and there are issues like:

1. The borrower may be talking to the Bank for settlement even when the Bank proceeds under the provisions of SARFAESI Act, 2002. At this stage, the borrower will be under dilemma as to whether to file an Appeal antagonizing the Bank or the Bank Manager or to pursue the talks of settlement.

2. The borrower will be having a right to object to the demand or the notice issued by the Bank under Section 13 (2) of the Act. But, the borrower may choose not to raise any objections considering his relations with the Bank or Bank Manager and considering settlement talks.

3. Even when it comes to settlement, in many cases, the Bank Manager may orally say something and believing that the borrower may make some deposit and then, the Bank turns around and will say that the entire outstanding is to be cleared.

4.The law prescribes a time limit for filing an appeal pursuant to the notice issued by the Bank under section 13 (4) of the Act. However, in view of the continuous talks, assurances from the Bank or the Manager concerned, the borrower may not choose to exercise his right of Appeal.

5.Though it is now settled that all actions of the Bank pursuant to Section 13 (4) of the Act are appeallable, the borrower may have to explain to the Tribunal as to why there is a delay in filing the Appeal and there can be insistence for filing ‘condonation of delay’ application. It is really illogical in the context that even the ‘Auction Sale’ can be challenged under Section 17.

6. It is often alleged that the Debt Recovery Tribunal insists for ‘substantial deposit’ while granting a temporary stay of Bank’s proceedings. In many cases, this temporary relief ends even without looking at the allegations in the Appeal seriously.

7. The Bank keeps on proceeding under SARFAESI Act, 2002 even when an Appeal is pending. If there is some development during the pendency of the Appeal, the Bank will contend that the original Appeal becomes infructuous. This is illogical. The Debt Recovery Tribunal shall consider all issues pertaining to the Bank’s action when the Appeal is pending. Even where the borrower only challenges the notice under section 13 (4) and if the property is sold pending the Appeal, then, the DRT shall consider setting aside the sale also if it is found that the Sale is illegal. There can’t be any logic in asking the borrower to file an appeal afresh and at the best, the borrower may be asked to file additional affidavit if there are further allegations about the ‘Sale Proceedings’.

Like-wise, there are several issues if the borrower wants to pursue his case against the Bank through an appeal under section 17 of the SARFAESI Act, 2002. There can not be any problem if the Debt Recovery Tribunal takes quick decisions instead of keep-on adjourning the issues. In the recent past, there are several serious allegations against the Bank as to how it conducts the ‘Auction Sale’. In one case, an Appeal is pending before the DRAT and as the Bank is proceeding with the auction, the borrower has mentioned the urgency and wanted to look into the issue on urgent basis as there will be ‘third party interest’ if the auction is proceeded to. While the proceeding is ‘on’, the Bank says that the ‘Auction’ is going-on and then says that the ‘Auction’ is over as there is one ‘bid’ and it is confirmed also. How come this be termed as a fair ‘Auction Sale’. The DRAT should have decided the issue ‘then and there’ instead of keeping the matter pending and adjourning the matter without recording anything on merits and submissions of the parties concerned.

These genuine difficulties of the borrowers and the reality as to how the provisions of SARFAESI Act, 2002 are misused, there is a merit in the argument that the High Court can interfere under Article 226 of the Constitution in ‘SARFAESI proceedings’. Now, the argument will be against the ‘judicial restraint’ in this regard. If the borrower is not genuine, then, he can be handled straight-away and even if the borrower is not genuine on one issue, that can not be a ground for the Bank to be ‘unfair’ to him while using the provisions of SARFAESI Act, 2002.

In the recent past, the Madras High Court has passed several judgments coming heavily against the Banks and their action. It is laudable and the Banks and their officers should be taken to task in appropriate cases. The extract of a recent wonderful judgment of Madras High Court in W.P.No.21987 of 2010 & M.P.No. 1 of 2010, reported in CDJ 2011 MHC 5036, emphasizing as to how the ‘Auction process’, is to be fair is as follows:

“18. The course of conduct adopted by the Bank clearly gives an indication that the market rate was deliberately reduced in the subsequent valuation report. The forced/distress value was shown only for the purpose of fixing a lesser amount as reserve price. In case there were no bidders during the second auction, the Authorised Officer in all fairness should have postponed the auction. It is not the case of the Bank that several attempts were made earlier to dispose of the property. Given the location of the property, there would be no difficulty to get higher price as indicated in the earlier valuation report.

19. It is true that the there is no provision akin to that of Order XXI Rule 72 of the Code of Civil Procedure in SARFAESI Act dis-entitling the decree holder from participating in the auction without the express permission of Court. However, in a matter like this, when there were no bidders, the Bank should not have knocked down the property for a paltry sum.

20. The petitioner is still liable to pay the balance amount to the Bank, in spite of losing the property.

21. The Bank is a responsible body. The SARFAESI Act gives wide powers to the Bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to Court. Therefore the Bank is expected to conduct the procedure in a bona fide manner. The dealings of the Bank should be fair and transparent. When the amount due from the borrower is more than Rs.4 cores, the attempt of the Bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery.

22. The Authorised Officer is none other than the officer of the Bank. The auction was conducted at the premises of the respondent Bank. Admittedly there were no other bidders. In case the Bank was having an idea to purchase the property, they should have given prior intimation to the borrower. The fact that there is no statutory prohibition against the secured creditor taking part in the auction, will not enable them to purchase the property by re-fixing the market price as well as the reserve price and to purchase the property at such reduced rate. This is absolutely not the intention of the law makers while enacting the SARFAESI Act.

23. In Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 the Supreme Court found that there were no rules or guidelines framed by the Kerala Financial Corporation for sale of properties. Therefore, the Supreme Court indicated certain guidelines in the matter of sale of properties owned by the Corporation till such formation of rules, guidelines or orders. The relevant norms are extracted below :-

"(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price.

(vi) The essential ingredients of sale are correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them."

24. In Eureka Forbes Ltd., vs. Allahabad Bank and ors. [2010(6) SCC 193], the Supreme Court while considering the concept of public accountability and performance, indicated that the same would apply to the banks as well. The Supreme Court observed :-

"82. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision-making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance."

25. There is no dispute that judicial review is concerned only with the decision making process. Courts and Tribunals are not expected to sit in appeal over the decisions taken by the authorities including banks. However, when a case of grave miscarriage of justice is made out, necessarily, the Court has to come to the rescue of the affected party. The Court of equity is expected to advance justice. When it is made out that substantial injustice has been done to a party, the Court should not shirk its responsibility. Technicality has no say in such matters.

26. The authority given to the Bank to recover the dues without recourse to legal proceedings will not give them the right to snatch away the property from the borrower. The very fact that in spite of the steep rise in land value, the market value was shown at a low rate after a period of about two years itself shows the mala fides in the matter. The subject sale effected by the Authorised Officer of the Bank cannot be treated as a valid public sale. Therefore we are constrained to set aside the sale made in favour of the Bank.

27. The Authorised Officer is directed to issue fresh auction notice and conduct the auction as per statute in a fair and transparent manner, without giving room for complaints.”

Note: the views expressed are my personal.