ILLEGAL SARFAESI AUCTION: WHEN DOES A DEFECTIVE AUCTION SALE BECOME LEGALLY UNSUSTAINABLE?

Auction sales enjoy a strong presumption of finality, but that protection is reserved for sales conducted in accordance with law. In Sterling Holiday Resorts Ltd. v. M/s P.M. Associates & Ors., 2026 INSC 1071, a Bench of J. Pamidighantam, J. Sri Narasimha and J. Alok Aradhe set aside a SARFAESI auction of a hill resort in Ooty after finding that the process leading to the sale certificate violated both the statutory Rules and the auction notice itself.

 

Background

Sterling Holiday Resorts had mortgaged its resort, The Fernhill, to Industrial Finance Corporation of India Limited (IFCI) and Tourism Finance Corporation of India Limited (TFCI). After default, IFCI invoked the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)  and on 25.03.2010, issued an auction notice with a reserve price of Rs. 20 crores. On 07.04.2010, the Debts Recovery Appellate Tribunal (DRAT) restrained the Authorised Officer from proceeding further under the Act, subject to a deposit of Rs. 1 crore, which the Borrower made on 08.04.2010.

After the High Court reversed the DRAT’s order on 06.09.2011, IFCI opened the bids on 12.09.2011 and declared Ms. Rukmani Khemchand the successful bidder. The full price was paid that day by M/s P.M. Associates, a partnership formed the same day and a sale certificate dated 16.09.2011 was issued to it. The Borrower later settled with IFCI, which cancelled the certificate and refunded the price, but the High Court upheld the sale on 23.08.2013. Both sides appealed.

The pivotal question

Although the parties debated several issues, the Court identified one question as determinative: whether the auction process was conducted in accordance with law. It held that Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 are mandatory. Because SARFAESI allows a creditor to sell a borrower’s property without court intervention, its procedural safeguards are the very condition on which that power exists.

Five infirmities

First, the bid was received in defiance of the DRAT’s restraint. Receiving bids and earnest money was a step under the Act and the later High Court Judgment could not retrospectively validate it. An act done in violation of a court or tribunal order is bereft of legal effect.

Second, the sale violated Rule 9(1). Applying the maxim actus curiae neminem gravabit, the Court excluded the period of restraint from the thirty days. Only thirteen days had run before the restraint, leaving seventeen days that would have expired on 23.09.2011, yet the bids were opened on 12.09.2011 and the certificate issued on 16.09.2011.

Third, the Borrower had no notice that bids would be opened on 12.09.2011, some seventeen months after the date originally fixed. Such a sale offends basic fairness.

Fourth, the certificate was issued to a “nominee”. Rules 9(2) and 9(6) require the sale to be confirmed and the certificate issued, in favour of the highest bidder, and the auction notice treats the successful bidder as the purchaser. Ms. Khemchand bid in her individual capacity, but the certificate went to a firm that did not exist on the auction date and which, as a firm, could never have been assessed for eligibility.

Fifth, the records were missing. IFCI described the sale first as a private treaty and then as a public tender and despite High Court directions, never produced the original records. There was no trace of inter se bidding under Clause 2.10 or of written terms under Rule 8(8).

Finality of auctions and Article 300A

The Court acknowledged its repeated emphasis on the sanctity of auction sales, but held that finality presupposes an auction conducted in accordance with law. A sale vitiated by material irregularity, fraud or non-compliance with mandatory procedure may be set aside even after confirmation. In its words, sanctity is the reward of legality, not a substitute for it.

It also noted several fortifying considerations. The Borrower had paid IFCI’s entire dues while the certificate was unregistered and possession remained with it, which is the very opportunity Section 13(8) preserves. The plea of collusion was rejected, since the settlement was disclosed to the High Court. The Purchaser had encashed its refund with interest. Invoking Article 300A, the Court observed that a person can be deprived of property only by authority of law, which a sale disregarding the statutory procedure is not.

Questions left open

The Court expressly declined to decide whether an Authorised Officer can unilaterally cancel a sale certificate, whether such a certificate requires registration and precisely when the right of redemption is extinguished. As the auction itself was illegal, these questions remain open.

Outcome

The High Court’s Judgment was quashed, the Borrower’s appeals were allowed and the Purchaser’s appeals dismissed. The contempt petitions were not pursued and the challenge to the Borrower’s merger with Thomas Cook (India) Limited was dismissed.

The ruling is a reminder to secured creditors that SARFAESI sales must follow the Rules and the auction notice strictly, particularly when proceedings have been stayed and later revived. For auction purchasers, it shows that diligence on the validity of the process matters, because an illegal auction confers no protectable right.

 

Shomdeepta Chanda

Associate

The Indian Lawyer & Allied Services

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