Can a Confirmed SARFAESI Auction Sale Be Set Aside? Supreme Court Answers

The Supreme Court has held that while the rights of an auction purchaser and the sanctity of a confirmed auction sale ordinarily deserve protection, such protection is not absolute. If the process leading to the sale is found to be legally defective or contrary to the statutory framework, courts can set aside the sale even after it has been confirmed.

A Bench of Justices Dipankar Datta and Augustine George Masih said the objective of proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) is not merely to complete an auction sale, but to realise the secured asset through a process that is fair, transparent and in strict compliance with the law.

"The mere factum that the sale stood confirmed cannot, therefore, foreclose judicial scrutiny," the Bench observed.

The judgment came while allowing an appeal filed by M R Vasumathi against a September 21, 2020 judgment of the Madras High Court.

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The high court had dismissed writ petitions filed by one Vasumathi and the son of the deceased guarantor, refusing to interfere with the measures taken by the authorised officer of Indian Bank under the SARFAESI Act, which culminated in the auction sale of the mortgaged property.

Vasumathi challenged the legality of the auction sale conducted on March 11, 2010, contending that the mandatory procedure prescribed under the SARFAESI Act and Rules had not been followed.

What was the dispute in the SARFAESI auction sale case?

According to the facts, G Ramanujam had stood as guarantor for a loan and mortgaged his immovable property in favour of the secured creditor. After the borrower defaulted, the bank obtained a preliminary decree in 1997 for recovery of Rs 1,92,400.23, along with interest at 18% per annum.

Ramanujam died in 2001, leaving behind his legal heirs, including the appellant.

In 2009, the bank initiated proceedings under the SARFAESI Act by issuing a demand notice and a possession notice, followed by a sale notice in 2010.

The property was auctioned on March 11, 2010, and respondent No. 2 emerged as the successful bidder with a bid of Rs 2.11 crore.

Vasumathi unsuccessfully challenged the proceedings before the Debt Recovery Tribunal (DRT), the Debt Recovery Appellate Tribunal (DRAT) and the Madras High Court.

Before the Supreme Court, she argued that the bank had hurried through the sale without complying with the mandatory legal requirements. She also contended that when the outstanding dues were about Rs 95 lakh, the bank ought to have sold only so much of the property as was necessary to recover the debt instead of selling the entire property.

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She further argued that since the bank had already obtained a preliminary decree from a civil court, it ought to have executed that decree instead of initiating fresh proceedings under the SARFAESI Act.

The Supreme Court examined whether the proceedings initiated in 2009, nearly 12 years after the preliminary decree, were barred by limitation. It also considered whether the auction sale was vitiated because of procedural violations. However, while disposing of the appeal, the Bench left the question of limitation open.

What did the Supreme Court say about compliance with the SARFAESI Rules?

Court held that the validity of an auction conducted under the SARFAESI Act must be tested strictly on the basis of compliance with the statute and the Rules, and not on equitable considerations.

It observed that the SARFAESI Rules, being subordinate legislation, are binding on both the secured creditor and the auction purchaser.

Referring to Rule 9 of the SARFAESI Rules, the Bench noted that the successful auction purchaser must immediately deposit 25% of the sale price, including the earnest money, on the date of sale. If this is not done, the property has to be resold.

The remaining 75% of the sale consideration must be paid within 15 days of confirmation of the sale, unless a written extension of time is granted. Failing this, the deposit stands forfeited and the purchaser loses all claims over the property.

The Bench emphasised that these requirements are mandatory.

"It is clear that these provisions are neither ornamental nor directory; they are couched in mandatory terms and go to the root of the validity of the sale," Court observed.

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It added that the requirement of depositing the balance sale consideration within the prescribed time is integral to maintaining the sanctity and credibility of the auction process.

"Any deviation therefrom, absent legally sustainable justification, would render the process vitiated," the Bench said.

Why did the Supreme Court set aside the auction sale?

Examining the facts, Court found that although the auction purchaser claimed the sale was confirmed on March 11, 2010, the remaining 75% of the sale consideration was deposited only on March 31, 2010, well beyond the statutory period of 15 days.

The Bench also found no material on record to show that the delay had been regularised through any valid written extension or waiver.

It rejected the contention that the borrower's failure to repay the loan despite the delayed payment by the auction purchaser could validate an otherwise illegal sale.

According to the Court, the non-compliance with the timelines prescribed under the SARFAESI Rules constituted a material irregularity that went to the root of the auction proceedings.

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The Bench further observed that the property belonged to the deceased guarantor, Ramanujam, and after his death had devolved upon his legal heirs. Their rights, it said, could be taken away only through a procedure that is fair, just and in strict conformity with the SARFAESI Act and the Rules.

What relief did the Supreme Court grant?

The Supreme Court directed that the auction purchaser be refunded the entire amount deposited by him, along with interest at 7% per annum from the respective dates of deposit until payment. The refund is to be made by the secured creditor within six weeks.

Invoking its powers under Article 142 of the Constitution, Court also granted the appellant a one-time opportunity to redeem the mortgage.

It directed that she may approach the secured creditor within two weeks to ascertain the outstanding dues and redeem the mortgaged property by paying Rs 95,42,372.52 along with interest at 5% per annum from the date of the Section 13(2) notice under the SARFAESI Act until the date of payment.

Court clarified that if the appellant fails to avail this one-time opportunity, she would forfeit all her rights over the secured asset.

Case Title: M R Vasumathi Vs The Authorised Officer & Ors

Bench: Justices Dipankar Datta and Augustine George Masih

Date of Judgment: June 9, 2026