Supreme Court Upholds Bank's Auction of Property in Loan Default Case

The Supreme Court of India recently ruled in favor of Arce Polymers Private Limited and Andhra Bank, upholding the validity of the bank’s auction process under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The case involved a dispute over the auctioning of mortgaged property belonging to M/s. Alphine Pharmaceuticals Private Limited, which had defaulted on loan repayments. The Court overturned the Telangana High Court’s ruling that had invalidated the auction and restored possession to the borrower. This judgment reinforces the legal procedures under the SARFAESI Act, ensuring that banks can effectively recover bad loans while upholding due process.

Background of the Case

The dispute arose when Alphine Pharmaceuticals Private Limited (the borrower) secured a term loan of Rs. 1.52 crore and a working capital limit of Rs. 35 lakh from Andhra Bank in March 2015. The loan was secured by mortgaging plot No. 66/B-1, Phase-I, IDA Jeedimetla, Quthbullapur Mandal, Medchal Malkajgiri District, Hyderabad.

However, the borrower defaulted on repayments, and the loan account was classified as a Non-Performing Asset (NPA) on July 31, 2016. Following this, the bank issued a demand notice under Section 13(2) of the SARFAESI Act on August 1, 2016, requiring the borrower to clear the outstanding dues within 60 days.

Actions Taken Under SARFAESI Act

Despite multiple warnings and opportunities to settle the debt, the borrower failed to make the required payments. The bank subsequently took the following steps:

On March 3, 2017, the bank issued a possession notice under Section 13(4) and took symbolic possession of the property.
On May 3, 2017, the bank took physical possession of the property through the Chief Metropolitan Magistrate, Cyberabad.
After multiple failed attempts to sell the property via auction due to lack of bidders, the bank finally conducted a successful auction on September 11, 2018, selling the property to Basa Chandramouli for Rs. 2.91 crore.
On September 27, 2018, the sale certificate was issued, and the auction purchaser took possession.

Legal Challenge by the Borrower

More than eight months after the sale, the borrower approached the Debt Recovery Tribunal (DRT), Hyderabad, challenging the entire enforcement process. However, the DRT dismissed the petition on July 1, 2019, ruling that the bank had complied with all procedural requirements under the SARFAESI Act.

The borrower then filed a writ petition before the Telangana High Court, which ruled in their favor, citing violations of Section 13(3A) of the SARFAESI Act, which requires the bank to respond to objections raised by the borrower. The High Court set aside the auction and ordered the property to be returned to the borrower.

Arguments Before the Supreme Court

Appellants (Andhra Bank & Arce Polymers) Arguments:

The bank argued that it had followed all mandatory steps under the SARFAESI Act, including issuing multiple notices and providing opportunities for repayment.
The borrower failed to challenge the bank’s actions in a timely manner and only raised objections after the property had been sold to a third party.
The High Court exceeded its jurisdiction by conducting a “mini-trial” under Article 226 of the Constitution when the borrower had a statutory remedy under the SARFAESI Act.

Respondents (Borrower’s) Arguments:

The borrower contended that the bank failed to respond to their request for loan restructuring, which was effectively an objection under Section 13(3A) of the SARFAESI Act.
The property was undervalued, and the auction process lacked transparency.
The High Court was justified in intervening to correct procedural lapses.

Supreme Court’s Observations

The Supreme Court made the following key observations:

Borrower Waived Their Right to Challenge: The borrower was given multiple opportunities to object and regularize the loan account but failed to do so.
Compliance with SARFAESI Act: The bank followed all due process, including issuing notices, obtaining possession orders, and conducting public auctions.
Judicial Overreach by High Court: The Supreme Court ruled that the High Court erred in interfering with the bank’s auction process, as the borrower had alternative remedies under the SARFAESI Act.
Public Interest and Banking Sector Stability: The judgment emphasized that setting aside bank auctions on procedural technicalities could undermine confidence in the financial system.

Final Judgment

The Supreme Court set aside the Telangana High Court’s order and restored the DRT’s decision, upholding the bank’s auction and subsequent sale of the property. It also directed that the borrower was not entitled to any relief and must abide by the auction process.

Key Takeaways

SARFAESI Act Ensures Speedy Loan Recovery: The ruling reaffirms that banks have the right to seize and auction assets of defaulting borrowers.
Judicial Overreach in Financial Matters Discouraged: High Courts must exercise caution when interfering with bank recoveries unless there is a clear violation of statutory provisions.
Timely Objections Are Essential: Borrowers must challenge auction processes within the prescribed legal framework rather than after a sale is completed.
Third-Party Purchasers Are Protected: The judgment reassures genuine buyers that courts will not easily invalidate legally conducted bank auctions.

This ruling is a landmark decision for financial institutions, reinforcing the credibility of the SARFAESI Act and protecting banks’ rights to recover debts through legally sanctioned auctions.

Petitioner Name: Arce Polymers Private Limited.
Respondent Name: M/s. Alphine Pharmaceuticals Private Limited & Others.
Judgment By: Justice Sanjiv Khanna.
Place Of Incident: Hyderabad, Telangana.
Judgment Date: 03-12-2021.

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