2010 (7) TMI 1118 - HC - VAT and Sales Tax

Whether a bank or financial institution, while invoking the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Rules made thereunder, is entitled to bring the property for sale by way of auction without disclosing the encumbrance?

Summary

Issues:
- Whether a bank or financial institution can auction a property without disclosing encumbrances?
- Validity of forfeiture of earnest money deposit due to failure to pay balance sale consideration.
- Obligations of the bank under the SARFAESI Act and Rules regarding disclosure of encumbrances in sale notices.

Analysis:
1. The judgment dealt with the question of whether a bank or financial institution, under the SARFAESI Act, can auction a property without disclosing encumbrances. The petitioner firm participated in an auction but later discovered encumbrances on the property. The petitioner argued that had they been informed about the encumbrance, they would not have bid. The respondent bank contended that they were not aware of the encumbrance when issuing the sale notice and were entitled to forfeit the earnest money if the balance sale consideration was not paid. The court considered the duty of the bank to disclose encumbrances under Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002. It held that the rule includes the obligation to disclose encumbrances to protect the interests of intending purchasers. The court emphasized that failure to disclose encumbrances could lead to buyers unknowingly purchasing litigation along with the property, justifying the petitioner's challenge.

2. The judgment addressed the validity of forfeiting the earnest money deposit due to the petitioner's failure to pay the balance sale consideration. The petitioner argued that their failure was not willful as they were unaware of the encumbrance. The respondent bank contended that the forfeiture was justified as per auction terms. The court referred to the Supreme Court's judgment in United Bank of India v. Official Liquidator, emphasizing the duty of intending purchasers to verify encumbrances before bidding. However, it differentiated the present case, stating that under the SARFAESI Act, the bank must disclose encumbrances in sale notices. The court set aside the forfeiture order, directing the respondent to refund the earnest money, highlighting the importance of banks disclosing encumbrances in sale notices to prevent such disputes.

3. The judgment analyzed the obligations of the bank under the SARFAESI Act and Rules regarding disclosure of encumbrances in sale notices. It emphasized Rule 8(6)(f) requiring the disclosure of any material information, including encumbrances, to enable purchasers to assess the property's nature and value. The court highlighted the need for transparency to protect the interests of bidders. It suggested that banks and financial institutions should clearly indicate encumbrances or the absence of other liabilities in auction notices to avoid confusion and ensure fair transactions. The court's decision to set aside the forfeiture order and refund the earnest money underscored the importance of full disclosure to maintain the integrity of auction processes and protect the rights of bidders.