Procedure for Sale of Asset – Legal Frameworks | Valuation Methods | Sale Processes

Table of Contents

1. Sale of asset directly or to ARC
2. Procedure in respect of movable secured asset
3. Procedure in respect of sale of immovable secured asset

Check out Taxmann's SARFAESI & Debts Recovery Law Manual which  is a comprehensive book on SARFAESI & Debts Recovery Laws. It combines statutes (i.e. Acts, Rules, Circulars & Notifications, etc.) and case laws digest. It also provides a topic-wise commentary on SARFAESI [120+ pages] & Debt Recovery Laws [80+ pages]. This book is essential for understanding the complexities of India's financial asset securitisation, asset reconstruction, and debt recovery laws.

1. Sale of asset directly or to ARC

The sale of asset should be such that the asset is taken off the books of Bank/FI. After sale, there should not be any known liability devolving on the Banks/FIs. In other words, sale should be on ‘without recourse’ basis, i.e. entire credit risk associated with the financial asset should be transferred to ARC or to buyer.

Sale should be conducted in prudent manner in accordance with policy and guidelines laid down by Board of Bank/FI. In case of consortium, at least 60% by value of Banks/FI should accept the offer. No sale should be made on contingent price i.e. Bank/FI agreeing to bear shortfall if ARC have to sale the asset sub-sequently at lower price.

Sale proceeds may be received from ARC or buyer by way of cash, bonds or debentures. Banks/FIs may also invest in PTC or other bonds/debentures issued by ARC.

1.1 Prudential norms for sale transactions

If there is shortfall in sale, it should be debited to P&L account of that year. If sale is higher that Net Book Value (NBV), excess provision should be reversed.

All instruments received by Banks/FIs from ARC as sale proceeds of financial asset will be in nature of Non-SLR securities. RBI has also issued guidelines for capital adequacy and exposure norms.

1.2 Assistance of Magistrate to take over position

The secured creditor can take over possession of assets 60 days after giving notice. Where the possession of assets is required to be taken or if any asset is required to be sold or transferred and if secured creditor expects resistance, he can request in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction the assets or the documents are located, to take possession of the assets or documents. On such request, Chief Metropolitan Magistrate or the District Magistrate shall take possession of such assets and documents relating thereto and forward such assets and documents to secured creditor. [section 14(1) of SARFAESI Act].

Chief Judicial Magistrate (CJM) is equally competent to process request of secured creditor to take possession of secured asset under section 14 of SARFAESI Act – Authorised Officer, Indian Bank v. D Visalakshi (2019) 156 SCL 566 = 109 taxmann.com 453 (SC).

Chief Judicial Magistrate as well as District Magistrate can exercise jurisdiction under section 14 – Bajaj Finance Ltd. v. Ali Agency (2022) 172 SCL 36 = 136 taxmann.com 250 (Ori HC DB) – SLP against the judgment dismissed by SC in Pawan Kumar Jajodia v. Bajaj Finance Ltd. (2022) 173 SCL 674 = 142 taxmann.com 410 (SC).

The application shall be accompanied by affidavit declaring specified details. On examining the Affidavit, the Magistrate shall issue suitable orders for possession of assets, within 30 days. This period can be extended by further 30 days – second and third proviso to section 14(1) of SARFAESI Act, amended w.e.f. 1-9-2016.

The word used is ‘shall  ’. Hence, technically, it is mandatory for Chief Metropolitan Magistrate or the District Magistrate to take possession once written request is received.

However, in C Bright v. District Collector (2021) 2 SCC 392 = 163 SCL 573 = 121 taxmann.com 67 (SC 3 member bench), it has been held that the provision is directory, as remedy under section 14 is not rendered redundant if District Magistrate is unable to hand over possession. He would still be enjoined upon duty to facilitate delivery of possession at the earliest.

The Chief Metropolitan Magistrate or the District Magistrate may authorize any officer subordinate to him

(a) to take possession of such assets and related documents

(b) to forward such assets and documents to registered dealer – section 14(1A) of SARFAESI Act.

The Chief Metropolitan Magistrate or the District Magistrate can use necessary force to take over possession. [section 14(2) of SARFAESI Act].

Action of the Chief Metropolitan Magistrate or the District Magistrate or officer authorized by such Chief Metropolitan Magistrate or the District Magistrate, pursuant to this section is fully protected and cannot be questioned in court or before any authority. [section 14(3) of SARFAESI Act].

