Valluru Ganga Bhavani vs State Bank of India And Ors.

This SA is filed by the applicant with a prayer to declare that the classification of the account as NPA is illegal and not in accordance with guidelines of RBI, to declare demand notice dt.26.4.2017 purported to be issued by bank against schedule mentioned property is illegal and not maintainable under SARFAESI Act, to declare sale notice dt.31.10.2019 published in English daily Indian Express on 1.11.2019 as arbitrary, illegal, to declare the action of respondent bank in bringing the secured asset of the applicant to the sale under e-auction sale notice dt.3.2.2020 is illegal and arbitrary and not maintainable.

According to the facts of the case in brief stated in the SA by the applicant that the applicant is a guarantor to the loan availed by the borrower from the Respondent Bank; that one of his relatives informed about the publication of sale notice dt.31.10.2019 in English daily newspaper on 01.11.2019 by the Respondent Bank against the schedule mentioned properties which is mortgaged to the Respondent Bank towards the security for the loan availed by her son Suresh Babu from the Respondent Bank. It is submitted that as her son i.e. Respondent No.3 not in talking terms, the Applicant sent a representative to the Respondent Bank to enquiry about the publication of Sale Notice and inform the Respondent Bank that she is not in a position to go out from the schedule property as suffering from old age ailments. It is further submitted that the officials of the Respondent Bank informed to the representative sent by the Applicant that all the notices have been given to her son; that upon enquiry with the officials of the Respondent Bank by representative of the Applicant about the publication of sale notice, immediately the officials of the Respondent Bank placed a banner at the schedule property about the sale of the same and taken photographs; that the Respondent Bank never informed about the initiation of recovery proceedings under SARFAESI Act against the schedule mentioned property; that in the said 'Sale Notice' dated 31.10.2019 that as per 'Demand Notice' dated 26.04.2017 the outstanding amount of Rs.23,60,498.59 Ps. as on 31.03.2017. But no point of time the Respondent Bank informed about the classification of the account as NPA; that it can be assumed that the intension of the Respondent Bank to transfer the schedule mentioned properties for a low price to their stooge syndicate without following the due procedure contemplated under SARFAESI Act, 2002 in collusion with the Respondent No. 3 & 4; that the Applicant has been informed that Respondent Bank has initiated Section 14 of SARFAESI Act, 2002 to take physical possession of the schedule properties to neck her out from the schedule property. It has been stated that undoubtedly, public money should be recovered and recovery should be made expeditiously but it does not mean that the secured creditors which are concerned only with the recovery of their loans may be permitted to behave like property dealers and be permitted further to dispose of the secured assets in any unreasonable or arbitrary manner in flagrant violation of the statutory provisions of SARFAESI Act and principles of natural justice as well. It is also submitted that the secured creditors should ensure that the required opportunity be given to the guarantor to take all possible steps for retrieving his/her property and the secured creditor shall not be allowed to exploit the situation of the guarantor by virtue of the proceedings initiated under the SARFAESI Act and if the Respondent Bank takes the physical possession of the schedule properties, the Applicant would be on roads at her old age as she does not have any support from her husband and son and also taking physical possession of the schedule property would also damage the reputation of the Applicant in the public. It has been further stated that the Applicants have also filed an application, aggrieved by the Sale Notice' dated 31.10.2019 under the SARFAESI Act, 2002, seeking a stay order restraining the Respondent Bank from proceeding further. As the same is for hearing, meanwhile the Respondent Bank published another E-Auction Sale Notice dated 03.04.2020 which was published in English daily Indian Express on 04.02.2020 fixing the auction on 26.02.2020, but the E-Auction Sale Notice dated 03.04.2020 was not served on the Applicant. There is thus, a clear violation of statutory mandate of Right of Redemption notice should be given with at least 30 days of period. It has been stated that the subject properties are immovable properties which are not perishable to get the schedule properties auctioned in an urgent manner; that the Respondent Bank has not given opportunity to redeem her property before putting the schedule mentioned properties for public auction. But publishing of E-Auction Sale Notice dated 03.02.2020 in English daily 'Indian Express' on 04.02.2020 shows the malafide intension of the Respondent Bank to cause pecuniary detriment to the Applicant; that in these circumstances the Applicant is entitled to seek appropriate remedy against the illegal action initiated by the Respondent Bank; that the Respondent Bank not followed due process of law in bringing the schedule property for sale and the action of the Respondent Bank is arbitrary and illegal and hence, the action initiated by the Respondent Bank in the guise of the SARFAESI Act, 2002 deserves to be set aside by this Tribunal. Aggrieved by the measures taken by the Respondent Bank, the present SA is filed on the following the grounds of appeal that the declaration of the account as NPA is against the guidelines of the RBI; that the 'Possession is not personally served on the Applicant and as such there is an irregularity under Rule 8(1) of Security Interest (Enforcement) Rules, 2002 that The Applicant submits that the 'Possession Notice' is not affixed on the conspicuous part of the schedule mentioned properties and as such there is an irregularity; that Sale Notice dated 31.10.2019 against the schedule mentioned properties has not been personally served on the Applicant and as such there is an irregularity. It has been stated that the Respondent Bank is not following the mandatory Rules under Security Interest (Enforcement) Rules, 2002 and as such there is an irregularity.

