The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002 allows banks and financial institutions in India for expeditious adjudication and recovery of debts, by auctioning the secured assets without court’s intervention. However, this expedited process is governed by mandatory and strict procedural safeguards to protect the right of redemption of a borrower. Recently, the Allahabad High Court in Sharp Industries v. Bank of Maharashtra & Others[1] sought to determine whether mere knowledge of an auction date on part of borrower override a bank’s failure to serve notice upon the borrower as per the requirement under Rule 8(6) of Security Interest (Enforcement) Rules, 2002.
The brief facts of the case were that the borrower availed loan from the respondent bank and defaulted in repayment of the same, therefore the bank initiated the recovery actions against the borrower. While the bank had already taken physical possession of the mortgaged property/secured asset in the year 2017, the legal conflict arose when Notice under Rule 8(6) of 2002 rules was issued on 16.08.2018. The said notice was dispatched by the bank to borrower’s old address in Faridabad, despite the fact that the borrower having already intimated change of address to the bank via e-mail dated 13.11.2017. The bank proceeded to publish auction notice and conduct the sale. A Securitisation Application (S.A.) was filed before D.R.T. (Debt Recovery Tribunal) which got dismissed, therefore, Regular Appeal was preferred by the borrower, where the DRAT (Debt Recovery Appellate Tribunal) eventually set aside the sale of secured assets, finding that the bank had failed to prove that the compliance of mandatory 30 days’ notice so as to provide opportunity to borrower/guarantor for redemption of their property and notices sent by the bank were never served to the appellant or the other guarantors.
Aggrieved by the order of the appellate tribunal, the bank preferred a writ petition in high court, which was allowed by the Ld. Single Judge. The Ld. Single Judge reversed appellate tribunal’s order and noted that the borrower himself sent an email on 05.09.2018 whereby requesting the bank not to proceed with auction, which proved that the appellant had knowledge of the date fixed for auction, thus, no prejudice was caused by the faulty service of the formal notice.
Consequently, the appellant preferred a Special Appeal against the judgement passed by the Ld. Single Judge. In the Special Appeal following issues were raised:
- Whether a Special Appeal is maintainable before a Ld. Division Bench against the judgement of a Ld. Single Judge?
- Whether the 30-day prior notice under Rule 8(6) of the Security Interest (Enforcement) Rules, 2002, is a mandatory requirement?
- Whether “mere knowledge” of the auction date could substitute for formal service of statutory notice?
On Issue no. 1
The respondents argued that a Special Appeal is barred under Chapter VIII Rule 5, Allahabad High Court Rules, 1952 as the proceedings arose out of an order passed in appeal, arising from a tribunal’s order related to matters in List II (State List) or List III (Concurrent List). Also, the appellate tribunal was constituted in exercise of powers under Entry 9 (i.e., Bankruptcy & Insolvency) of List III (i.e., Concurrent List).
The Division Bench observed that the constitution of Debt Recovery Appellate Tribunal is constituted in exercise of powers by parliament under Entry 45 (i.e., Banking) of List I (Union List).The court noted that for the bar against a special appeal to apply, the tribunal’s order must relate to a matter in the State or Concurrent List. Thus, the bar/exclusion clause curtailing entertainment of appeal arising out of orders passed by tribunals constituted under List II and List III would not apply. Thus, the Special Appeal was held to be maintainable.
On Issue no. 2
The Division Bench answered the issue positively and affirmed the decision of Appellate Tribunal, that under Rule 8(6) of 2002 Rules, a 30-day prior notice is mandatory in nature, and bank’s failure to send it to the known current address duly intimated by the borrower is utter failure and a procedural irregularity.
The Division bench also went on to examinethe 2016 amendment to Section 13(8) of the SARFAESI Act, which provides for right of redemption of assets of borrower would extinguish upon the publication of notice for public auction under Rule 9(1) of the 2002 Rules. However, Rule 8(6) of 2002 Rules, stipulates that a 30-day prior notice period is to enable borrower to redeem his property. The Supreme Court in Mathew Varghese v. M. Amritha Kumar[2], it was stated that this statutory notice period of 30 days is sacrosanct and any deviation therefrom would curtail the right of redemption available to the borrower.
On Issue no. 3
It was held that merely because the appellant had the knowledge of the date of auction, it does not mean that non-adherence with the requirement of notice under Rule 8(6) would stand obliterated. It was thus emphasized that the formal notice has a “distinct purpose”, to provide a specific, legally protected window for the borrower to exercise their right of redemption. Therefore, astatutory mandate cannot be bypassed by proving that the borrower had informal awareness. In the terms of aforesaid, an opportunity was given to the appellant to exercise its Right of Redemption by offering to pay the entire amount due to bank in terms of notice dated 16.08.2018. And, further a statutory period of 30 days, which is a time period available to a borrower for redemption of secured asset, was given to the appellant to produce a banker’s cheque for the amount aforesaid.
Author – Tanu Jaiswal
Tanu Jaiswal is a practising advocate contributing legal insights to FixLegally. She writes on contemporary legal issues, blending courtroom experience with practical, accessible analysis for readers.
