SARFAESI Newsletter | December 2024 - January 2025

Welcome to the SARFAESI Newsletter for December, 2024 & January 2025. This edition highlights significant recent legal developments under the SARFAESI Act and related financial statutes. We explore key rulings, including DRAT decision on conduction of auction and reserve price, condonation of delay, Hon'ble Supreme Court decision on requirement of special resolution for conversion of debt into shares and on registration on sale certificates issued by bank. These insights provide valuable guidance for navigating the evolving landscape of financial dispute resolution and recovery mechanisms.

1. Auction Sale

Praveen Prakash Mahtani vs Punjab National Bank and Ors.

In a recent DRAT decision, a question arose as to whether auction sale of the secured asset 'at the reserve price', without obtaining the consent of the borrower violates the proviso to Rule 9 (2) of the Security Interest (Enforcement) Rules, 2002?

The DRAT analysed Rule 9(2) and held that 'reserve price' is fixed to notify the public at large and the participating bidders that the subject property will not be sold for a price less than the reserve price. The appellant was the sole bidder and he started his bid at the reserve price. There were no other bidders to enhance that bid of the appellant and hence, he remained the highest bidder without challenge. The auction notice does not state that the sale has to start at a price higher than the reserve price. If that is so, the reserve price would be that higher price at which the bid has to start. In the subsequent auction notice of the subject property, it has been clarified that the bid has to start at an increment higher price than the reserve price. But there is no such requirement in the auction notice. Hence, there is no gainsaying that the authorised officer has the authority to reject the bid of the appellant without assigning any reasons. The reason assigned for not confirming the sale is that there is an internal circular of the bank which insists on selling the properties at a price higher than the reserve price. But that was not incorporated in the auction notice.
The Tribunal further held that while understanding the concept behind the fixation of a reserve price, it has to be observed that the bid should begin at the reserve price. The appellant was not given an opportunity by the authorised officer to raise his bid. Had the authorised officer insisted on not conforming to the sale at the reserve price, the appellant could have offered a higher price. Depriving the appellant of such an opportunity is against the principles of natural justice. No bid would be successful and bidders would not dare to participate if auctions are held in such a manner.

Accordingly, the rejection of the bid was held to be improper.

2. Requirement of Special Resolution for conversion of portion of debt into shares

Jyoti Ltd. Vs. BSE Ltd. and Anr

Hon'ble Supreme Court has examined a question as to whether special resolution of the shareholders under Section 62(1)(c) of the Companies Act, 2013 is necessary for conversion of any portion of debt into shares by ARC under Section 9 of SARFAESI, 2002?

The Hon'ble Supreme Court held that even the application for listing of the additional shares was made by the Company to the BSE meaning thereby that the proposal for increasing the subscribed capital of the company by converting part of the debt into equity shares, as aforesaid, was initiated by the appellant company itself and not actually by RARE. Therefore, the proposal was that of the company only. Accordingly, as contemplated by Section 62(1)(c) of the Companies Act, 2013, the approval of the shareholders would be mandatory before the shares are accepted for listing on the BSE.

3. Whether appeal beyond 30 days is condonable

Nipco Manufacturing & Trading Company Ltd. and Ors. Vs. Central Bank of India

In a recent DRAT decision, a question arose as to whether the delay in preferring an appeal u/s 30 of RDB Act, 1993 beyond a period of 30 days is condonable?

The DRAT referred to the decision of Hon'ble Supreme Court in the matter of International Asset Reconstruction Company of India Ltd. vs. Official Liquidator of Aldrich Pharmaceuticals Ltd. & Ors which held that the RDDB Act was enacted to facilitate and expedite recovery of debts due to banks and financial institutions by summary proceedings before the statutory Tribunal. Section 18 bars the jurisdiction of any court or other authority in such matters (except the Supreme Court/High Court under Articles 226 and 227 of the Constitution). Sec. 31 provides for the transfer of pending cases from a court to the Tribunal. The Act provides a complete procedure for the institution of recovery proceedings, and the method of its enforcement, including the right to appeal. The RDDB Act is undoubtedly a special law and a complete code by itself with regard to expeditious recovery of dues to banks and financial institutions. After considering all the aspects concerning the application of the Limitation Act has also the application of the Code of Civil Procedure, the Hon'ble Supreme Court held thus: "14. The RDB Act is a special law. The proceedings are before a statutory Tribunal. The scheme of the Act manifestly provides that the legislature has provided for application of the Limitation Act to original proceedings before the Tribunal under section 19 only. The appellate tribunal has been conferred the power to condone the delay beyond 45 days under Section 20 (3) of the Act. The proceedings before the Recovery Officer are not before a Tribunal. Section 24 is limited in its application to proceedings before the Tribunal for anything under Section 19 only. The exclusion of any provision for extension of time by the Tribunal in preferring an appeal under Section 30 of the Act makes it manifest that the legislative intent for exclusion was express. The application of Section 5 of the Limitation Act by resort to Section 29 (2) of the Limitation Act, 1963 therefore does not arise. The prescribed period of 30 days under Section (1) of the RDB Act for preferring an appeal against the order of the Recovery Officer therefore, cannot be condoned by application of Section 5 of the Limitation Act."

Accordingly, the DRAT upheld the decision of DRT in dismissing the application filed for condonation of delay in filing the appeal.

4. Sale Certificate and Registration

The State of Punjab and Anr. Vs. Ferrous Alloy Forgings P Ltd. and Ors.

The Hon'ble Supreme Court held that a sale certificate issued to the purchaser in pursuance of the confirmation of an auction sale is merely evidence of such title and does not require registration under Section 17(1) of the Registration Act. The title is transferred upon successful completion of the sale and its confirmation by the competent authority after all the objections against the sale have been disposed of. The position of law makes it clear that sale certificate issued by the authorised officer is not compulsorily registrable. Mere filing under Section 89(4) of the Registration Act itself is sufficient when a copy of the sale certificate is forwarded by the authorised officer to the registering authority. However, a perusal of Articles 18 and 23 respectively of the first schedule to the Stamp Act respectively makes it clear that when the auction purchaser presents the original sale certificate for registration, it would attract stamp duty in accordance with the said Articles. As long as the sale certificate remains as it is, it is not compulsorily registrable. It is only when the auction purchaser uses the certificate for some other purpose that the requirement of payment of stamp duty, etc. would arise.

Contributors to the newsletter:

• Ravi Charan Pentapati, Partner
• Venkateshwara Rao Lakkineni, Senior Associate
• Grancy Bonam, Associate

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