Reply on behalf of respondent No.1 and 2 bank has been filed denying the averments made in the SA and further stated that that the SA is not maintainable under law since the SA schedule property sold to auction purchaser i.e., 5th respondent and sale certificate is also registered as such SA became infructuous and the same is liable to be dismissed. It has been further submitted that intact said sale was cancelled for want of bidders. It has been stated that the loan account of respondents 3 and 4 became irregular and failed to comply sanction terms and conditions as such loan account became NPA and as such the respondent bank issued Demand Notice under section 13(2) of SARFAESI Act dt: 26-04-2017 to applicant and respondents 3& 4 to repay entire outstanding amount plus interest etc and same are duly acknowledged by applicant and Respondents 3& 4. The Bank issued a possession notice on 21-07-2017 to applicant and respondents 3& 4 are sent by registered post and same is also affixed on Mortgaged property and said possession notice is received by respondents 3 &4 on 22-07-2017 and said possession notice is also published in two news papers on 23-07-2017 Telugu and English i.e., Andhra Jyothi and New Indian Express . The applicant along with Respondents 3& 4 filed MA 100/2019 for condonation of delay and seeking restoration of said SA in ORT Visakhapatnam and same is pending. The Respondents 1 & 2 submit that the applicant is having knowledge of SARFAESI Proceedings and also colluded with respondents 3 &4 and filed this SA to stall the recovery proceedings of the Bank The Respondents 1& 2 submit that with regard sale notice dt: 31-10-2019 doesnot arise since sale was cancelled for want of bidders. It has been stated that the bank has sold SA schedule property in e auction conducted on 26-02-2020 to auction purchaser i.e., Sri Chitturi Rama Rao s/o Satyanarayana and sale certificate is registered on 05-03-2020 . The 1st sale auction was cancelled for want of bidders. The Respondents 1 & 2 submit that it obtained valuation report as per Provisions of SARFAESI Act again issued Intend to sale Notice dt: 09-12-2019 to applicant and respondents 3 & 4 and thereafter issued Sale Notice to applicant and respondents 3 & 4 and also affixed on Mortgage Property and also published in two news papers sakshi and The New Indian Express as per provisions of SARFAESI Act on 04-02-2020 and sold SA schedule property in e-auction conducted on 26-02-2020 to auction purchaser i.e., 5th respondent i.e., Sri Chitturi Rama Rao s/o Satyanarayana and said auction purchaser paid entire auction price as per provisions of SARFAESI Act and sale certificate is registered on 05-03-2020 vide doc No: 1880/2020. It has been stated that the Bank already adjusted the said sale proceeds to loan account and said loan account was closed with the said sale proceeds and that the applicant and respondents 3 & 4 are colluded each other only to stall recovery process of the Bank and filed this SA. It has been further stated that the Bank has filed Petition for taking physical possession of mortgage Property in CMM Court at Vijayawada in Cri Mp No: 5036/2019 in CF No: 8820/2019 under SARFAESI No: 174/2019 Cri and the Court appointed Advocate Commissioner on 20-01- 2020 and subsequently taken physical possession of Mortgaged Property by conducting Panchanama and Inventory on 13.2.2020. It has been further stated that R1 and R2 had meticulously followed the provisions of SARFAESI Act and as such SA is liable to be dismissed with costs.

