Madras High Court Declares SARFAESI Auction Void Where Borrower Redeems Before Valid Completion of Sale

1. Background of the Writ Petitions

The Madras High Court, in Sri International Vs Central Bank of India (Madras High Court), examined two writ petitions filed by the borrowers challenging a common order dated 24.11.2022 passed by the Debts Recovery Appellate Tribunal, Chennai (DRAT) in R.A.(SA).No.17 of 2022 and R.A.(SA).No.18 of 2022.

The core dispute related to the validity of an auction sale conducted under the SARFAESI Act, 2002, the consequent sale certificate issued in favour of the auction purchasers, and the borrowers’ continued right of redemption after they had deposited the entire loan dues with interest.

The High Court ultimately:

  • Set aside the DRAT order dated 24.11.2022
  • Declared the SARFAESI auction sale and registered sale certificate invalid
  • Directed discharge of the mortgage and return of title documents to the borrowers
  • Ordered refund of ₹4,95,21,000 to the auction purchasers with 12% annual interest

2. Factual Matrix

2.1 Loan Facilities and Security

  • The first petitioner was a partnership firm; the second and third petitioners were partners.
  • They availed packing credit and cash credit facilities from the first respondent bank in 2017.
  • The facilities were renewed by a sanction letter dated 29.03.2019 for a limit of Rs.4 crores.
  • The fourth respondent acted as guarantor, and four properties were mortgaged as collateral.

Due to non-compliance with repayment terms, the accounts turned irregular and were classified as Non-Performing Asset (NPA) on 25.11.2018.

2.2 Initiation of SARFAESI Measures

  • A notice under Section 13(2) of the SARFAESI Act, 2002 was issued on 10.02.2020.
  • Symbolic possession was taken on 21.04.2020 under Section 13(4).
  • The bank issued a sale notice dated 31.07.2020, fixing the auction for 04.09.2020.

2.3 First Round Before DRT and High Court

The assessee (borrower) challenged the sale notice by filing S.A.No.263 of 2020 before the Debts Recovery Tribunal (DRT). Since the DRT then lacked a Presiding Officer, the borrowers approached the High Court through W.P.No.11948 of 2020.

By order dated 01.09.2020, the High Court:

  • Permitted the bank to proceed with the auction on 04.09.2020
  • Restrained the bank from confirming the sale till 08.09.2020
  • Granted liberty to the borrowers to move the DRT for appropriate interim relief

Subsequently, on 07.09.2020, the DRT ordered in S.A.No.263 of 2020 that:

  • The bank should not confirm the sale
  • This protection would continue provided the borrowers deposited Rs.2 crores within four weeks
  • The auction purchaser was to be impleaded

2.4 Challenge to DRT’s Conditional Order and DRAT Proceedings

The borrowers filed C.R.P.(PD).No.1800 of 2020 before the High Court, contesting the DRT’s deposit condition, citing non-functioning of DRAT as the reason for approaching the High Court.

The High Court:

  • Noted that DRAT had resumed physical hearings from 21.09.2020
  • Granted liberty to file appeal before DRAT within two weeks
  • Directed that the appeal be heard on merits
  • Ordered that status quo as on that date be maintained till further orders

Subsequently, the borrowers filed A.I.R.S.A.No.105 of 2020 before DRAT.

On 19.10.2020, DRAT directed:

  • Pre-deposit of Rs.1.50 crores in two equal instalments—Rs.75 lakhs by 17.11.2020 and the balance within four weeks thereafter
  • Protection to the borrowers “in the moment the amount is deposited”
  • Automatic disposal of the appeal on non-compliance with the pre-deposit

2.5 Further Modification by High Court in Civil Revision

The borrowers again approached the High Court in C.R.P.No.2187 of 2020 challenging the DRAT’s pre-deposit condition. While considering the effect of the auction already held, the High Court held:

  • The second instalment of Rs.75 lakhs was reduced to Rs.35 lakhs
  • Payment was to be made to the Registrar, DRAT, Chennai, within two weeks
  • Upon compliance, nothing further would remain for adjudication in A.I.R.S.A.No.105 of 2020 as it was only an appeal against the interim order
  • DRT, Coimbatore, was directed to dispose of S.A.No.263 of 2020 expeditiously after being informed of compliance

Critically, paragraph 14 of this High Court order stated:

“It is also open to the respondent-Bank to accept the balance sale consideration from the auction purchaser and however it is made clear that till the disposal of SA.No.263 of 2020, by DRT, Coimbatore, no further steps should take place.”

The High Court later treated this paragraph as central to construing the scope of interim protection.

2.6 DRT Final Order, Confirmation of Sale and Sale Certificate

  • On 31.03.2022, DRT, Coimbatore, dismissed the securitisation appeals, including S.A.No.263 of 2020.
  • On the same day, the bank confirmed the auction sale in favour of respondents No.2 to 4 (auction purchasers).
  • At the request of the auction purchasers, their fixed deposits with the bank were appropriated on 31.03.2022 itself towards the remaining 75% of sale consideration.
  • A sale certificate dated 18.04.2022 was issued in favour of the auction purchasers and registered as Document No.2041 of 2022 in the office of the Sub‑Registrar, Tiruppur District.

2.7 DRAT Appeals and Order

The borrowers filed RA.S.A.Nos.17 & 18 of 2022 before DRAT against the DRT’s order. By common order dated 24.11.2022, DRAT held:

  • Adequate 30 days’ notice of sale had been given
  • The sale was validly confirmed on 31.03.2022
  • The balance 75% was paid within 15 days of confirmation as required by Rule 9(4) of the Security Interest (Enforcement) Rules, 2002
  • Since the interim order not to confirm sale continued till 31.03.2022, there was no violation of the Rules

The appeals were dismissed accordingly.

2.8 Writ Petitions and Deposit of Entire Dues

In the writ petitions filed before the High Court against the DRAT order, the Court granted an interim status quo order on the condition that the borrowers deposit the entire outstanding loan amount with interest within one week.