Secured creditor has to take higher degree of care and caution to acquire secured assets

Latest amendment i.e. sub-Sec.5A to Sec.13 of SARFAESI Act allows secured creditor to authorize any of its officer to participate. Sub-Sec 5A is extracted and reproduced hereunder:

“(5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorized by secured creditor in this behalf , to bid for the immovable property, on behalf of the secured creditor at any subsequent sale”.

This is not a new law. O.21 Rule 72 of C.P.C. provides that decree holder can take court’s permission to participate as bidder which is extracted reproduced hereunder:

“72. Decree holder not to bid for or buy property without permission.- (1) No holder of a decree in execution of which property is sold shall, without the express permission of the court, bid for or purchase the property.

(2) Where decree holder purchases, amount of decree may be taken as payment—Where a decree holder purchases with such permission, the purchase money and the amount due on the decree may, subject to the provisions of section 73, be set-off against one another, and the court executing the decree shall enter up satisfaction of the decree in whole or in part accordingly.

(3) Where a decree holder purchases, by himself or through another person, without such permission, the court may, if it thinks fit, on the application of the judgment debtor or any other person whose interests are affected by the sale, by Order set aside the sale; and the costs of such application and order, and any deficiency of price which may happen on the re-sale and all expenses attending it, shall be paid by the decree holder.

In case where a secured creditor bank / fi instituted suit and obtained a decree for its claim and there are no bidders coming forward for participating in the bid for one reason or the other, then the secured creditor/fi used to move an interlocutory application in the court seeking for an order permitting to participate as bidder. The secured creditor bank/fi is on safe side as no mala fides can be attributed to the bank such as fraud etc. as court which is different authority is according the permission. But such scope to attribute mala fides by borrower or any aggrieved party, is very wide as the secured creditor and purchaser of the property in a bid, are not different persons. They represent the same legal person.

Further, for exercising this right under Sec.13(5A), the secured creditor has to take higher degree of caution in complying with all the Rules and Sub-Rules without any deviation or default or waiver which will not be approved by DRT while scrutinizing the action under Sec.17 of SARFAESI Act. Following are some of the compliances

a). to ensure that, the statutory notices are served to all the borrowers as per the prescription. Apart from service of notices, the secured creditor has to affix and publish of notices wherever prescribed by rules.

c). valuation of secured assets by approved valuer

d). to make all out efforts to gather bidders

a). To ensure that, the statutory notices are served to all the borrowers: Many times the demand notice u/s 13(2) is not served to borrower(s) as contemplated/prescribed in Rule 3 of Security Interest (Enforcement) Rules 2002. If demand notice is not served as contemplated/prescribed, or not published or affixed as contemplated in the Rules, then, the entire action stands vitiated (Sublato fundamento Opus cadit = Meaning thereby that, if foundation is removed, super structure falls). Any action in deviation of the Rules prescribed (i.e. Security Interest (Enforcement) Rules 2002) is not permissible in law. This cardinal principle (“expressio unius est exclusio alterius” )  is followed by Supreme Court (Indian Banks' Association, Bombay & Ors.Vs. M/s. Devkala Consultancy Service & Ors. (2004) 267 ITR 179 (SC) = [2004] 120 Comp). The High Courts also rely and strictly follow this maxim. The bank has to maintain evidence showing that bidders have not gathered in spite of their several attempts (paper publications) by inviting tenders or by holding bids.