The respondent No.3 and 4 were called absent and set exparte on 14.8.2020.

Reply on behalf of respondent No.5 has been filed stating that he is the auction purchaser of the schedule property; that the respondent bank observed all legal formalities for auction; that he participated in the auction and became the successful bidder for Rs.35,65,000/- and also incurred additional expenditure of Rs.5,00,000/-. It has been stated that respondent bank executed a registered sale certificate in favour of RS on 5.3.2020 and delivered the physical possession of the schedule property. It has been stated that respondent No.5 has nothing to do with the dispute between the bank and the applicant as well as respondent No.3 and 4. It has been stated that RS is in physical possession of the property and further stated that if any adverse orders are passed against R1 and R2, R1 and R2 should return the money with 12% interest from the date of deposit hence prayed to dismiss the SA with costs.

Written arguments have been filed by the applicant reiterating the averments made in the SA and further stated that as per rule 9(1) no sale of immovable property shall take place before the expiry of thirty days from the date on which the pubic notice of sale is published in newspapers as referred to in the proviso to Rule 8(6) or notice of sale has been served to the borrower and whereas in the present case the sale was cancelled by the respondent bank after realizing the fact that they have not issued intended sale notice before issuance of auction notice but it is mentioned in its reply that the sale was cancelled for want of bidders. It is submitted that the sale was cancelled after publishing the auction notice and the respondent bank had to follow all the proceedings contemplated in the Act strictly. It has been further stated that there is an ambiguity in the demand notice dt.26.4.2017 sent to R3 and R4 by respondent bank regarding due amount. It has been further stated that there is no clarity and visibility in the document filed by respondent bank in its reply that the photographs showing the affixture of possession notice as to where the same is affixed but in fact no possession notice was affixed at the schedule mentioned property to the best knowledge of the applicant. It has been further stated that as per the sale certificate executed on 5.3.2020 the sale price of the schedule property is Rs.38,65,000/- but as per the auction purchaser as mentioned in his reply the sale price is Rs.35,65,000/- plus extra expenditure of Rs.5,00,000/- and there is no coincidence between the sale price mentioned by the respondent bank and the auction purchaser. It is further submitted that auction conducted against the schedule property on 26.2.2020 pursuant to e-auction sale notice dt.3.2.2020 and sale certificate issued and got registered in favour of auction purchaser on 5.3.2020 i.e., 9th day from the date of conducting the auction and in fact the bank has to issue sale certificate after 151h day from the date of confirmation of sale but they have issued sale certificate on 5.3.2020. It has bee further stated that in fact the schedule mentioned property is given on rent prior to the alleged loan transaction to a company by name M/s.Thyssen Krupp Elevator (Pvt) Ltd , and the said company has been continuing as a tenant till date. It has been stated that the respondent bank and the auction purchaser made negotiations with the tenant of the applicant and some exchange of communication by way of letters took place and as such the schedule mentioned property has been in possession of the applicant. It has been further stated that schedule property is mortgaged by R3 but he has no right to mortgage the same as the property belongs to applicant and in the sale certificate issued to auction purchaser clearly mentioned that the schedule property belongs to applicant. It is submitted that if the GPA existed in favour of borrower - R3 to mortgage the schedule property the bank has not filed the same before the Tribunal as such the alleged mortgage void ab intio and all the proceedings under SARFAESI Act are null and void hence the auction conducted on 26.2.2020 pursuant to e- auction notice dt.3.2.2020 against the schedule property are liable to be set aside. In view of the above the applicant prayed the Tribunal for setting aside all the measures initiated under SARFAESI Act against the schedule property and direct the respondent bank to forfeit the amount paid by the auction purchaser as he is colluded with the respondent bank to grab the property in the guise of the SARFAESI Act and to direct the respondent bank to pay an amount of Rs.50 lakhs towards damages and mental agony and to direct the respondent bank to relieve the applicant from debt as there is no mortgage against the schedule mentioned property.