The Chief Metropolitan Magistrate (CMM) or the District Magistrate (DM) can authorise Advocate Commissioner for section 14(1A) as Advocate Commissioner is subordinate to CMM/DM – NKGEB Coop Bank v. Subir Chakravarty (2022) 171 SCL 310 = 135 taxmann.com 347 (SC).

Powers under section 14 can be exercised by concerned Additional Chief Metropolitan Magistrate and also by Additional District Magistrates who is exercising powers at par with District Magistrate – R D Jain v. Capital First Ltd. (2022) 173 SCL 533 = 140 taxmann.com 614 (SC).

In Standard Chartered Bank v. V Noble Kumar (2013) 9 SCC 620 = 122 SCL 124 = 37 taxmann.com 305 (SC), it was held that it is not mandatory that Bank should first try to take possession under section 13(4) of SARFAESI Act prior to approaching Magistrate. Bank can directly approach Magistrate.

In Citibank v. Sudeep Singh (2005) 57 SCL 1 (Kar HC), it was held that District Magistrate or Chief judicial magistrate is required to assist secured creditors. He cannot ask police to make enquiries.

In Saraswat Cooperative Bank Ltd. v. State of Maharashtra (2011) 110 SCL 626 = 16 taxmann.com 139 (Bom HC DB), it was held that District Magistrate should deal with application expeditiously and should not delay the matter.

In Punjab and Sind Bank v. Gemini Fashions (2007) 78 SCL 422 (Kar HC), it was held that section 14 of SARFAESI Act is to supplement section 13 of SARFAESI Act. Magistrate is not required to issue to issue notice to borrower – same view in Tensile Steel Ltd. v. Punjab and Sind Bank (2007) 79 SCL 570 (Guj HC) * Trade Well v. Indian Bank (2008) 81 SCL 173 (Bom HC DB) * Mrs Sunanda Kumari v. Standard Chartered Bank (2009) 89 SCL 52 ((Mag) (Kar HC DB).

Magistrate only has to see whether security falls in his jurisdiction and whether notice has been issued under section 13(2) of SARFAESI Act. Then, he has to pass order under section 14 of SARFAESI Act. Magistrate cannot go into merits of entitlement of petitioner – Asset Recovery Corporation of India v. State of Maharashtra (2011) 110 SCL = 68 (Mag.) = 15 taxmann.com 182 (Bom. HC DB) * Liladhar Ladappa v. Solapur Janata Sahakari Bank (2022) 170 SCL 540 = 135 taxmann.com 309 (Bom. HC DB).

Powers of CMM/DM under section 14 of SARFAESI Act are ministerial step. Section 14 does not involve any adjudication powers qua points raised by borrower against secured creditor or third party with respect to security assets. Once all requirements of section 14 of SARFAESI Act are fulfilled, it is duty cast upon CMM/DM to assist secured creditor in obtaining possession. CMM/DM is not required to adjudicate dispute between borrower and secured creditor or any third party(s) – Balkrishna Rama Tarle Dead through LRS v. Phoenix ARC P. Ltd. (2022) 142 taxmann.com 492 = 174 SCL 534  (SC).

In Solaris Systems v. Oriental Bank of Commerce (2006) 72 SCL 168 (Ker HC), it was held that Chief Judicial Magistrate in a non-metropolitan area stands on same footing as a Chief Metropolitan Magistrate in a Metropolitan area. Hence, he can exercise powers under section 14 of SARFAESI Act.

In Aboobacker v. Punjab National Bank (2005) 64 SCL 42 (Ker HC), it was held that Bank can take assistance of Magistrate if there is resistance. However, it is not an inexorable rule that in all cases, bank must take assistance of magistrate.

1.3 Display of information of assets taken over on website of Bank/FI

Regulated entities which are secured creditors must display information on borrowers whose assets are taken over under SARFAESI Act. The information should be displayed in prescribed format within one month – RBI circular No. DOR.FIN.REC.41/20.16.03/2023-24 dated 25-9-2023.

2. Procedure in respect of movable secured asset

If movable property is taken over, the authorised officer shall prepare a ‘Panchnama’ in presence of two witnesses. The ‘Panchnama’ shall be signed by two witnesses and be in form as near as possible to Appendix I of Security Interest (Enforcement) Rules, 2002. [rule 4(1) of Security Interest (Enforcement) Rules, 2002].

