SARFAESI Act, 2002 — Security Interest (Enforcement) Rules, 2002 — Rule 9(2), Second Proviso — Public auction of secured asset — Highest bid equal to reserve price — Confirmation of sale — Consent of borrower and secured creditor — Mandatory requirement.

advocatemmmohan

AP High Court Held That 

SARFAESI Act, 2002 — Security Interest (Enforcement) Rules, 2002 — Rule 9(2), Second Proviso — Public auction of secured asset — Highest bid equal to reserve price — Confirmation of sale — Consent of borrower and secured creditor — Mandatory requirement.

When Authorised Officer conducting auction of secured asset fails to secure bid higher than reserve price and highest bid received is exactly equal to reserve price, sale cannot be confirmed without obtaining consent of borrower and secured creditor as contemplated 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. 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 — Reserve price — Interpretation of “at such price”.

Rule 9(2) and both provisos appended thereto are required to be interpreted harmoniously. First proviso prohibits confirmation of sale below reserve price, while second proviso governs situation where bid received is not higher than reserve price. Interpretation that expression “at such price” means below reserve price is contrary to statutory scheme and legislative intent.
(Paras 15 and 16)

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FACTS OF THE CASE

1. Secured creditor initiated proceedings under SARFAESI Act for recovery of loan dues by bringing mortgaged secured asset to sale in public auction.
   
2. Reserve price for secured asset was fixed at Rs.3,48,00,000/- and in auction proceedings only one bidder participated.
   
3. Sole bidder offered amount exactly equal to reserve price and no bid higher than reserve price was received in auction.
   
4. Authorised Officer confirmed sale in favour of auction purchaser at reserve price without obtaining consent of borrower.
   
5. Borrower challenged validity of sale before Debts Recovery Tribunal under Section 17 of SARFAESI Act contending that second proviso to Rule 9(2) mandated borrower’s consent where sale was confirmed at reserve price after failure to secure higher bid.
   
6. Debts Recovery Tribunal accepted said contention and set aside sale. Debts Recovery Appellate Tribunal affirmed said finding.
   
7. Bank and auction purchaser separately challenged orders of DRT and DRAT before High Court.
   

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ANALYSIS OF FACTS AND LAW

The High Court examined scope and interpretation of Rule 9(2) of the Security Interest (Enforcement) Rules, 2002 along with its two provisos.

The Court noticed cleavage of judicial opinion among various High Courts regarding interpretation of the second proviso to Rule 9(2). While Madras and Delhi High Courts held borrower’s consent mandatory for confirmation of sale at reserve price, Kolkata and Kerala High Courts had taken contrary view.

After analyzing statutory scheme, the Court identified three distinct situations contemplated under Rule 9(2):
(i) where sale price exceeds reserve price;
(ii) where sale price is below reserve price; and
(iii) where sale price 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, sale may be confirmed only with consent of borrower and secured creditor.

Rejecting contrary interpretation, the Court held that expression “at such price” necessarily means reserve price itself and not a price below reserve price. Any other interpretation would conflict with first proviso which prohibits confirmation of sale below reserve price.

The Court further emphasized that statutory rules framed under SARFAESI Act possess binding statutory force and where law prescribes a particular mode for doing an act, same must be strictly complied with.

Consequently, confirmation of sale at reserve price without borrower’s consent was held 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 fails to obtain a bid higher than the reserve price and the highest bid received is exactly equal to the reserve price, sale of the secured asset can be confirmed only with consent of borrower and secured creditor, and confirmation of sale at reserve price without such consent is contrary to the statutory mandate and invalid in law.
(Paras 11 to 16)