Those looking for great buys at the auctions being conducted by Banks and FIs should be careful about the auction notices. The auction notice issued under SRFAESI Act requires certain mandatory information. These are crucial to the very notice itself. Non inclusion of the data in the notice is fatal to the auction itself.

Generally the participants of a auction process doe not question the auctioning Officer whether he has complied with all the requisite procedures required for conducting the auction. More often than not the auction purchasers take it for granted that the auctioning officer or Court would have complied with all the requisite procedures for the conduct of the auction and they can safely buy the asset at the auction. But should there be any some latches or shortcomings in the auction process, the entire auction is set aside. The auction purchaser does not have any means to claim any compensation other the meager interest allowed on his EMD or the amount deposited. And in case the auction purchaser has spend some money on betterment of the property he has purchased it can be presumed to have gone down the drain. The courts rarely grant any compensation for money spent by the auction purchaser on improving the property. On the contrary there a quite a few instances where it has been held that the auction purchaser has extracted more benefits from the property during the period without the authority of law and need not be compensated.

Auction of assets are held under provisions of one or the other Act. Procedures to be followed by the Auction Officer are prescribed under some subordinate Rule or Regulation attached to main Act. For example, Recovery Officers of Debts Recovery Tribunal should follow Schedule-II of the Income Tax Procedure Rules as well as Income Tax Certificate Proceedings Rules. These are in addition to provisions expressly stated in Chapter-V of the RDDBFI Act. Similarly, auction under SRFAESI Act are held under procedure of Securitisation Rules. The official liquidator follows the provisions of Companies Act. However, there are certain basic things which are common to all in one form or another which must mandatorily be followed by the auction officer. Any latches in complying with any of these provisions would be fatal to the auction.

Every Act Auction purchasers must satisfy himself that following have been duly complies with:

1. Whether the debtor had been served with a notice(s) of demand, and had been given the statutory opportunity of having his say in the matter;
2. Where the secured creditor has claimed possession, then whether notice of possession has been served on the debtor;
3. Whether valuation of the property has been in accordance with the prescribed procedures and by empanelled valuer;
4. Whether the proclamation of sale has been drawn up in the manner prescribed under the relevant Rules; and lastly
5. Whether the proclamation has been published in the manner stipulated.

The above points are common to any auction. These are fundamental principles of auction. But there could be some tricky and hidden provisions which must not be over looked no matter how silly it may look.

One such case came up before DRAT Delhi. In this case the asset was being sold under SRFAESI Act. The authorized officer had followed every provision of the Act to the ‘T’ but had made a minor mistake. In the proclamation published in the news papers he not mentioned the debt in respect of which the asset was being held. Even though the debt was not mentioned every other procedure was duly complied with. Looked from another angle, the debtor was in any case not prejudiced by the non mention of the debt in respect of which the asset was being put to auction. It could, at best be described as clerical error or oversight and the court could have given an opportunity to the debtor to either pay the debt or bring in a purchaser of his choice. However it was held that the proclamation violated Rule 8(6) of the Security Interest (Enforcement) Rules, 2002 and as such the notice was not legal. As such the auction notice had to be quashed. Once the notice is quashed and held as illegal then auction held in pursuance of the notice cannot be sustained but has to fall through. The auction was thus set aside.

There are a number of other instances where the auction was set aside after many years after its confirmation due to breach or non compliance with some provision of the Act, or Rules. The indenting bidders should therefore check the legal aspect of the auction as well before participating in it and not merely take for granted that the Recovery Officer or the Authorized Officer or Official Liquidator has acted correctly.

[Read full text of the Hon’ble Debts Recovery Appellate Tribunal, Delhi judgment]