c) Sale by inviting tenders or by holding bids: There is difference between ‘sale by inviting tenders’ and ‘sale by holding bids’. Sale by bidding may include tenders but sale by inviting tenders may not include bidding. Once tenders are opened the successful purchaser who knocked down the sale will be identified and the successful purchaser has to make payment of 25% of the offer price. In case the sale is by ‘tenders cum auction’ the sale process is incomplete if the purchaser is concluded on opening without holding bidding among them. In case of sale by ‘tenders cum auction’ the secured creditor has to conduct auction among the tenderers as practiced in Company Courts. After opening the Tenders, the Tenderers present will be given an opportunity, to have inter-se bidding among them to enhance the offer price. The Tenderers not present at the stipulated time of auction and not participating in the auction, will not be given an opportunity to enhance his offer price. For the sake of quick and convenient auction, the bid amount shall be the multiples of Rs.10000/-(Rupees Ten Thousand only) or such amounts as decided by the Authorized Officer. The EMD shall be liable for forfeiture without prior notice, if the successful bidder/ tenderer fails to adhere to the terms of the sale, time and commit any default in any manner. The successful bidder should pay 25% of the bid amount (less EMD) immediately on sale being knocked down in his/ her favour and the balance money within15 days, failing which the entire deposit made by him shall be forfeited without any notice and the property concerned will be re-sold. Therefore it is necessary to mention clearly whether the sale would be by inviting tenders or by holding bidding or by tenders cum auction.

d) Sale notice published under proviso to sub-Rule 6 of Rule 8 of S.I.(E) Rules : Sale notice published under proviso to sub-Rule 6 of Rule8 of S.I.(E) Rules should cover the following particulars:

(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;

(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.

The above particulars are not properly mentioned in the sale notice published.

e) Affixture of sale notice to secured asset(s): Affixture of sale notice to secured asset(s)is ignored and this is mandatory Rule. It serves 100 times the purpose than the paper publication.

f). According to sub-Rule (7) of Rule 8, every notice of sale shall be affixed on a conspicuous part of the immovable property. The part payments made by the borrower during the action, have to be properly appropriated and reflected the exact amount of debt due to the bank in the notice of sale to be published. This is because the right of borrower to redeem the mortgage is open until the mortgaged property (secured asset) is transferred to purchaser by registered certificate of sale.

g). Acquisition of secured assets and sale disposal of the same The bank can acquire secured assets by allowing participation of its officer in tender/bid under Sub-Sec 13(5A) of SARFAESI Act if there are no bidders coming forward in spite of repeated publication of sale notice in newspapers. According to Sec.(5B), where the secured creditor, referred to in sub-section (5A), is declared to be the purchaser of the immovable property at any subsequent sale, the amount of the purchase price shall be adjusted towards the amount of the claim of the secured creditor for which the auction of security asset is taken by the secured creditor, under sub-section (4) of section 13.

According to (5C), the provisions of section 9 of the Banking Regulation (B.R.) Act, 1949 shall, as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5A). This provision clarifies that Sec.9 overrides Sec 6 of B.R.Act 1949. Sec 9 of B.R.Act 1949 is extracted and reproduced herein below:

9. Disposal of non-banking assets

Notwithstanding anything contained in section 6, no banking company shall hold any immovable property howsoever acquired, except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever is later or any extension of such period as in this section provided, and such property shall be disposed of within such period or extended period, as the case may be:

PROVIDED that the banking company may, within the period of seven years as aforesaid, deal or trade in any such property for the purpose of facilitating the disposal thereof”

PROVIDED FURTHER that the Reserve Bank may in any particular case extend the aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interests of the depositors of the banking company”.

The bank thus can hold the secured assets acquired under Sec.5A and sell it at its convenience within seven years. If it does not find a buyer during seven years it can seek extension of time from RBI and then sell it within that extended period.

h). Sale deed vis-à-vis Sale Certificate: The bank selling the asset has to execute ‘sale deed’ in favour of the purchaser. Every sale deed contains an ‘indemnity’ clause and the bank is answerable to the purchaser for any defect in the title to the mortgage property. Whereas while selling the secured asset under SARFAESI Act the bank sells the property ‘as it is and what it is and where it is’ condition and issues only registered sale certificate to the purchaser which does not contain any indemnity clause and hence saved from adverse claims.

Therefore the banks have to take higher degree of care and caution in acquiring and selling the secured assets under this new Sub-Sec.5A of SARFAESI Act.

This Article is my personal view and is open to comments or sharing views others.