The authorised officer will make or cause to be made an inventory of property of the borrower in form given in Appendix II of Security Interest (Enforcement) Rules, 2002. Copy of the inventory shall be given to the borrower or person entitled to receive it on behalf of borrower. [rule 4(2) of Security Interest (Enforcement) Rules, 2002].

The borrower shall be intimated by a notice enclosing the panchnama drawn in Appendix I – rule 4(2A) of Security Interest (Enforcement) Rules, 2002 inserted w.e.f. 4-11-2016.

The property will be taken in custody of authorised person or any authorised person. Care shall be taken as an owner of ordinary prudence would take. The asset should be properly preserved and protected and insured. [Rule 4(3) and rule 4(4) of Security Interest (Enforcement) Rules, 2002].

Property subject to decay – If the property is subject to speedy and natural decay, or the expense of keeping the property in custody is likely to exceed its value, authorised person may sale it at once. [proviso to rule 4(3) of Security Interest (Enforcement) Rules, 2002]

Debt not secured by negotiable instrument – The debts of borrower may have been hypothecated to the secured creditor. – – If such debt is not secured by any negotiable instrument, the authorised officer can direct the debtor to pay the dues directly to him instead of paying to the borrower. Rule 4(5)(a) of Security Interest (Enforcement) Rules, 2002].

[If such debt was secured by a negotiable instrument, the authorised officer can enforce the same].

Shares in a body corporate – The borrower may have provided shares of a body corporate as security. In such case, the authorised officer can send notice to the borrower as well as to body corporate not to transfer the shares in favour of any person other than secured creditor. [rule 4(5)(b) of Security Interest (Enforcement) Rules, 2002].

Other movable property not in possession of borrower – Some property belonging to the borrower may not be in his possession. For example, it may be in possession of job worker, consignment agent, transporter or godown-keeper. In such case, the authorised officer can take possession of such property in the same manner in which possession of other property is taken. [Such possession would not be possible if such other person (like transporter, job worker, consignment agent, godown keeper etc.) has lien over the goods or movables are pledged or he is unpaid seller, as in such cases, provisions of Act do not apply in view of clear provisions of section 31 of SARFAESI Act].

Moreover, authorised officer cannot take possession if the assets are in custody of Court or any like authority. [rule 4(5)(c) of Security Interest (Enforcement) Rules, 2002]

Possession of assets by possession of documents of title – The authorised officer can take possession of movable secured assets by taking possession of document evidencing title in such secured assets. [rule 4(5)(iv) of Security Interest (Enforcement) Rules, 2002].

2.1 Valuation of movable secured asset

After the assets are taken over, the authorised officer shall obtain estimated value of assets and then, if considered necessary, fix a reserve price of assets to be sold, in consultation with secured creditor, to ensure maximum realization of dues. [rule 5 of Security Interest (Enforcement) Rules, 2002].

It is not indicated how he will obtain ‘estimated value’. It is not provided that estimated value should be obtained from approved valuer only, as is provided in case of immovable assets. – – There is no provision to consult borrower or involve him in the process of valuation. In fact, fixing reserve price itself is at the option of authorised officer.

However, in case of immovable property, valuation by approved valuer and fixing of reserve price is mandatory.

2.2 Sale of movable secured assets

The movable assets can be sold by any of the following methods –

(a) Obtaining quotations from parties dealing in secured assets or those who may be interested in buying such asset

(b) Inviting tenders

(c) Holding public auction including through e-auction mode or

(d) By private treaty. [rule 6(1) of Security Interest (Enforcement) Rules, 2002. Words in italics inserted w.e.f. 4-11-2016].

