Confirmed Sale on Auction Cannot Be Set Aside Under SARFAESI Act, 2002: SC Reconfirms

The Hon’ble Supreme Court of India, in the case of Celir LLP vs. Mrs. Sumati Prasad Bafna and Ors., [2024 SCC OnLine SC 3727], dated December 13, 2024, ruled that the borrower’s right of redemption under Section 13(8) of the SARFAESI Act, 2002, is extinguished upon the issuance of an auction notice. The case involved a dispute over a ₹100-crore Lease Rental Discounting (LRD) facility availed by Mr. Sumati Prasad Bafna (the “respondent” (borrower)) from Union Bank of India (the “bank”) and subsequent complications following the classification of the account as a Non-Performing Asset (NPA).

The respondent had secured the LRD facility by creating a simple mortgage over a parcel of land (the “secured asset”). Upon defaulting on loan repayments, the account was declared an NPA, prompting the bank to initiate proceedings under the SARFAESI Act, 2002. The secured asset was auctioned via a public sale, with Celir LLP (the “petitioner”) emerging as the highest bidder after depositing the earnest money. However, the respondent filed a redemption application before the Debt Recovery Tribunal (DRT) and simultaneously approached the Hon’ble High Court of Bombay to stay the auction process. The Hon’ble High Court of Bombay allowed the respondent to redeem the mortgage by paying ₹129 crores, overlooking the binding nature of the auction process prescribed under the SARFAESI Rules, 2002. Thereafter, the respondent subsequently transferred the secured asset to a third party (the “subsequent transferee”), despite the ongoing litigation. 

The decision of the Hon’ble High Court of Bombay was challenged before the Hon’ble Supreme Court of India through a Special Leave Petition (SLP), which ultimately:

• Set aside Bombay High Court’s order permitting redemption.
• Directed the issuance of the sale certificate to the petitioner.

Despite the above, the respondent and the subsequent transferee delayed compliance and obstructed the execution of the order, leading to the present contempt proceedings in the Hon’ble Supreme Court of India.

The Supreme Court addressed three key issues, namely:

• Procedural Irregularities
• Contempt of Court
• Lis Pendens

The Hon’ble Supreme Court of India upheld the validity of the auction, emphasizing that procedural irregularities under the SARFAESI Act do not invalidate a sale unless they cause substantial harm or involve fraud or collusion. Citing Phoenix ARC v. Vishwa Bharati Vidya Mandir, [(2022) 5 SCC 345], dated January 12, 2022, the court held that deviations from procedural rules must be significant and prejudicial to warrant setting aside an auction. The deliberate attempts by the respondent and subsequent transferee to circumvent the Supreme Court’s order were deemed an act of contempt, undermining judicial authority and the rule of law. The Supreme Court invoked its powers under the Contempt of Court Act of 1971 to enforce compliance. The assignment agreement of the secured asset executed between the respondent and the subsequent transferee dated August 28, 2023, during the pendency of the litigation was declared void, applying the doctrine of lis pendens.

In conclusion, the Hon’ble Supreme Court of India upheld the legality of the auction proceedings and confirmed the sale certificate issued to the petitioner. It directed the respondent and subsequent transferee to cancel the release deed and withdraw all pending proceedings before the DRT within one week. The assignment agreement executed on August 28, 2023, was declared void. The subsequent transferee must hand over possession and title deeds to the bank. The bank shall refund ₹129 crores paid by the respondent only upon full compliance with the Hon’ble Supreme Court of India’s directions.

This ruling reaffirms the importance of upholding the finality of confirmed auction sales under the SARFAESI Act, emphasizing that procedural irregularities alone cannot invalidate a sale unless substantial grounds such as fraud or inadequate pricing are established. It highlights the importance of respecting judicial orders in both their letter and spirit to maintain the integrity of the legal system.