In its ruling related to the forfeiture provision of sub-rule (5) of rule 9 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (hereinafter referred to as SARFAESI Act), the Supreme Court of India emphasized the crucial role played by the Act in maintaining the liquidity of finances in the economy.
The court also ruled that the power of judicial review would be used solely to safeguard public interests and not to settle private interests or contractual disagreements unless there was clear-cut proof of arbitrariness, mala fides, bias, or irrationality.
Brief Facts:
M/s Stallion Knitwear India Private Limited failed to pay off its debts to the State Bank of India, resulting in the possession of the secured asset, which was the plant and machinery of Stallion, by the Authorized Officer. The Authorized Officer issued an e-auction notice for the sale of the secured asset, and the respondent emerged as the highest bidder but failed to make the payment for the asset, leading to the forfeiture of Rs. 30,75,000/-. The Respondent applied for an extension to pay the balance amount, which was rejected, leading to the cancellation of the e-auction sale.
Procedural History:
The contesting Respondent filed an interim application before the Debt Recovery Tribunal (hereinafter referred to as DRT) seeking a stay of the auction, but the tribunal dismissed it. The Authorized Officer issued a fresh e-auction notice availing the liberty granted by the Debts Recovery Appellate Tribunal (hereinafter referred to as DRAT). The contesting respondent was allowed to participate in the e-auction in January 2018 but could not be held due to a lack of bidders. The contesting respondent challenged the letter of the Authorized Officer in the High Court, seeking a refund of the forfeited amount of Rs. 30,75,000 during the pendency of the writ proceedings.
Meanwhile, the secured asset was auctioned again and sold for Rs. 1,23,00,000/-. The High Court directed the Bank to refund the amount of Rs. 30,75,000/- with interest @ 9% per annum within four weeks to the contesting respondent, holding that the Authorized Officer had sold the secured assets for the same value of Rs. 1,23,00,000/- to another auction purchaser. The High Court found that the Bank should not be allowed to forfeit the amount from the contesting respondent and simultaneously appropriate the sale proceeds from the highest bidder. As a result, the Authorized Officer of the State Bank of India of Tamil Nadu appealed the judgment and order of the Madras High Court.
Contentions of the Appellants (State Bank of India):
The counsel argued that the Respondent had requested an extension of 25 days to pay the balance amount of the sale price but failed to do so within the extended period. The respondent had cited the pendency of proceedings before the DRT as the reason for not making the payment, but no order of stay was subsisting before 31st October 2017. The counsel also claimed that the contesting respondent had applied for a time extension to deposit the balance before the DRT, but no order was passed. As a result, the Authorized Officer had rightfully forfeited the amount of Rs. 30,75,000/-. The counsel argued that the High Court's order was unsustainable in law and should be set aside.
Contentions of the Respondent (M/s Stallion Knitwear India Pvt. Ltd):
The counsel representing the respondent argued that the appeal was not valid as the order for refund was based on a concession made by the Bank’s counsel before the High Court. Alternatively, he claimed that the Bank had sold the property at the same price the contesting respondent intended to purchase it. Therefore, the Bank had not suffered any financial loss. The counsel contended that the Authorized Officer had forfeited the deposit amount without proper consideration of the facts and circumstances and accused the Authorized Officer of being arbitrary in not granting an extension of time. The High Court rightly intervened and ordered the refund.
Issues:
- Whether the Authorized Officer arbitrarily exercised the power of forfeiture?
- Was the High Court justified its interference with the forfeiture order based on the ground assigned in the impugned judgment and order?
- Whether the bank received any benefit or advantage by forfeiting 25% of the sale price of a public auction? If yes, whether the retention of that forfeiture was unjust?
Law Discussed by the Court:
The Supreme Court explained that the sale of immovable property is regulated by the Security Interests (Enforcement) Rules, 2002, and that sub-rules (2), (3), (4) and (5) thereof are relevant. According to sub-rule (4), the time for depositing the balance of the sale price can be extended for a period not exceeding ninety days, and no further extension is allowed beyond that. While the authorized officer of a secured creditor under sub-rule (5) of rule 9 may have some discretion in granting extensions for intermittent periods not exceeding ninety days, such discretion must be exercised reasonably and not arbitrarily. The Court may grant a judicial review of the decision-making process if the authorized officer refuses a prayer for an extension without considering all facts and circumstances. The Court referred to the forfeiture provision in sub-rule (5) of rule 9 as a penal consequence that the defaulting bidder must suffer should he fail to make payment of the entire sale price within the period allowed to him by the authorised officer of a secured creditor. The Court stated that the power conferred by sub-rule (5) of rule 9 of the Rules ought to be exercised only with due regard to the facts and circumstances of each case.
The Supreme Court stated that SARFAESI Act was enacted to ensure the liquidity of finances and the flow of money essential for a healthy and growth-oriented economy. The Court emphasised that the purpose of sub-rule (5) of rule 9 was to instil a sense of discipline in the intending purchasers while they proceed to participate in the auction sale process. The Court held that auctions conducted under the SARFAESI Act should be taken seriously, and bidders who exit the process without any real intent to complete it should not be allowed to do so. The primary aim of the SARFAESI Act is to ensure prompt and effective recovery of debts, and it is important for the courts to prioritize this objective.
Verdict of the Court:
The Supreme Court found that the Respondent had not sought an extension for the maximum period of 90 days allowed by rule 9(4) and had also moved the DRT for an extension, which was not granted. The Court held that the forfeiture had not enriched the bank, much less unjustly. The Court emphasized that the power of judicial review would not be allowed to protect private interest at the cost of public interest or to decide contractual disputes unless a clear-cut case of arbitrariness, mala fides, bias, or irrationality was made out. Since no unjust enrichment of the bank occurred due to the forfeiture, the High Court was not justified in exercising writ jurisdiction and directing a refund of 25%. Thus, the Apex Court quashed the impugned order and judgement of the High Court and allowed the appeal of the State Bank of India.
Case Title: Authorised Officer, State Bank of India v C. Natarajan & Anr.
Case No.: Civil Appeal no 2545 of 2023
Citation: 2023 Latest Caselaw 391 SC
Coram: Hon’ble Mr. Justice S Ravindra Bhat and Hon’ble Mr. Justice Dipankar Dutta
Advocates for the Appellant: Mr. Sanjay Kapur, AOR, Ms. Megha Karnwal, Mr. Surya Prakash, Mrs. Shubhra Kapur, Ms. Mahima Kapur.
Advocates for the Respondent: Mr. VK Shukla, Sr. Adv., Mr. G. Balaji
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