Andhra Pradesh HC Upholds 2005 Auction Sale | DRAT Order Quashed As Bank Not Obligated To Restart Sale Process | Borrower Solely Responsible For Stalling OTS
Safiya Malik
The High Court of Andhra Pradesh Division Bench of Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati held that the Debts Recovery Appellate Tribunal (DRAT), Kolkata, erred in setting aside an auction sale conducted by Canara Bank in 2005. The Bench directed that the DRAT's order dated 12.08.2024, which had declared the auction sale to be violative of the Security Interest (Enforcement) Rules, 2002, was unsustainable in law. The High Court reinstated the validity of the auction, noting that the borrower’s conduct in proposing and defaulting on a one-time settlement (OTS) proposal had negated the requirement to issue a fresh 30-day notice under Rule 8(6).
The court stated that when the failure to conclude a previous auction is solely attributable to the borrower, a subsequent auction may proceed without reissuing the 30-day notice. Accordingly, the writ petition challenging the DRAT order was allowed, and the impugned order was quashed. The High Court concluded that the auction conducted in 2005 had complied with the applicable legal framework, and the DRAT had erroneously relied on amended rules introduced after the sale. All connected miscellaneous applications were declared closed.
The dispute stemmed from a loan transaction between Canara Bank and M/s. V.S.T. Constructions, who availed a Rs.10 lakh loan in 1999 to meet working capital requirements. Respondent No. 2, Mrs. V. Vijayamma, stood as guarantor and mortgaged her house property to secure the loan. Following defaults in repayment, the bank declared the account a Non-Performing Asset (NPA) and initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
A demand notice under Section 13(2) was issued on 25.11.2002, seeking Rs.14.59 lakhs. The borrower subsequently proposed a one-time settlement of Rs.12 lakhs, payable by 30.06.2003. However, apart from a partial deposit of Rs.25,000 on 29.06.2003, no further payment was made until 04.11.2004. The bank proceeded with a possession notice under Section 13(4) on 23.09.2003.
Challenging the demand and possession notices, the borrower filed W.P. No. 22072 of 2003. An interim order was passed on 27.10.2003, restraining the bank from creating third-party interests. The writ petition was eventually dismissed on 21.04.2004. Subsequently, the bank issued a fresh notice on 22.09.2004 calling upon the borrower to settle dues, failing which the property would be auctioned.
An auction notification was issued on 12.10.2004 and published on 13.10.2004. Due to lack of response, the bank issued another sale notice on 03.11.2004, inviting sealed tenders by 23.11.2004. During this period, the borrower proposed another OTS to pay Rs.13.88 lakhs, of which Rs.90,000 was remitted on 25.11.2004. The bank, however, required 50% upfront payment before accepting the offer.
With no further payments, a third auction notice was issued on 10.01.2005 and published on 18.01.2005, fixing the auction date as 24.01.2005. Mr. S. Satyanarayana emerged as the successful bidder with a bid of Rs.12,70,000, which was confirmed on the same day.
Respondents challenged the auction notice dated 10.01.2005 by filing W.P. No. 778 of 2005, alleging violation of natural justice and the OTS terms. The High Court dismissed the petition on 08.06.2005, holding that the borrower had defaulted on the OTS terms and the confirmed auction sale could not be annulled. A writ appeal was withdrawn with liberty to approach the Debts Recovery Tribunal (DRT).
An appeal under Section 17 of the SARFAESI Act was filed as S.A. No. 107 of 2005, which was dismissed by DRT, Visakhapatnam, on 14.12.2018. This was further challenged before the DRAT, Kolkata, which on 12.08.2024, allowed the appeal, holding that the 2005 auction violated Rule 8(6) and the first proviso to Rule 9(1) of the Security Interest (Enforcement) Rules, 2002.
The DRAT stated that even a subsequent sale required fresh 30-day and 15-day notices under Rule 8(6) and Rule 9(1), respectively. It held that the auction sale notice issued on 10.01.2005 and published on 18.01.2005, with the auction held on 24.01.2005, fell short of the statutory requirement.
Aggrieved, the petitioner, who had acquired the property from the legal heirs of the auction purchaser, challenged the DRAT order in the present writ petition.
The Division Bench observed that "even in case of subsequent sale, Authorised Officer is required to issue 30 days’ notice... under Rule 8 (6) and thereafter 15 days’ notice under Proviso attached to Rule 9 (1)." However, the High Court critically examined the reliance placed by the DRAT on these provisions and the factual context of the 2005 sale.
It recorded: "The position of law as it existed before the amendment in 2016 would be applicable as the sale in question was affected in the year, 2005." The Court clarified that the auction should be tested under the unamended Section 13(8) and Rules 8 and 9 of 2002.
Referring to Supreme Court precedent in Canara Bank v. M. Amarender Reddy, the Court stated: "There is no need to wait for the expiry of 30 days from issuance of notice of intention to sell the secured asset given to the borrower, for publication of a public notice for sale of such asset."
Citing Mathew Varghese v. M. Amritha Kumar, the Court noted: "We... hold that unless and until a clear 30 days' notice is given to the borrower, no sale or transfer can be resorted to by a secured creditor." Yet, it further stated from the same case: "In the event of any such sale properly notified... did not take place... and for which the entire blame cannot be thrown on the borrower... the procedure prescribed above will have to be followed afresh."
However, the Court concluded that the facts clearly indicated that the failure of the 2004 auction was due to the borrower's conduct: "At that critical moment, the respondents managed to prevent the action of the bank for selling the property... while going back on its promise even as per their OTS proposal."
Hence, referring to S. Karthik v. N. Subash Chand Jain, the Court held: "Since the sale scheduled... could not be held on account of the reasons solely attributable to the appellants/guarantors, there was no necessity to provide 30 days' period in the second sale notice... which was in continuation of the first sale notice."
The Bench observed: "The principles laid down by the Apex Court in the case of Mathew Varghese... would squarely apply in the present case and the bank would be under no obligation to yet again serve a 30-day notice."
Further, the Court rejected the DRAT's reliance on the amended Rule 9(1), observing: "Reference to the provisions of Rule 9(1) had been made after the said provision was amended in the year, 2016, which certainly was not applicable... as the sale had been affected... in the year 2005 itself."
The Division Bench concluded the matter with a clear and direct set of orders.
"The Writ Petition is allowed. The judgment and order impugned, dated 12.08.2024, passed by the DRAT, Kolkata, is set aside. There shall be no order as to costs."
"Consequently, connected miscellaneous applications, if any, shall stand closed."
Advocates Representing the Parties:
For the Petitioners: Mr. Ravi Kondaveeti, Senior Counsel appeared vice Mr. Hemanth Kumar Vemuri
For the Respondents: Mr. Y. N. Vivekananda and Mr. T. B. L. Murthy
Case Title: Dutta Umamaheswara Rao v. M/s. VST Constructions and others
Neutral Citation: APHC010424212024
Case Number: W.P. No. 21974 of 2024
Bench: Chief Justice Dhiraj Singh Thakur, & Justice Ravi Cheemalapati
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