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Bank’s Oversight: Supreme Court Upholds Procedural Compliance in Auction Sales under the SARFAESI Act


This present case, Govind Kumar Sharma v. Bank of Baroda[i], revolves around a legal dispute stemming from an auction sale conducted by the bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) due to the borrower’s default on a loan. The Supreme Court’s (‘SC’) ruling, affirming the importance of procedural compliance, reinstated the appellants’ status as tenants and mandated the return of auction money with compound interest. This decision underscores the necessity for transparent and lawful banking procedures, safeguarding the interests of the parties involved.


  • The appellants challenged a judgment of the Allahabad High Court (‘HC’), which upheld the orders of the Debt Recovery Tribunal (‘DRT’) and the Debt Recovery Appellate Tribunal (‘DRAT’), setting aside the auction sale they had won. The case originated from a loan taken by respondent no. 3 from the bank, leading to a default and subsequent recovery proceedings under the SARFAESI Act.

  • When the Recovery Officer conducted an auction, the appellants emerged as the highest bidders and were accordingly issued a sale certificate, transitioning their status from tenants to owners of the property. However, the borrower filed an application under s. 17 of the SARFAESI Act, alleging non-compliance with statutory procedures by the bank.

  • The DRT agreed, setting aside the sale, and directing the bank to refund the auction money upon regaining possession of the property. The appellant’s appeal to the DRAT was dismissed, as was their subsequent writ petition before the HC. This dismissal led to the current appeal before the SC, wherein the appellants argued that as bona fide purchasers for value, the decisions of the DRT, DRAT, and the HC to set aside the sale were erroneous. They contended that following the issuance of the sale certificate, the appellants had developed the property, investing approximately Rs. 60 lakhs and therefore, if the sale were to be set aside, the appellants were entitled to adequate compensation, not only by refunding the auction money with interest but also for the improvements made to and investments made in the property.

  • The bank, on the other hand, acknowledged that while it had followed prescribed procedures, it had failed to provide material to refute the findings of the DRT, DRAT, and the HC regarding its failure to comply with the 30-day statutory notice provision. They argued that as the appellants had already possessed the property and were aware of the recovery proceedings, they could not claim additional compensation for improvements made at their own risk.

  • Furthermore, the respondent borrower stated that they had settled the entire outstanding dues with the bank separately from the auction money held in escrow due to litigation. Despite this, the bank refused to issue a No Dues Certificate due to the pending litigation. They argued that the bank conducted the auction without following the due procedure, justifying the DRT’s decision to set aside the sale, which was upheld by the DRAT and the HC.


  • The SC upheld the decisions of the HC, DRAT and the DRT to set aside the auction sale due to the bank’s failure to comply with the mandatory notice requirements. As a result, the appellants’ status as owners was reverted to that of tenants.

  • It was held that the bank’s failure to adhere to rs. 8(6) and 8(7) of the SARFAESI Rules, 2002, as confirmed by its admission of not issuing the mandatory 30-day notice to the borrower before the auction sale, justified the setting aside of the sale. The SC thus stated that the bank must bear the consequences, especially since its dues had already been settled, and the additional auction money held since 2009 must be refunded to the appellants.

  • The direction to the bank to take possession before refunding the auction money was deemed incorrect. In view of the serious procedural errors, the SC also directed that the auction money, along with compound interest at 12% per annum from the date of deposit, be returned to the appellants. Further, any adjustments between the bank and the respondent borrower were directed to be settled independently, with the bank issuing a No Dues Certificate upon resolution.


This decision is important as it reaffirms the significance of procedural compliance in auction sales conducted by banks under the SARFAESI Act. It underscores the principle that failure to adhere to mandatory procedures can result in the nullification of auction sales. Additionally, the ruling clarifies the legal status of purchasers in such sales and emphasizes the need for fair restitution, including appropriate interest, when sales are set aside. Overall, this decision serves to uphold the strict adherence to statutory procedures by banks and protect the rights of the involved parties.

End Note

[i] [2024] 161 646 (SC).

Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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