Telangana HC Dismisses State Bank of India's Writ Plea: Upholds Auction Invalidation Over SARFAESI Violations [Read Order]

The case arose from a dispute over an auction conducted on March 22, 2013, in which Classic Chemicals Ltd. purchased property belonging to M/s Vasantha Surgical Equipments following proceedings initiated by SBI under the SARFAESI Act. However, the borrower challenged the sale on grounds of procedural violations, particularly around the mode and timeline of payment.

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SBI filed a writ petition contending that the DRAT’s January 10, 2025 order, invalidating the auction, was unsustainable and contrary to the SARFAESI framework. The Bank argued that the borrower’s objections were technical and failed to demonstrate material prejudice. SBI issued a demand notice on May 16, 2011, followed by a possession notice in September 2011. An e-auction sale notice was then published in February 2013, and the sale was held on March 22, 2013. Classic Chemicals Ltd. was declared the highest bidder at ₹5.16 crore, just above the reserve price.

The auction purchaser deposited the 25% of the bid amount via cheque, which was realized only on March 27, five days after the auction, contrary to the express condition in the auction notice, which disallowed cheque payments. SBI additionally extended the time for depositing the remaining 75% till June 30, 2013, unilaterally and without notifying the borrower, a move found to be in violation of Rule 9(4).

SBI argued that rule 9(3) does not strictly prohibit cheque payments as long as the amount is realized. The delay in encashing the cheque was minor and caused no real prejudice. It was held that the extended time for the balance payment was within the Bank’s discretion, and the borrower failed to establish any mala fides. SBI also cited judicial precedents supporting the view that minor procedural irregularities should not invalidate public auctions, especially when valuable third-party rights have accrued.

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The Division Bench comprising Justice Moushumi Bhattacharya and Justice B.R. Madhusudhan Rao firmly rejected SBI's contentions. The Court observed that clause 10 of the auction notice clearly barred payments via cheque, and yet SBI accepted them, undermining the transparency and certainty of the auction.

The court asserted that Rule 9(3) of the SARFAESI Rules mandates immediate deposit of 25% of the sale price. Acceptance of a cheque that cleared five days later was a direct violation and that rule 9(4) (pre-amendment) allowed extension of time only with written consent of all parties,including the borrower. SBI’s unilateral extension to June 30, 2013 was unauthorized and prejudicial.

The Court also held that the DRAT had correctly applied the doctrine of lis pendens, noting that the auction took place during ongoing litigation and that the purchaser could not claim equitable relief based on improvements made to the property after the sale. As a result, the court dismissed SBI’s plea.

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