Written arguments have also been filed by respondent No.1 and 2 reiterating the averments made in the reply and denied the averments made in the written arguments of applicant and further stated that the applicant is a guarantor to the loan availed by borrower from the Bank; that the Bank issued 13(2) Demand Notice and 13(4) possession notice as per SARFAESI Act and same is answered in Reply. The averments made in Written arguments are all not true and correct and hereby denied since the said SA shows the collusion between the applicant and respondents 3 and 4. It has been stated that since the said bank has issued Intend to Sale Notice dt: 28-08-2019 under rule 8(6) to borrower and applicant and there after issued Sale Notice for auction and published in two newspapers and said documents along with this Written arguments. The applicant filed this SA against 1st sale auction but said 1st auction was cancelled for want of bidders and Bank has filed a Memo dt: 05-12-2019 to that effect and the same is recorded by Tribunal. The present sale auction is 2nd auction and the same was materialized. The Bank submits that applicant making new allegations and filing documents without any pleadings in SA and same cannot be taken into consideration. The applicant along with Respondents 3& 4 already filed SA 248/2017 on ORT Visakhapatnam against the 13(2) Demand Notice and 13(4) possession notice which was dismissed on 06-07-2018 and no appeal was preferred as such order became final. The applicant have executed Guarantee agreement and Power of attorney dt:22-04-2015 with regard to loan facility and creation of mortgage which is valid under law and same are filed as Documents along with this Written Arguments. The Bank submits that applicant making new allegations and filing documents without any pleadings in SA and same cannot be taken into consideration. The Respondents 1 & 2 filed documents along with Reply which reveals that the Bank has followed the provisions of SARFAESI Act meticulously as such SA is liable to be dismissed. The Applicant is not entitled to any of the relief(s) much less the relief(s) as prayed for in the Application. The prayer in the SA cannot be granted and the SA is liable to be dismissed. The Respondents 1 & 2 submits that applicant filed written arguments as such they are not valid and tenable in the eye of Law. The Respondents 1 & 2 submits that the prayer in Written Arguments prayers in Written arguments which is meaningless, baseless and the said prayers are all not tenable in law and the same cannot be granted. The Respondents 1& 2 therefore prays that the Tribunal may be pleased to dismiss the S.A. with exemplary costs, in the interests of justice.

Written arguments have also been filed by respondent No.5 reiterating the averments made in the reply.

The point for consideration is that whether the applicant is entitled for to declare that the classification of the account as NPA is illegal and not in accordance with guidelines of RBI, to declare demand notice dt.26.4.2017 purported to be issued by bank against schedule mentioned property is illegal and not maintainable under SARFAESI Act, to declare sale notice dt.31.10.2019 published in English daily Indian Express on 1.11.2019 as arbitrary, illegal, to declare the action of respondent bank in bringing the secured asset of the applicant to the sale under e-auction sale notice dt.3.2.2020 is illegal and arbitrary and not maintainable or not?

The Ld.Counsel for the applicant argued that the respondent bank has not served sale notice to the applicant and also not followed the due procedure laid down under the Act in selling the schedule property. He further submitted that the respondent bank never informed about the classification of account as NPA and further argued that the property was sold in collusion with R3 and R4. It is also further submitted that the possession notice was not personally served on the applicant and possession notice was not affixed to the property. It is also further argued that no intended sale notice issued to applicant by giving 30 days time therefore the Ld.Counsel for the applicant argued to allow the SA.

