Auction Sale Set Aside by DRT Due to Default by the Bank: Supreme Court Enhances Rate of Interest to be Paid by the Bank Along with Refund Amount to the Successful Auction Purchaser | Tenants/Appellants being Successful Bidders Reverted to the Status of Tenants and Protected from Being Dispossessed by the Bank

Relevant Facts:

In the recent case of Govind Kumar Sharma & Anr. versus Bank of Baroda & Ors., the undisputed facts were that the Appellants were tenants in the mortgaged premises which had been put up for auction by the Respondent Bank under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, (“SARFAESI Act”). Appellants’ possession and status as tenants was converted into that of owners after the sale was confirmed and the sale certificate was issued in their favour by the Bank. The Respondent Borrowers admitted that they were in default and that the Bank had a right to recover its dues in accordance with law. After the auction, the Respondent Borrowers deposited the entire outstanding amount independent of the auction money which was additionally lying with the Bank. The Bank admitted that there was non-compliance of the statutory provisions in conducting the auction sale and had conceded before the DRT that the auction sale in question may be set aside and the Bank be granted liberty to proceed afresh under the provisions of SARFAESI Act. The Bank also admitted that the auction money of Rs.12.40 Lakh was lying in a separate fixed deposit and this amount was in addition to the outstanding amount deposited by the Respondent Borrowers after the auction sale. The DRT, after setting aside the auction sale, further directed the Bank to refund the auction money with interest as applicable to fixed deposits only after receiving possession of the property from the Appellant/Auction Purchasers within 15 days thereof. The appeal filed by the Appellant/Auction Purchasers before the DRAT and the Writ Petition filed before the High Court were both dismissed, giving rise to the Appeal before the Hon’ble Supreme Court.

Findings of the Supreme Court in its judgement dated April 18, 2024:

In view of the above facts and circumstances, the Hon’ble Supreme Court held and ordered the following:

• Since that mandatory notice of 30 days as per the Security Interest (Enforcement) Rules, 2002, was not given by the Bank to the Borrower before holding the auction/sale, the setting aside of the auction/sale by the DRT and affirmed by the DRAT and the High Court was approved/upheld by the Supreme Court.
• Once the sale is set aside, the status of possession of the Appellant would be altered from that of an owner to that of the tenants and the Bank would not have any right to claim actual physical possession from the Appellants nor the Appellants would be under any obligation to handover physical possession to the Bank. Therefore, the direction issued by the DRT that the Bank will first take possession and thereafter refund the auction money with interest applicable to fixed deposits, was set aside. It was kept open for the Borrower as owner of the property to evict the Appellants in accordance with law.
• Since the entire controversy had arisen because of the Bank not following the prescribed mandatory procedure for conducting the auction, the Bank was ordered to return the purchase amount to the Appellants and the interest rate was enhanced to 12% per annum compound interest to be calculated from the date of deposit till the date it is actually paid.