Supreme Court Awards 12% Compound Interest to Auction Purchaser After Illegal SARFAESI Auction

In Govind Kumar Sharma & Anr. v. Bank of Baroda & Ors. (2024 Latest Caselaw 253 SC), the Supreme Court upheld the cancellation of an auction sale conducted under the SARFAESI Act after finding that the Bank had failed to comply with the mandatory notice requirements prescribed under the Security Interest (Enforcement) Rules, 2002. While affirming the cancellation of the sale, the Court directed the Bank to refund the auction amount along with 12% compound interest, holding that the Bank must bear the consequences of its own procedural lapses

The borrower had defaulted on a loan obtained from the Bank of Baroda. The Bank initiated recovery proceedings under the SARFAESI Act and auctioned the secured property. The appellants, who were already tenants in the property, emerged as the highest bidders. After depositing the sale consideration, a sale certificate was issued in their favour. The borrowers challenged the auction before the Debt Recovery Tribunal (DRT), contending that the Bank had failed to issue the mandatory 30-day notice required under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules, 2002. The DRT accepted the contention and set aside the auction sale. The order was affirmed by the Debt Recovery Appellate Tribunal (DRAT) and the Allahabad High Court, leading to the present appeal before the Supreme Court. 

The principal issues were whether the auction sale was liable to be set aside for non-compliance with the mandatory provisions of the SARFAESI Rules and whether the auction purchasers were entitled to appropriate compensation. 

The Supreme Court held that the auction sale could not be sustained. The Court observed that:

•The Bank had admitted its failure to comply with the mandatory notice requirements under Rules 8(6) and 8(7) of the Security Interest (Enforcement) Rules. 

•The concurrent findings of the DRT, DRAT and the High Court setting aside the auction were therefore correct. 

•Since the auction stood cancelled, the appellants' status automatically reverted from owners to tenants. 

•The DRT erred in directing the auction purchasers to first hand over possession before seeking a refund of the auction amount. 

•The entire litigation had arisen solely because of the Bank's failure to follow the statutory procedure. The Court further observed that although the appellants claimed compensation for improvements made to the property, such improvements were undertaken during the pendency of litigation and at their own risk. However, the Court found that merely awarding interest applicable to fixed deposits was inadequate. Considering the serious procedural lapse committed by the Bank, the Court held that the appellants deserved substantially higher compensation by way of compound interest on the auction money. 

The Supreme Court:

•Affirmed the setting aside of the auction sale. 

•Restored the appellants' status as tenants. 

•Directed the Bank to refund the entire auction amount with 12% compound interest per annum from the date of deposit until actual payment. 

•Directed the Bank and the borrower to settle their accounts and issue a No Dues Certificate upon completion of the settlement. 

The judgment reinforces that compliance with the mandatory safeguards under the SARFAESI Act and the Security Interest (Enforcement) Rules is essential before conducting an auction sale. It clarifies that banks cannot benefit from their own procedural violations and may be required to compensate auction purchasers where an auction is invalidated due to the bank's fault. The decision also recognises the rights of bona fide auction purchasers while balancing them against the statutory protections available to borrowers under the SARFAESI framework.