On the other hand, the Ld.Counsel for the respondent bank argued that the respondent bank sold the property by following due procedure as laid down under law. Admittedly the applicant is a guarantor to the loan availed by borrower - R3 from respondent bank. The loan account became NPA. According to the case of the applicant that the respondent bank has not informed the applicant about declaration of account of R3 as NPA but admittedly, the respondent No.3 is the son of applicant therefore it cannot be said that the applicant has no knowledge about the fact that the account of R3 declared as NPA. Merely because they have no talks with R3, it cannot be said that the applicant has no knowledge about the declaration of NPA therefore the applicant cannot contend that the respondent bank has not informed the applicant about declaration of account as NPA. After declaration of NPA, as per documents filed by respondent bank it is crystal clear that the respondent bank has issued section 13(2) notice on 26.4.2017 to the applicant and R3 and R4 to pay the entire outstanding amount with interest. Acknowledgements were also filed by the respondent bank therefore it is crystal clear that the demand notice were also served on the applicant and R3 and R4. Thereafter the respondent bank issued possession notice dt.21. 7.2017 to the applicant and R3 and R4 by registered post and the same was also affixed to the mortgaged property and the possession notice was also published in Telugu and English newspapers and the copies of the same are also filed. Therefore, it cannot be said that there is no possession notice issued to the applicant and R3 and R4. Admittedly, R3 and R4 filed SA.248/2017 before this Tribunal and the said SA was dismissed for default. The applicant along with R3 and R4 also filed MA.100/2019 for condonation of delay and seeking restoration of said SA and same is pending before this Tribunal. The Ld.Counsel for respondent bank argued that the applicant colluded with R3 and R4 and has filed this SA to stall the recovery proceedings. The respondent bank submits that pursuant to sale notice dt.31.10.2019, the sale was cancelled for want of bidders. It is further contended by respondent bank that an IA.458/2020 was filed by applicant for amendment of SA. It is further contended that again the respondent bank after obtaining valuation report issued intend to sale notice dt.9.12.2019 to applicants and R3 and R4 and sale notice published in two newspapers on 4.2.2020 and auction was conducted on 26.2.2020 and Sri Chitturi Rama Rao - R5 declared as highest bidder and sale certificate issued on 5.3.2020 in favour of R5. According to the respondent bank, the bank filed petition before CMM court at Vijayawada under section 14 of the Act and Commissioner was appointed on 20.1.2020 and subsequently taken physical possession of the mortgaged property. So according to the arguments of the Ld.Counsel for the respondent bank the sale was conducted in accordance with law. The respondent No.5 filed written arguments. As per written arguments, he is a bonafide purchaser participated in the auction conducted by respondent bank and he is entitled for return of money deposited by him with 12% interest in case sale is cancelled.

Now let us verify the documents filed by the respondent bank. Upon perusal, the section 13(2) notice along with acknowledgements were filed and thereafter section 13(4) notice dt.21.7.2017 and acknowledgements on 22.7.2017 were also filed. The photocopies of affixture of possession notice were also filed and paper publication copies of possession notice in "Andhra Jyothi" and "New Sunday Express" newspapers have been filed therefore it is crystal clear that the respondent bank has followed the provisions of SARFAESI Act validly after declaration of the account as NPA in respect of R3 and R4 and applicant, for which the applicant stood as guarantor to the loan availed by R3 and R4 and therefore section 13(2) demand notice and 13(4) possession notice were issued by following due process of law. Along with written arguments, the respondent bank also filed copy of orders passed in SA.248/2017. The respondent bank also filed copy of deed of guarantee executed by applicant and rule 8(6) notice dt.28.8.2019 and acknowledgements were also filed and rule 8(6) notice was received on 30.8.2019 by the applicant and thereafter on 1.11.2019 sale notice was issued to applicant and R3 and R4 putting the auction date on 5.12.2019 but in the paper publication copy filed by respondent bank the date of sale notice shown as 31.10.2019 and published on 1.11.2019 in "Eenadu" and "The New Indian Express" newspapers. Originally, the 1st sale notice was issued on 1.11.2019 but in the paper publication the sale notice dated is mentioned as 31.10.2019 so there is discrepancy in the date of sale notice in paper publication and sale notice.

