Supreme Court annuls SARFAESI auction sale of Sterling Holiday’s Fernhill resort: process defects render sale void

The Supreme Court of India, in Sterling Holiday Resorts Ltd. Vs P.M. Associates & Ors., has set aside the auction sale of the Fernhill resort at Ooty conducted under the SARFAESI Act, 2002. The Court concluded that the entire sale process violated mandatory statutory requirements, breached an operative restraint order of the Debts Recovery Appellate Tribunal (DRAT), and disregarded the auction terms.

The judgment underscores a critical proposition: a sale certificate represents the culmination of a lawful sale process; it cannot retrospectively validate an auction that is fundamentally non-compliant with law. Legal finality and protection ordinarily accorded to confirmed auction sales arise only when the auction has been conducted in strict conformity with the applicable statutory framework.

Background: Resort mortgaged to IFCI and TFCI

Sterling Holiday Resorts Limited (the Borrower) had been in the business of developing and marketing timeshare resorts since 1987. For its resort project “The Fernhill” at Ooty, Nilgiris, Tamil Nadu, the Borrower availed institutional finance as follows:

  • Loan of Rs. 2.06 crores from Industrial Finance Corporation of India Limited (IFCI)
  • Term loan of Rs. 3.24 crores from Tourism Finance Corporation of India Limited (TFCI)

As security, a joint equitable mortgage was created in favour of IFCI and TFCI, conferring a first charge over the Fernhill resort property.

Upon default, IFCI and TFCI filed O.A. No. 277 of 2000 before the Debts Recovery Tribunal, New Delhi (DRT, Delhi) on 02.06.2000 under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. They claimed Rs. 8,87,36,938/- as on 30.05.2000, out of which IFCI’s share was Rs. 3,64,60,434/-.

During the pendency of those proceedings, IFCI invoked the SARFAESI Act, 2002 by issuing a Section 13(2) notice dated 30.10.2007 demanding Rs. 17,71,78,482/-. The Borrower’s representation under Section 13(3A) dated 26.12.2007 was not responded to.

In continuation, IFCI’s Authorised Officer (AO) issued a Section 13(4) notice on 21.08.2009, stating that symbolic possession of the resort had been taken and that physical possession would be taken thereafter.

The Borrower challenged this action before the Debts Recovery Tribunal, Chennai (DRT, Chennai) in S.A. No. 189 of 2009. By interim order dated 08.09.2009, the AO was restrained from taking physical possession, subject to deposit of Rs. 3.40 crores, later enhanced in appeal to Rs. 4 crores, which the Borrower paid.

Separately, DRT, Delhi decreed O.A. No. 277 of 2000 on 23.10.2009, quantifying the liability as:

  • TFCI: Rs. 5,08,46,131/-
  • IFCI: Rs. 3,52,53,263/-

with interest at 13.5% p.a., later enhanced by DRAT, Delhi to 16% p.a. pendente lite and thereafter (order dated 06.08.2010). The Borrower thereafter fully settled TFCI’s claim under a one-time settlement for Rs. 6.03 crores.

DRT Chennai order and IFCI’s auction notice

By order dated 05.03.2010, DRT, Chennai partly allowed S.A. No. 189 of 2009. It:

  • Set aside IFCI’s action in relation to taking physical possession, but
  • Permitted IFCI to proceed from the stage of symbolic possession.

Relying on this liberty, IFCI issued an auction sale notice dated 25.03.2010 for Fernhill resort. The key parameters were:

  • Reserve price: Rs. 20 crores
  • Auction date: 28.04.2010

DRAT’s restraint order and its consequences

The Borrower appealed to the Debts Recovery Appellate Tribunal, Chennai (DRAT). By order dated 07.04.2010, DRAT ordered as follows (operative part):

“Accordingly, the petitioner company is directed to deposit a sum of Rs. 1.00 crore with the Registrar of this Tribunal on or before 09.04.2010 and on the petitioner company depositing the said sum, the Authorised Officer shall stand restrained from in any way proceeding further under the provisions of the SARFAESI Act till further orders and in the event of the petitioner company’s failure to deposit the said amount, the Authorised Officer shall be at liberty to proceed against the petitioner company under the provisions of the SARFAESI Act from 10.04.2010 onwards.”

The Borrower deposited Rs. 1 crore on 08.04.2010, making the restraint operative.

Despite this broad restraint “from in any way proceeding further under the provisions of the SARFAESI Act”, IFCI went ahead and received bids and earnest money in response to the auction notice, although the bids were not opened because of the DRAT order.

The Supreme Court later held that accepting bids itself is a step in the auction process under the SARFAESI framework. The restraint covered not just opening or finalising bids, but any move in furtherance of the auction. Therefore, IFCI’s conduct in accepting bids was contrary to the DRAT’s operative order.

Litigation timeline: DRAT, High Court and subsequent steps

DRAT, Chennai allowed the Borrower’s appeal on 09.03.2011, setting aside the DRT, Chennai order dated 05.03.2010. IFCI then filed a writ petition before the Madras High Court.

By judgment dated 06.09.2011, the High Court allowed IFCI’s writ, holding that there was “substantial compliance” of Section 13(3-A) and relevant rules, and restored IFCI’s SARFAESI proceedings.

Within six days of the High Court’s decision, on 12.09.2011:

  • IFCI opened the previously received bids
  • One Ms. Rukmani Khemchand was declared the successful bidder
  • On the same day, the total bid amount of Rs. 20,00,10,000/- was paid, not by Ms. Rukmani Khemchand, but by M/s P.M. Associates, a partnership firm.

IFCI issued a sale certificate dated 16.09.2011 in favour of M/s P.M. Associates (the Purchaser).

Subsequently:

  • On 21.09.2011, the Borrower filed SLP (C) No. 27587 of 2011 before the Supreme Court against the Madras High Court judgment dated 06.09.2011.
  • In Writ Petition No. 21820 of 2011, the Madras High Court granted interim protection on 22.09.2011 and 27.09.2011 restraining IFCI from moving under Section 14 of the SARFAESI Act to obtain possession via the Chief Judicial Magistrate.

The High Court thereafter sought production of original sale records by orders dated 25.11.2011 and 10.12.2011, noting that IFCI had first described the transaction as a private treaty and later as a public tender. Despite specific directions, original records were not produced; only photocopies were shown, which the Court declined to act upon.

Settlement of IFCI’s dues and cancellation of sale certificate

By order dated 05.01.2012 in SLP (C) No. 27587 of 2011, the Supreme Court allowed the Borrower to clear IFCI’s dues in terms of the DRT, Delhi decree (as modified by DRAT, Delhi), after adjusting earlier deposits. The Borrower accordingly deposited Rs. 8,80,00,000/-.

Meanwhile:

  • The Borrower filed W.P. No. 22837 of 2011 challenging the auction notice dated 25.03.2010
  • The Purchaser filed W.P. No. 1937 of 2012 seeking registration of the sale certificate.

On IFCI’s intimation dated 03.02.2012, the Borrower paid an additional Rs. 3,72,00,000/- in full and final settlement of IFCI’s dues.

On 08.02.2012, IFCI: