Departure From Prescribed Rules Under SARFAESI Act Renders Sale Illegal: Supreme Court

The Supreme Court has held that the statutory requirements under the SARFAESI Act must be scrupulously followed, as they are the very conditions upon which the extraordinary power of sale is conferred.

A Bench of Justices P S Narasimha and Alok Aradhe observed that any departure from the prescribed procedure renders the sale illegal, particularly when it undermines the borrower’s right of redemption as it stood before the 2016 amendment to the law.

The Bench made the observation while allowing an appeal filed by Sterling Holiday Resorts Ltd and others, and held that the auction process conducted by the authorised officer was illegal due to multiple procedural infirmities, including receiving bids during a period when a tribunal had restrained the officer from proceeding further.

Why did the Supreme Court hold the SARFAESI auction illegal?

Court held that an act done in violation of an order passed by a court or tribunal is not merely an irregularity but is bereft of legal effect.

“Parties cannot be permitted to retain advantages secured through the defiance of such orders,” the Bench said, holding that the auction notice and acceptance of bids were illegal as they took place during a period when the tribunal had restrained the authorised officer from proceeding further.

The Bench also highlighted that Rule 9(1) of the Security Interest (Enforcement) Rules, 2002 mandates a 30-day notice period before an auction.

“When proceedings are stayed by a court, the period of the stay must be excluded when computing the notice period, as an act of court shall prejudice no one,” the Bench said.

In the present case, Court held that the auction sale could not be sustained because it was concluded before the mandatory 30-day notice period had expired after accounting for the period during which the proceedings were stayed.

Can a sale certificate be issued to someone who did not participate in the auction?

The Supreme Court held that under Rules 9(2) and 9(6) of the Security Interest (Enforcement) Rules, 2002, the sale certificate must be issued in favour of the highest bidder who participated in the auction process.

“Neither the rules nor the auction notice contemplate the substitution of the bidder with a nominee or a third party who did not participate or exist at the time of the auction,” the Bench said.

In this case, Court found that the sale certificate was issued in favour of an entity that was neither the successful bidder nor in existence at the time of the auction. Court held this to be impermissible.

The Bench further underscored that the principle of finality in auction sales presupposes that the auction was conducted in accordance with law.

“Sanctity is the reward of legality, and sales vitiated by material irregularity or non-compliance with mandatory procedure may be set aside even after confirmation,” the Bench said.

Court thus clarified that the principle of sanctity of auction sales applies only to sales conducted in accordance with law and does not protect sales vitiated by material irregularity or fraud.

What was the dispute over the Ooty hill resort?

The batch of matters concerned the fate of a hill resort that has been the subject of litigation for well over a decade. The central issue before the Court was whether the process culminating in the issuance of the sale certificate had been conducted in conformity with the statutory framework governing such sales.

Sterling Holiday Resorts Limited was the borrower, while M/s P M Associates was the purchaser.

In 1991, the borrower had obtained a loan of Rs 2.06 crores from the Industrial Finance Corporation of India Limited (IFCI) and a term loan of Rs 3.24 crores from the Tourism Finance Corporation of India Limited (TFCI) on a consortium basis.

As security for the loans, the borrower created a joint equitable mortgage in favour of IFCI and TFCI, creating a first charge over its resort property, ‘The Fernhill’, situated in Ooty, District Nilgiris, Tamil Nadu.

Following default, an auction was held, and Ms Rukmani Khemchand was declared the successful bidder.

However, the entire sale consideration of Rs 20,00,10,000 was remitted not by Rukmani Khemchand, the declared bidder, but by M/s P M Associates. The sale was subsequently cancelled and the money was refunded.

The dispute later centred on the fact that M/s P M Associates was a partnership firm constituted in 2011 between Rukmani Khemchand and her brother Murli Khemchand. According to the borrower, the firm was not even in existence on the last date for submission of bids and had not participated in the auction.

Despite this, a sale certificate dated September 16, 2011 was issued in favour of M/s P M Associates.

The dispute subsequently reached the Madras High Court. In 2012, following a settlement between the borrower and IFCI, the high court permitted the borrower to withdraw its writ petitions challenging the auction notice and proceedings under the SARFAESI Act. The borrower was given liberty to seek impleadment in the writ petitions filed by the purchaser and defend itself therein.

By judgment dated August 23, 2013, a division vench of the Madras High Court held that the sale certificate in favour of M/s P M Associates had been validly issued.

The high court also held that the authorised officer had no power under the SARFAESI Act or the Security Interest (Enforcement) Rules, 2002 to unilaterally cancel a sale certificate once issued, as such power vested only in the competent court or tribunal.

It further held that acceptance of a settlement amount of about Rs 12.5 crores from the borrower was impermissible.

The matter was thereafter challenged before the Supreme Court.

What were the parties’ arguments before the Supreme Court?

The borrower argued that M/s P M Associates was a stranger to the auction.

It submitted that the bid had been made by Rukmani Khemchand in her individual capacity, while M/s P M Associates, the partnership firm, was not even in existence on the last date for submission of bids.

The borrower therefore contended that the sale certificate could not have been issued in favour of M/s P M Associates merely as Rukmani Khemchand’s nominee, as neither the auction notice nor the rules permitted such substitution.

The borrower also submitted that possession of the resort had at all times remained with it and that it had been running the resort successfully for over two decades.

M/s P M Associates, on the other hand, argued that the authorised officer had no authority in law to cancel the sale certificate, particularly when neither the sale nor the certificate was under challenge.

It further contended that the borrower’s right of redemption stood extinguished upon issuance of the sale certificate in 2011 and that no fresh notice was required.

IFCI submitted that it had cancelled the sale certificate because the borrower had tendered the dues in terms of the decree of the Debt Recovery Tribunal.

What did the Supreme Court find?

After examining the statutory framework and the manner in which the auction was conducted, the Supreme Court found multiple violations of the mandatory procedure.

Court also took note of the fact that M/s P M Associates had accepted and encashed the refund of the sale consideration along with interest. The possession of the resort, meanwhile, had at all times remained with the borrower. The purchaser’s investment was thus restored to it within five months.

The Bench held that the principle of finality or sanctity attached to auction sales cannot be invoked to protect a sale that itself was not conducted in accordance with law.

“The right to property, though no longer a fundamental right, remains a constitutional right under Article 300A, and a person can be deprived of property only by the authority of law. A sale that disregards the procedure mandated by the statute is not a deprivation by the authority of law,” the Bench said.

The Supreme Court accordingly set aside the impugned judgment.

Case Title: Sterling Holiday Resorts Limited Vs M/s P M Associates & Ors

Bench: Justices P S Narasimha and Alok Aradhe

Date of Judgment: September 30, 2026