Auction Sale Invalid for Stale Valuation Under Rule 8(5) Despite Valid Service of Statutory Notices | DRAT Allahabad
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REEDLAW Legal News Network reports:Â In a significant ruling under the SARFAESI framework, the Debts Recovery Appellate Tribunal at Allahabad set aside an auction sale conducted on the basis of an outdated valuation report. The Tribunal held that compliance with statutory notice requirements could not cure a fundamental defect arising from the violation of Rule 8(5) of the Security Interest (Enforcement) Rules, 2002, which mandates reliance on a contemporaneous and valid valuation prior to sale.
The Debts Recovery Appellate Tribunal (DRAT), Allahabad, headed by Justice R.D. Khare (Chairperson), while adjudicating a regular appeal, held that an auction sale conducted under the SARFAESI Act was unsustainable where the secured creditor proceeded on the basis of a valuation report obtained several months prior to the auction. The Tribunal ruled that such stale valuation directly violated Rule 8(5) of the Security Interest (Enforcement) Rules, 2002, and that due service of statutory notices or rejection of objections regarding proceedings against a deceased person could not validate an otherwise defective sale process.
The appeal under section 18 of the SARFAESI Act had been preferred by the Appellant, challenging the dismissal of the securitisation application by the Tribunal. The Appellant had availed financial assistance from the Respondent Bank, which was secured by the creation of an equitable mortgage over a residential property through the deposit of title deeds by a guarantor. Upon default in repayment, the loan account was classified as a non-performing asset, following which the Respondent Bank had issued a demand notice under section 13(2) and thereafter taken symbolic possession under section 13(4). Sale notices were issued and published, and ultimately, the secured asset was auctioned. Earlier attempts at auction had failed due to part payment made by the Appellant to avert the sale.
The Appellant had assailed the SARFAESI proceedings before the Tribunal on the grounds that the statutory notices were not properly served and that mandatory provisions of the Security Interest (Enforcement) Rules, 2002, were violated. It was further contended in the appeal that the guarantor/mortgagor had expired prior to the issuance of the demand notice and, therefore, the entire proceedings were vitiated as having been conducted against a deceased person. The Respondent Bank resisted the appeal by contending that due procedure had been followed, that notices were duly served with proof on record, that the issue of the death of the guarantor was never raised before the Tribunal, and that the Appellant, despite being a legal heir, had never informed the Bank about such death. The auction purchaser supported the stand of the Respondent Bank and asserted a bona fide purchase after payment of full consideration.
Upon consideration of the record, it was found that the loan had admittedly been availed by the Appellant and that copies of the demand notice, possession notice and sale notice, along with proof of service, were available on record. The contention regarding non-service of notices was therefore rejected. However, while examining compliance with Rule 8(5) of the 2002 Rules, it was noticed that the valuation report relied upon by the Respondent Bank was prepared in February 2018, whereas the auction sale was conducted in November 2018, after a lapse of about ten months. In view of the settled principle that valuation ought to be fresh where there is a substantial time gap, it was held that the Respondent Bank ought to have obtained a fresh valuation prior to conducting the auction. Failure to do so amounted to a violation of the mandatory rules governing the sale of secured assets.
On the plea that proceedings were conducted against a dead person, it was observed that the deceased guarantor and co-mortgagor were not parties to the securitisation application and that no legal heirs, other than the Appellant, had approached the Tribunal with any grievance. It was further noted that the Appellant, despite being a legal heir, had neither informed the Respondent Bank about the death nor raised this issue at the appropriate stage before the Tribunal. Consequently, the contention that the SARFAESI proceedings were void on this ground was rejected.
In conclusion, the appellate authority had set aside the impugned order only to the limited extent of the auction sale dated 29.11.2018 and all subsequent actions flowing therefrom, on account of violation of Rule 8(5) of the 2002 Rules. The remaining part of the order of the Tribunal was left undisturbed, and the appeal was disposed of accordingly.
Mr. Arif Iqbal, Advocate, represented the Appellant.
Mr. S.D. Sahai, Advocate, appeared for Respondent No. 1 and Respondent No. 2/Bank.
Mr. K. Kartikeya, Advocate, appeared for the Respondent No. 3/Auction Purchaser.
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