Critical Analysis of the Mandatory Issuance of Notices under Rule 8 and Rule 9 of the Security Interest (Enforcement) Rules, 2002
Amir Bavani (Founder, AB Legal), Rishika Kumar (Senior Associate, AB Legal) and Amisha Shree (Associate, AB Legal)
Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) provides for methods that can be undertaken by a secured creditor to recover its dues in case of a default. The main provision under the SARFAESI Act is Section 13 relating to ‘Enforcement of Security Interest’ describing the manner, timelines and procedures within which the secured creditors can enforce their rights to recover their dues against a Non-Performing Asset (‘NPA’).
The secured creditors through the authorised officer[1] can recover their dues by auctioning the immovable secured assets in the manner and procedure given under Rule 8 and Rule 9 of the Security Interest (Enforcement) Rules, 2002 (‘Security Enforcement Rules’).
The authorised officer before conducting the sale of secured immovable property, will have to serve to the borrower a notice of thirty days for sale of the immovable secured assets[2] and no sale of the such property can be conducted before the expiry of thirty days from the date on which the public notice of sale is published in newspapers, as per the proviso to sub-rule (6) of rule 8 or notice of sale has been served to the borrower.[3]
From the bare perusal of the present law, we can infer that the secured creditors are required to serve a thirty-day notice before conducting the sale of the immovable secured assets and no sale can be conducted before the expiry of thirty days. Furthermore, if sale of immovable property by any one of the methods specified by Rule 8(5) fails and sale is required to be conducted again, the authorised officer will serve, affix, and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale.[4]
Let us understand the provisions through various judgments given by the Courts in India.
1. There must be two notices issued by the secured creditor
On analysing the provisions of the Security Enforcement Rules, we can see that there are two notices to be issued: (i) Sale Notice under Rule 8(6) proposing to sell the secured asset; and (ii) Public Notice of Sale under Rule 9(1) fixing the auction date. Further, the sale notice is to be served to the borrower and public notice of sale is to be published in newspapers.
In Mathew Varghese Vs M. Amritha Kumar (2017) ibclaw.in 92 SC[5] the Hon’ble Supreme Court observed that, the service of individual notice to the borrower, specifying clear thirty days’ time gap for effecting any sale of immovable secured asset is a statutory mandate. Therefore, the requirement under Rule 8(6) and Rule 9(1) contemplates a clear thirty days’ individual notice to the borrower and a public notice by way of publication in the newspapers.
Similar position was held in KVV Prasad Rao Gupta vs State Bank of India[6], by Hon’ble Telangana High Court where the court observed that:
- The authorized officer of the Bank shall serve on the borrower a notice of thirty days for sale of immovable property.
- If the sale of such secured assets is by way of public auction, the Bank / secured creditor, shall cause publication of such notice in two leading newspapers, while one being in vernacular language having sufficient circulation in the locality by setting out the terms of sale, mentioned in the said provision; and
- Such sale of immovable property under the Security Enforcement Rules shall not take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of Rule 8, or notice of sale has been served to the borrower.
2. The Sale Notice and Public Notice for Sale may be issued simultaneously with thirty days’ time period between the service of notice and actual date of sale/date of auction
The Sale Notice and Public Notice for Sale can be issued simultaneously. In various judgments the Courts have held that the two notices can issued together. Some of them are enumerated below:
In Adhya Industries Vs Vijaya Bank (2020) ibclaw.in 236 HC[7] the Division Bench of Telangana High Court concluded that “23. There need not be a clear 30 day notice period between issuance of notice under Rule 8(6) and issuance of notice Rule 9(1) of the Rules. It would suffice if there is 30 day gap from the date of publication of public notice in newspaper of sale and the date of sale.”
The Hon’ble Supreme Court in Canara Bank Vs. M. Amarender Reddy (2017) ibclaw.in 573 SC[8] observed the following;
“14. …In other words, it is permissible to simultaneously issue notice to the borrower about the intention to sell the secured assets and also to issue a public notice for sale of such secured asset by inviting tenders from the public or by holding public auction. The only restriction is to give thirty days’ time gap between such notice and the date of sale of the immovable secured asset.”
“16. …There is no need to wait for the expiry of 30 days from issuance of notice of intention to sell the secured asset given to the borrower, for publication of a public notice for sale of such asset. Nor is there any requirement to give a separate individual notice prior to deciding on the mode of sale of the secured asset.”
A recent case before the Hon’ble Telangana High Court in Indian Overseas Bank v. RA Pure Life Science Limited & Ors. (2023) ibclaw.in 61 HC[9] held that, “16. It is thus beyond pale of doubt that it is sufficient that 30 days notice is issued before sale of secured asset is conducted and notices under Rule 8(6) and Rule 9(1) can be issued simultaneously. In other words, it is not necessary that there must be a 30 days gap after notice under Rule 8(6) is issued and before notice under Rule 9(1) is issued….”
3. Mandatory fifteen days’ notice in the event of second or subsequent auctions
As per the proviso to the Rule 9(1) of the Security Enforcement Rules, a notice of not less than fifteen days must be served to the borrower by the authorized officer and same must be affixed and published, in case an auction fails and second or subsequent auction is to be conducted again.
In a recent case, before the Hon’ble Kerela High Court in E.K Rajan vs. Authorized Officer, Canara Bank (2022) ibclaw.in 118 HC[10], the Petitioner filed a Writ Petition challenging the sale notice issued under SARFAESI Act. As per the Petitioner, a notice was issued to the Petitioner under Section 13(2) of the SARFAESI Act and subsequently, under Section 13(4) of the SARFAESI Act, accordingly the possession of Petitioner’s property was taken over and a notice of sale was published by the Respondent proposing auction of the property. The Petitioner contended that the sale notice was not issued to the Petitioner till the date of filing of the Writ Petition. The Respondent pleaded that the service of notice was duly done and this being the second attempt to sell the property, all procedures were carried out in accordance with law.
