A Notice in Time Saves Nine

The right to receive notice and an opportunity to be heard are considered as twin ingredients of natural justice, unless specifically excluded by legislation. There are certain laws in India that warrant strict compliance with this requirement. The courts in India have also examined this requirement and its consequences, while keeping in mind the extent to which this requirement is needed to be met with.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFEASI Act”), is a legislation, which enables a bank or a financial institution (“Lender”) to enforce its rights against defaulting borrowers. If a borrower’s account is classified as a non-performing asset (NPA), a Lender can recover its dues through the sale of secured assets of the borrower under Section 13 of SARFAESI Act. Upon initiating the sale process under Section 13(1) to (4) of the SARFAESI Act, the pre-requisites to be complied with are stipulated under Rules 8 and 9 of the Security Interest (Enforcement) Rules (“SI Rules”). Rule 9(1) of the SI Rules provides that no sale of immovable property should take place before the expiry of 30 days from the date on which a public notice is published. In case the previous sale has not fructified, for any subsequent sale, the authorised officer should serve, affix and publish notice of sale of not less than 15 days to the borrower.

In the case of Ratnamani George and Ors. vs. Authorised officer, Canara Bank (“Ratnamani Case”), the petitioners had filed a Writ Petition before the Court of Kerala, seeking direction to confirm the sale of the property, which was auctioned by the bank, after accepting the remaining bid amount.

In the instant case, the petitioners had responded to a notice published by Canara Bank (“Bank”) on their website about the e-auction of an immovable property owned by the borrower (E.K. Rajan).  In response to this notice, the petitioners submitted their financial bid on November 18, 2021. The petitioners-bidders had also deposited 10% of the reserve auction price, i.e., INR 10,53,000/- on December 06, 2021, in compliance with the terms of the auction notice. Subsequently, the auction was held on December 08, 2021, and the petitioners emerged as the successful bidders, upon bidding a sum of INR 1,06,25,000/-. However, the petitioners were informed by the Bank that the sale would not be confirmed until the disposal of W.P. (C) No. 27485 of 2021[1] (“E.K. Rajan Case”), which was pending before the High Court of Kerala. In this case, E.K. Rajan, who is a borrower, had challenged the sale notice issued under the provisions of the SARFAESI Act.

The High Court of Kerala referred to Rule 9(1) of the SI Rules and interpreted the words ‘serve’ as personal service of notice, ‘affixture’ as notice being affixed to the property and ‘publication’ as the publication of notice in newspapers. The High Court of Kerala emphasised on the conjunction “and” employed in the proviso, as an indication to the mandatory nature of all the three modes of notice. In the Ratnamani Case, the notice of sale was served on November 23, 2021, and the sale took place on December 08, 2021, which is the 15th day of service of notice. It was, hence, held that the technical requirement of 15 days clear notice or “notice of not less than 15 days” was not satisfied. Therefore, the notice of sale issued by the Bank in Ratnamani Case was set aside. The High Court also held that ‘if the notice of Sale which resulted in the bidding of the property is set aside, there is no sale in the eyes of law’.

While deciding the E.K. Rajan Case, the High Court of Kerala referred to the judgement of the Supreme Court in S. Karthik & Others v. Subhash Chand Jain and Ors[2] (“S. Karthik Case”) and distinguished it from the present writ petition. In the S. Karthik case, the Supreme Court had considered a sale that took place in 2012, when the proviso to Rule 9(1) of the SI Rules was not in existence[3]. The Supreme Court took a Lender friendly approach and adopted a rather flexible standard in interpreting the procedural prerequisites for sale of security interest. The Apex Court was of the view that if the first sale notice does not result in a sale due to reasons “entirely attributed to the borrower”, then the Lender need not wait for another 30 days before selling the assets mortgaged through a subsequent sale notice.

In the E.K. Rajan Case, the High Court of Kerala interpreted the amendment to Rule (9) scrupulously, by stating that the pre-requisite of 30 days’ notice in case of sale at first instance and a 15 days’ notice for subsequent sale are protections guaranteed to the borrowers that cannot be tampered with.

These procedural standards are intended to protect the interests of the borrowers, to provide them an opportunity to take all the steps to repay their dues. The sale notice is also aimed at informing the intending purchaser of the nature of the property, extent of liability and other encumbrances attached to it. However, any deviation from compliance of such procedural standards result in protracted litigations between the borrowers and the Lenders and would diminish the value of the security property. It is, thus, clear that the Lenders must strictly comply with the timelines stipulated under SI Rules, while issuing sale notices, to achieve a valid sale-auction of the secured assets to recover its dues.

[1] E.K. Rajan v. The Authorised officer, Canara Bank.

[2] AIR 2021 SC 4559

[3] Amendment brought into force by Act 44 of 2016 w.e.f September 01, 2016