SARFAESI Act — Bank Auction of Property — Legal Rights and Defence for Borrowers

Step 1 — Classification as NPA: The loan account must be classified as a Non-Performing Asset (NPA) — interest or principal remains unpaid for 90 days or more.

Step 2 — Notice under Section 13(2): The bank issues a 60-day notice demanding payment of the outstanding amount. The borrower must pay within 60 days or file objections.

Step 3 — Consideration of Objections: The bank must consider any objections filed by the borrower within 60 days. If the objections are rejected, the bank proceeds with enforcement.

Step 4 — Possession Notice: After 60 days, the bank can take possession of the secured asset. A possession notice is published in newspapers and affixed on the property.

Step 5 — Sale of Asset: The bank can sell the asset through auction or private treaty. The sale proceeds are applied to the outstanding loan amount.

Right to Receive Notice: The bank must issue a valid 60-day notice under Section 13(2). Without proper notice, the entire SARFAESI proceedings are invalid.

Right to File Objections: The borrower can file objections to the 60-day notice within 60 days. The bank must consider these objections and communicate its decision.

Right to Approach DRT: If the bank rejects objections or takes possession, the borrower can file an application (SA) before the DRT under Section 17 within 45 days of the possession notice.

Right to Get Property Back: Even after possession, the borrower can get the property back by paying the entire outstanding amount before the sale is confirmed.

Right to Fair Value: The bank must obtain a valuation of the property before auction and publish the reserve price. The auction must be conducted transparently.

Defence 1: Invalid NPA Classification — If the account was wrongly classified as NPA before 90 days of default, the entire proceedings can be challenged.

Defence 2: Defective Notice — If the 60-day notice is defective (wrong amount, incomplete details, or improper service), the proceedings are invalid.

Defence 3: Non-Compliance with Procedure — If the bank did not follow the procedure (no possession notice, improper publication, inadequate valuation).

Defence 4: Offer to Pay — If the borrower pays the outstanding amount before auction, the proceedings must be stopped.

Defence 5: Disproportionate Action — If the value of the property exceeds the loan amount substantially (prima facie disproportionate).

The application (SA) under Section 17 must be filed within 45 days of the possession notice. The DRT can condone the delay for sufficient cause. The application should challenge the SARFAESI action on factual and legal grounds.

The DRT examines whether the bank has complied with the SARFAESI Act and RBI guidelines. If the DRT finds that the bank's action is illegal, it can set aside the possession notice, direct restoration of possession, and award compensation.

An appeal against the DRT order lies with the Debt Recovery Appellate Tribunal (DRAT) within 30 days. Further appeal lies with the High Court under Article 226/227.

The bank publishes an auction notice with details of the property, reserve price, earnest money deposit, and auction date. The reserve price should be based on the valuation report.

Borrowers can challenge the auction if: (1) the reserve price is too low, causing the property to be sold at a undervalued price, (2) the auction was not properly published, (3) there was collusion among bidders, or (4) the sale was to a related party of the bank.

Once the sale is confirmed, it is difficult to set aside. The DRT has limited powers to set aside a confirmed sale. Hence, it is crucial to act before the auction.

Even after SARFAESI proceedings have started, the borrower can negotiate a one-time settlement (OTS) with the bank. The bank may accept a discounted amount to avoid the auction process.

OTS is often the best option for borrowers who can arrange funds but cannot pay the full outstanding amount. The settlement terms should be documented in writing. Our lawyers negotiate OTS with banks to protect borrowers' interests.