In this background, the Hon’ble Court clarified that, the statutory requirement of 15 days clear notice or “notice of not less than 15 days” has to be satisfied. The situation would be different if the delay in service of notice was on account of the Petitioner’s default or that Petitioner evaded the service of notice, which was not the case. However, the sale of Petitioner’s property took place on the fifteenth day of the service of notice and hence the statutory requirement of fifteen days was not fulfilled. Since, the Respondent failed to serve notice of sale in accordance with law. The Hon’ble Court held that the notice of sale was bad in law and therefore liable to be set aside.
4. A fresh thirty days’ notice is not required in case of failure to conduct sale/auction
When a lender is unable to sell the secured asset through a Sale Notice under the Security Enforcement Rules due to reasons entirely attributable to the borrower, then such lender is not required to wait for another thirty days before selling the secured assets through a subsequent sale notice. This was held by the Hon’ble Supreme Court in S. Karthik & Ors. v. N. Subhash Chand Jain & Ors. (2021) ibclaw.in 162 SC[11].
The brief facts of the case are that the Ace Concrete Private Limited (“Borrower”) had taken loans from the Indian Overseas Bank (“Lender”), with the earlier promoters of the Borrower (“Guarantors”) by mortgaging four immovable properties (“Secured Assets”) The account of the Borrower was declared as NPA in April 2010 and a Sale notice was issued on January 2012 in respect of the Secured Assets giving the Guarantors more than thirty days to make the payment towards outstanding dues (“First Sale Notice”). The First Sale Notice was challenged by the Guarantors in Debt Recovery Tribunal, Chennai (“DRT”) and obtained a stay for a period of thirty days, provided they deposit fifty percent of the outstanding amount with the Lender. However, they failed to deposit the outstanding amount and the Lender was able to sell the one of the four Secured Assets through a private treaty.
In July 2012, the application of stay by the Guarantors was dismissed by the DRT and soon after the dismissal, the Lender issued another sale notice for remaining three secured assets giving them ten days to clear the outstanding dues (“Second Sale Notice”). The Guarantors challenged the legality of the Second Sale Notice before the DRT, Chennai inter-alia, on the ground that the auction/sale has been fixed before the expiry of 30 days from the date of service of Second Sale Notice.
In August 2012, the DRT passed an interim stay order on the Second Sale Notice for thirty-days on the condition that the Guarantor shall deposit 50% of the outstanding amount with the Lender within the said period, failing which the interim order was to stand vacated. The Guarantors failed to comply with the interim order of the DRT Chennai and in September 2012, DRT, Chennai passed an order, allowing the Lender to proceed with the sale of the Secured Assets.
Thereafter, several applications/petitions were filed by the Guarantors before the DRT, Debt Recovery Appellant Tribunal, (“DRAT”) and thereafter in Hon’ble Madras High Court.
It was in the month of June 2018, that the DRT set aside the Second Sale Notice and subsequent sale of the two Secured Assets, on the grounds of wilfully violating the provisions of law and imposed cost of Rs. 50,000 on the Lender. The DRT found that the Lender had not complied with the actions under Rule 9(1) of the Security Enforcement Rules and had continued their allegations against the Borrowers instead of conceding to their defect and correcting themselves at the first opportunity.
This order of DRT was challenged by the Lender and the auction purchaser before the DRAT, which set aside the DRT’s order, holding in favour of the legality of the Second Sale Notice. This was further challenged before the Hon’ble Madras High Court, which upheld the order of the DRAT, and finally came up for consideration before the Hon’ble Supreme Court.
The Hon’ble Supreme Court while pronouncing the judgment stated that the Lender cannot rely on the First Sale Notice unless the sale pursuant to the first notice did not take place solely attributable to the borrower. In this instance case, the Hon’ble Court had found that the Guarantors failed to comply with their representations made before the DRT on settling the outstanding amount with the Lender, which led to the failure of the First Sale Notice. The Second Sale Notice was for auctioning the same properties as mentioned in the First Sale Notice and the sale pursuant to it was not completed due to the actions of the Guarantors as well. Hence, the Hon’ble Court concluded that the Second Sale Notice was only in continuation of the First Sale Notice.
The Hon’ble Court also observed that the Guarantors were given several opportunities by the DRT to settle the outstanding amount with the Lender but the Guarantors resorted to dilatory tactics of filing multiple applications in lieu of stalling the Lender from enforcing the security interest. Thus, the Court held in favour of the legality of the Second Sale Notice.
Conclusion
The provisions under SARFEASI Act and the Security Enforcement Rules have been crucial for the secured creditors in recovering their dues by enforcing security interest. The conundrum of issuing notices has been extensively litigated before various forums and plays a huge role while enforcing security interest and hence one must know the minute nuances of issuing notices under the SARFEASI Act and Security Enforcement Rules. The Courts have through several judicial pronouncement have expanded the scope of interpretation while resolving many irregularities through Judicial wisdom.
Reference
[1] Rule 2(a): authorised officer means an officer not less than a chief manager of a public sector bank or equivalent, as specified by the Board of Directors or Board of Trustees of the secured creditor or any other person or authority exercising powers of superintendence, direction and control of the business or affairs of the secured creditor, as the case may be, to exercise the rights of a secured creditor under the Act
[2] Rule 8(6) of the Security Interest (Enforcement) Rules, 2002
[3] Rule 9(1) of the Security Interest (Enforcement) Rules, 2002
[4] Proviso to Rule 9(1) of the Security Interest (Enforcement) Rules, 2002
[6] 2021 SCC OnLine TS 328
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