SARFAESI Act, 2002 — Security Interest (Enforcement) Rules, 2002 — R.9(2), Second Proviso — Sale of secured asset — Reserve price — Authorised Officer failing to secure bid higher than reserve price — Confirmation of sale exactly at reserve price — Consent of borrower — Mandatory requirement.

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AP High Court Held that 

SARFAESI Act, 2002 — Security Interest (Enforcement) Rules, 2002 — R.9(2), Second Proviso — Sale of secured asset — Reserve price — Authorised Officer failing to secure bid higher than reserve price — Confirmation of sale exactly at reserve price — Consent of borrower — Mandatory requirement.

Where Authorised Officer in public auction fails to obtain bid higher than reserve price and sole bid received is exactly equal to reserve price, sale of secured asset cannot be confirmed without consent of borrower and secured creditor as mandated under second proviso to Rule 9(2) of Security Interest (Enforcement) Rules, 2002. Expression “at such price” occurring in second proviso refers to reserve price itself and not a price below reserve price. Confirmation of sale at reserve price without consent of borrower is contrary to statutory mandate and renders sale invalid.
(Paras 11 to 16)

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Statutory Interpretation — Proviso — Harmonious construction — SARFAESI Rules.

Rule 9(2) and both provisos appended thereto are required to be read harmoniously. First proviso prohibits confirmation of sale below reserve price, while second proviso governs situation where no price higher than reserve price is obtained. Statutory proviso being mandatory in nature must be strictly complied with.
(Paras 13 to 16)

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FACTS OF THE CASE

1. Secured creditor initiated proceedings under the SARFAESI Act against secured asset belonging to borrower consequent upon default in repayment of loan advanced to partnership firm.
   
2. Secured asset was brought to sale in public auction after fixation of reserve price at Rs.3,48,00,000/-.
   
3. In auction proceedings, only one bidder participated and offered bid exactly equal to reserve price. There was no bid higher than reserve price.
   
4. Authorised Officer confirmed sale in favour of sole bidder at reserve price without obtaining consent of borrower.
   
5. Borrower challenged validity of sale before Debts Recovery Tribunal contending that under second proviso to Rule 9(2) of the Security Interest (Enforcement) Rules, consent of borrower was mandatory where Authorised Officer failed to secure price higher than reserve price.
   
6. Debts Recovery Tribunal accepted contention and set aside sale. Appeal before Debts Recovery Appellate Tribunal was dismissed affirming said view.
   
7. Bank and auction purchaser separately approached High Court challenging legality of orders passed by DRT and DRAT.
   

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ANALYSIS OF FACTS AND LAW

The principal issue before the High Court concerned interpretation of the second proviso to Rule 9(2) of the Security Interest (Enforcement) Rules, 2002.

The Court noticed divergence of judicial opinion amongst various High Courts regarding meaning of expression “at such price” used in second proviso to Rule 9(2).

The Court analyzed Rule 9(2) and identified three distinct situations contemplated by statutory scheme:

1. where sale price obtained is higher than reserve price;
2. where sale price is below reserve price;
3. where sale price obtained is exactly equal to reserve price.
   

The Court held that second proviso specifically governs third situation, namely where Authorised Officer fails to obtain price higher than reserve price. In such circumstances, confirmation of sale at reserve price can be effected only with consent of borrower and secured creditor.

Rejecting contrary interpretation adopted by Kolkata High Court and Kerala High Court, the Court held that expression “at such price” necessarily refers to reserve price itself and not to any amount below reserve price.

The judgment emphasized that statutory rules framed under SARFAESI Act possess mandatory force and where statute prescribes that a thing shall be done in a particular manner, it must be done strictly in that manner alone.

The Court therefore concluded that confirmation of sale at reserve price without borrower’s consent was contrary to mandatory statutory requirement and consequently invalid.

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RATIO DECIDENDI

Under the second proviso to Rule 9(2) of the Security Interest (Enforcement) Rules, 2002, where the Authorised Officer conducting auction of secured asset fails to obtain a bid higher than the reserve price and the highest bid received is exactly equal to the reserve price, confirmation of sale can be effected only with consent of borrower and secured creditor, and any confirmation of sale at reserve price without such consent is invalid and contrary to the statutory mandate.
(Paras 11 to 16)