Again the respondent bank issued another rule 8(6) notice dt.9.12.2019 but no acknowledgements have been filed by the respondent bank for the notices issued and served under rule 8(6) dt.9.12.2019 on the borrowers. Only postal receipts were filed therefore it cannot be said that rule 8(6) was served on the applicant by giving 30 days time as required under law. The sale notice was issued on 4.2.2020 but as per paper publication copy the sale notice was issued on 3.2.2020 therefore there is discrepancy in respect of date of sale notice issued on 4.2.2020 and in the paper publication Sale notice copies were served on 8.2.2020 and the sale was held on 26.2.2020. Even for each and every sale, the respondent bank has to obtain fresh valuation certificates/reports, but the respondent bank has even though mentioned in the written arguments, has not filed any fresh valuation certificates to show that the respondent bank has followed rule 8(5) of Security Interest (Enforcement) Rules as mentioned in the written arguments.

In so far as rule 8(5) of Security Interest (Enforcement) Rules and as per decision reported in 2018(2) ALD 543 (DB) of Hon'ble High Court of Judicature, Telangana and Andhra Pradesh at Hyderabad, it is mandatory on the part of the respondent bank to secure a fresh valuation from an approved valuer in terms of Rule 8(5) before issuing a fresh sale notice and for taking consideration of reserve price that were fixed in the earlier e-auction sale notice which came to naught illegal. It is mandatory for respondent bank to secure fresh valuation from an approved valuer in terms of rule 8(5) of rules before issuing a fresh sale notice. Section 13(4) of the SARFAESI Act empowers the bank being a secured creditor to take possession of the secured asset and sell it for realizing its dues. Rule 8 of the rules 2002 deals with sale of immovable secured assets by a secured creditor. The statutory scheme, as set out in section 13(4) of the Act and rule 8(4) and (5) of the rules, 2002 demonstrates that merely because power is vested in a secured creditor to realize its dues from a defaulting borrower by taking recourse to the measures provided under the SARFAESI Act, it does not dilute the fact that such a secured creditor owes a fiduciary duty to protect the interest of such borrower, while putting his properties to sale. It is also observed by the Hon'ble High Court that Rule 8(5) of the rules mandates that before effecting sale of the immovable property under rule 9(1) thereof, the authorized officer should obtain valuation of the property from an approved valuer and, in consultation with the secured creditor, fix its reserve price. The provision therefore requires that this step should be taken immediately before the proposed sale. Rule 8 of the Rules 2002 deals with the sale of immovable secured assets by a secured creditor. Rule 8(4) and (5) of the Rules, 2002 are of relevance and are extracted hereunder:-

Rule 8(4) The authorised officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed of.

Rule 8(5) Before effecting sale of the immovable property referred to in sub-rule (1) of rule 9, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:-

(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or

(b) by inviting tenders from the public;

(c) by holding public auction; or

(d) by private treaty.

The statutory scheme, set out supra, demonstrates that merely because power is vested in a secured creditor to realize its dues from a defaulting borrower by taking recourse to the measures provided under the SARFAESI Act, it does not dilute the fact that such a secured creditor owes a fiduciary duty to protect the interest of such borrower, while putting his properties to sale. Therefore it is crystal clear from the documents filed by the respondent bank no such valuation report were taken by the respondent bank before issuing sale notice issued by respondent bank and therefore the respondent bank has not followed the rule 8(5) of Security Interest (Enforcement) Rules.

Therefore, it is crystal clear that the respondent bank has not followed rule 8(5) and conducted the sale and violated the rule 8(5) of SARFAESI rules and therefore the sale held on 26.2.2020 pursuant to sale notice dt.4.2.2020 is liable to be set aside and accordingly the sale certificate issued on 5.3.2020 in favour of RS is also liable to be set aside. The arguments of the respondent No.5 cannot be taken into consideration and it is for the respondent No.1 and 2 bank to refund the amount paid by the respondent No.5 with interest.

In the result, this SA.434/2019 is allowed and the sale notice dt.4.2.2020 is declared as illegal and sale conducted on 26.2.2020 is also declared as illegal and accordingly the sale certificate issued on 5.3.2020 in favour of respondent No.5 is here by set aside.

However, the respondent bank is at liberty to take fresh action in respect of schedule property under SARFAESI Act by following due process of law.

(Dictated to PS, transcribed by him and corrected and pronounced by me m the open court on this 9th day of October, 2020]