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Cancellation of Sale Certificate under SARFAESI Act

Feb 23 2023

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a powerful tool that empowers banks and financial institutions to recover their dues from defaulting borrowers. One of the important provisions of the SARFAESI Act is the sale of secured assets through a public auction. Once the auction is conducted, and the sale certificate is issued to the highest bidder, the ownership of the asset is transferred to the buyer. However, in certain cases, the sale certificate can be cancelled. In this article, we will discuss the cancellation of sale certificate under SARFAESI Act.

What is a Sale Certificate?

Before we delve into the cancellation of a sale certificate, let's understand what it means. A sale certificate is a legal document issued by the authorised officer of the bank or financial institution after the sale of a secured asset through a public auction. The sale certificate certifies that the sale has been conducted in accordance with the provisions of the SARFAESI Act and that the ownership of the asset has been transferred to the highest bidder.

Grounds for Cancellation of Sale Certificate

The cancellation of a sale certificate is a rare occurrence and can happen only under certain circumstances. The following are the grounds on which a sale certificate can be cancelled:

  1. Non-fulfilment of terms and conditions: If the highest bidder fails to fulfil the terms and conditions of the auction as mentioned in the sale notice, the sale certificate can be cancelled. For example, if the highest bidder fails to make the payment within the stipulated time, the sale certificate can be cancelled.

  2. Non-compliance with legal requirements: If the sale is not conducted in accordance with the provisions of the SARFAESI Act, the sale certificate can be cancelled. For example, if the public notice inviting bids is not published in the prescribed manner, the sale certificate can be cancelled.

  3. Fraud or collusion: If there is evidence of fraud or collusion between the borrower and the highest bidder, the sale certificate can be cancelled. For example, if the borrower and the highest bidder are related, and the bid is not made in good faith, the sale certificate can be cancelled.

  4. Any other reason: The authorised officer can cancel the sale certificate for any other reason if he deems fit. However, the reasons for cancellation must be recorded in writing.

Procedure for Cancellation of Sale Certificate

If the authorised officer decides to cancel the sale certificate, he must follow the following procedure:

  1. The authorised officer must record the reasons for cancellation in writing.

  2. The borrower and the highest bidder must be informed of the decision to cancel the sale certificate.

  3. The borrower must be given an opportunity to rectify the default or non-compliance, if possible.

  4. If the default or non-compliance is not rectified within the stipulated time, the authorised officer can cancel the sale certificate.

  5. The cancellation of the sale certificate must be recorded in writing, and a copy of the same must be provided to the borrower and the highest bidder.

Can Bank Auction Be Cancelled

Yes, a bank auction can be canceled under specific circumstances. Understanding these scenarios involves a mix of legal rulings, procedural aspects, and practical constraints. Let’s explore:

1. Reasons for Cancellation of a Bank Auction

a) Purchaser Defaults on Payment

  • If the highest bidder (auction purchaser) fails to pay the remaining balance after the initial deposit within the stipulated timeframe, the bank can cancel the auction.
  • Supreme Court Ruling: In cases like IDBI Bank Ltd. v. Ramswaroop Daliya and Ors., the court clarified that the auction can only be canceled if the default is on the purchaser’s side.

b) Legal Stay or Injunction

  • A borrower may challenge the auction process in a court or tribunal if there are procedural lapses (e.g., improper notice under Section 13(4) of SARFAESI).
  • Courts or Debt Recovery Tribunals (DRTs) can issue a stay order or cancel the auction if the auction violates legal provisions.

c) Settlement Between Borrower and Bank

  • If the borrower clears the outstanding dues before the auction is finalized, the bank may call off the sale.

d) Procedural Irregularities

  • Any violations in the auction process, such as inadequate public notice or incorrect reserve pricing, can lead to the cancellation of the auction.

2. Legal Provisions Under SARFAESI Act, 2002

The SARFAESI Act provides a framework for secured creditors to recover dues through auctioning secured assets. The following sections are relevant:

  • Section 13(4): Empowers the secured creditor to take possession of the asset and sell it.
  • Section 17: Allows borrowers to challenge the possession notice before a Debt Recovery Tribunal (DRT).
  • Section 18: Provides appellate relief through the Debt Recovery Appellate Tribunal (DRAT).

3. Flexibility in Auction Timelines

  • 15-Day Deposit Period: As per the law, the purchaser must deposit 25% of the bid immediately and the remaining 75% within 15 days. However, this period can be extended by mutual agreement between the bank and the purchaser.

4. Key Supreme Court Rulings

a) IDBI Bank Ltd. v. Ramswaroop Daliya and Ors.

  • Reaffirmed that banks cannot arbitrarily cancel an auction if the purchaser complies with all terms.
  • The ruling protects the interests of genuine bidders.

b) Mathew Varghese v. M. Amritha Kumar

  • Highlighted the importance of strict adherence to procedural requirements under the SARFAESI Act.

5. Common Misconceptions

  • Banks Arbitrarily Cancel Auctions: Banks are bound by the SARFAESI Act and cannot cancel auctions without valid reasons.
  • Liquidator’s Role in Auctions: If a liquidator is involved, they cannot cancel a valid auction solely for expecting a higher price.

6. Borrower's Rights

  • Borrowers can negotiate or appeal against the auction notice if they believe:
    • Incorrect valuation was done.
    • They were not served a valid notice.
    • Procedural lapses occurred.

7. Purchaser's Rights

  • If the purchaser fulfills all obligations (payment and documentation), the bank or auctioneer cannot refuse to issue the sale certificate.
  • The purchaser can legally challenge any arbitrary cancellation.

8. Practical Considerations

For Borrowers

  • Act promptly by settling dues or appealing to DRT/DRAT if necessary.
  • Ensure you understand the auction process thoroughly.

For Bidders

  • Verify the property’s title and legal clearances before participating.
  • Negotiate extension of payment deadlines if needed but document all agreements in writing.

9. Preventing Cancellation

From the Borrower's Side

  • Regularize loan payments to avoid auction proceedings.
  • Engage in settlement discussions early.

From the Bank's Side

  • Follow SARFAESI guidelines to ensure the auction process is legally sound.
  • Conduct detailed due diligence to avoid disputes.

From the Purchaser's Side

  • Adhere to the auction terms strictly, including timely payments.

Conclusion

The cancellation of a sale certificate under SARFAESI Act is a rare occurrence and can happen only under specific circumstances. It is essential to follow the proper procedure while cancelling the sale certificate. As a borrower, it is essential to comply with the terms and conditions of the auction and ensure that the sale is conducted in accordance with the provisions of the SARFAESI Act. As a buyer, it is essential to bid in good faith and ensure that there is no fraud or collusion involved. By following the rules and regulations, we can ensure a smooth and transparent recovery process for banks and financial institutions.