Land kept as Security can be Auctioned for Loan Default after giving 30 Days Time to clear Dues u/r 9(1) SARFAESI: J&K HC [Read Order]

The High Court ofJammu & Kashmir and Ladakh recently ruled that lender banks can auction off land mortgaged as security for a loan under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (c) Act, 2002, provided that the borrower is given 30 days’ time from the date of issuance of notice of sale to clear their outstanding dues as per Rule 9(1) of the SARFAESI Security Interest (Enforcement) Rules, 2002.

The petitioner Nazir Ahmad Bhat availed a loan of ₹1.45 crore from the respondent J&K Bank and had pledged fruit crops, book debts, receivables, land and mortgage of land, and personal guarantees as security/collateral.

Following the petitioner’s failure to repay the interest and principal amounts due, the bank classified his account as a Non-Performing Asset (NPA) and invoked its powers under Section 13(4) of the SARFAESI Act, 2002 to auction off the pledged securities.

Section 13(4) in The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) [ take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: [Substituted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, Section 8 (30 of 2004), for Cl.(b) (w.e.f. 11.11.2004).]

Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:

Provided further that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt.]

Prior to its substitution, Clause(b) read;

(b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

J&K bank accordingly issued a sale notice dated 22 August 2023 under Rule 9(1) of the Security Interest (Enforcement) Rules, 2002, providing the petitioner with 30 days’ time to repay the entire dues and redeem the property.

Since no payment was made by the petitioner during the permitted period, the mortgaged land was sold through public auction. A sale certificate dated 15 December 2023 was then issued in favour of the auction purchaser who is Respondent No. 10 herein.

Tariq M. Shah and Zahid Ahmad appeared for the petitioner and argued that the auction and subsequent sale were illegal and contrary to the provisions of law. It was argued that the initial sale notice granted the petitioner only 15 days’ time to clear dues.

Insha Rashid and Taniya represented the J&K Bank and asserted that the proceedings initiated by the bank adhered to the SARFAESI Act.

The Division Bench of Justice Sanjeev Kumar and Justice Sanjay Parihar noted that Rule 9(1) mandates the Authorised Officer to grant a borrower 30 days’ time from the date of sale notice to clear dues before any auction.

Against the argument raised by the petitioner, the Court noted that while the bank had initially issued the auction notice prescribing a 15-day window, it had subsequently issued an extension notice to provide the petitioner with a full 30-day period in conformity with Rule 9(1) of the Security Interest (Enforcement) Rules, 2002.

Since the bank had conformed to all statutory prescriptions, the High Court found no illegality in the auction or sale certificate and dismissed the writ petition.

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