The Supreme Court upheld the setting aside of an auction sale due to the Bank's failure to follow the statutory requirement of a 30-day notice under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The appellants, who had purchased the property in an auction, challenged the dismissal of their writ petition by the Allahabad High Court. The Court ruled that the appellants, former tenants, would revert to their tenant status, and the Bank was ordered to refund the auction money along with 12% compound interest.

1. Auction and Sale: The appellants, tenants of the borrower, became the highest bidders in a Bank auction after the borrower defaulted on a loan. A sale certificate was issued in their favor in 2009.

2. Challenge to Sale: The borrower filed an application under Section 17 of the SARFAESI Act, alleging non-compliance with mandatory statutory procedures during the auction.

3. Findings of Non-Compliance: The DRT, followed by DRAT and the Allahabad High Court, found that the Bank had failed to issue the mandatory 30-day notice before auctioning the property, leading to the setting aside of the sale.

4. Appellants' Appeal: The appellants contended that they were bona fide purchasers and sought compensation for improvements made to the property.

5. Court’s Decision: The Supreme Court upheld the setting aside of the sale, restoring the appellants to their tenant status. It directed the Bank to refund the auction money with 12% compound interest, penalizing the Bank for procedural lapses.

Acts and Sections Discussed:

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – Governing recovery proceedings initiated by the Bank.
• Security Interest (Enforcement) Rules, 2002 – Particularly Rules 8(6) and 8(7), mandating a 30-day notice period before auctioning secured assets.
• Section 17 of SARFAESI Act – Allows borrowers to challenge wrongful actions of secured creditors.

Ratio:

The Court reaffirmed that a failure by the Bank to comply with statutory provisions, particularly the mandatory notice period under SARFAESI Rules, invalidates the sale, regardless of the purchaser’s status as a bona fide buyer. The auction money must be refunded with a penalty interest rate to compensate for the Bank’s errors, ensuring public money is safeguarded while penalizing procedural lapses.

Subjects:

Non-Compliance by Banks, Auction Sale, SARFAESI Act, Security Interest, DRT, Tenants' Rights, Bank Recovery, Judicial Review