A 30 days notice is required to be given to the borrower for sale of movable secured assets. [presumably to enable him to pay dues within that time, but practically, he may use that time to dispose of asset or try to obtain a stay]

If sale of such security assets is being affected by either inviting tenders from public or by holding public auction, the secured creditor shall issue public notice in form given in Appendix II-A, to be published in two leading newspapers including one in vernacular language having wide circulation in the locality   [Proviso to Rule 6(2) of Security Interest (Enforcement) Rules, 2002 as substituted on 17-10-2018]

Till 17-10-2018, the proviso to rule was as follows – If sale is by public auction or tenders, secured creditor shall put up a public notice in two leading newspapers, one in vernacular language, by setting out term of sale, which may include

(a) Details about borrower and secured creditor

(b) Description of assets with identification marks or numbers if any

(c) Reserve price if any and time and manner of payment (Thus, fixing reserve price is not mandatory in case of movable assets)

(d) Time and place of public auction or time after which sale by any other mode will be completed

(e) Earnest money deposit

(f) any other material details as considered essential by authorised officer. [Proviso to Rule 6(2) of Security Interest (Enforcement) Rules, 2002 as existing upto 17-10-2018]

If sale of immovable property fails and fresh sale is to be made, fresh notice of sale and fresh public notice is required – second proviso to rule 6(2) of Security Interest (Enforcement) Rules, 2002 inserted w.e.f. 4-11-2016.

Sale by methods other than public auction or public tender shall be on such terms as may be agreed upon between secured creditors and proposed purchaser. [rule 6(3) of Security Interest (Enforcement) Rules, 2002 amended w.e.f. 4-11-2016].

The authorised officer shall upload the detailed terms and conditions of the sale of movable secured assets in website of financial creditor. This should include details as prescribed in rule 6(4) of Security Interest (Enforcement) Rules, 2002, inserted w.e.f. 17-10-2018.

If the buyer does not pay for the asset within time as per agreed terms, the movable asset can be offered for sale again.

Public notice of auction sale and personal notice to borrower both are required – Mathew Verghese v. M Amritha Kumar (2014) 5 SCC 610 = 125 SCL 209 = 44 taxmann.com 137 (SC).

Second notice when can be considered as continuation of first notice – In S Karthik v. N Subhash Chand Jain (2022) 10 SCC 641 (SC 3 member bench), it has been held that if first sale could not be completed for reasons solely attributable to borrower or guarantor, second notice can be considered as in continuation of first notice and then 30 days time gap between second sale notice and date of sale as contemplated under rules 8(6) and 9(1) of Security Interest (Enforcement) Rules, 2002 is not required.

2.3 Transfer of mortgage, hypothecation or pledge of movable property or right or interest in security

‘Financial asset’ means normally ‘debts or receivables’. However, the definition of financial asset is inclusive and it includes a mortgage, charge, hypothecation or pledge of movable property [section 2(1)(l)(iii) of SARFAESI Act] and any right or interest in the security, whether full or part, underlying the debt or receivables. [section 2(1)(l)(iv) of SARFAESI Act].

Rule 7(3) of Security Interest (Enforcement) Rules, 2002 states that sale of asset covered under section 2(1)(iii) or 2(1)(l)(iv) of SARFAESI Act shall be as if it is a sale of movable secured asset and provisions of rules as applicable to sale of movable assets applies.

2.4 Wide flexibility in sale of assets

It can be seen that wide flexibility has been provided to the secured creditor. This may not be held as over delegation, as in State Financial Corporation v. Jagdamba Oil Mills 2002 AIR SCW 500 = (2002) 3 SCC 496 = AIR 2002 SC 834 (SC 3 member bench), it was held that any mode of sale of assets can be adopted. The only requirement is that it should be fair and transparent – same view in Punjab Financial Corpn. v. Surya Auto Industries (2010) 1 SCC 297 = AIR 2010 SC 266.

2.5 Certificate of sale

On receipt of sale price, the authorised officer shall issue a certificate of sale in form prescribed in Appendix III. Thereafter, the sale shall be absolute. The certificate of sale shall be prima facie evidence of title of purchaser. [rule 7(2) of Security Interest (Enforcement) Rules, 2002].

The certificate is not ‘conclusive evidence’. The reason is that the purchaser cannot get a title better than what the borrower has. This is also clarified in section 13(6) of SARFAESI Act which states that transfer of asset by secured creditor shall vest in the transferee all rights as if the transfer had been made by the borrower. Thus, a title better that what borrower had cannot be transferred to purchaser.

3. Procedure in respect of sale of immovable secured asset

If immovable property is taken over, the authorised officer shall take possession by delivering possession notice to the borrower. The possession notice shall be in form as near as possible to Appendix IV of Security Interest (Enforcement) Rules, 2002. Copy of such possession notice shall also be affixed on outer door or at a conspicuous place of the property. [rule 8(1) of Security Interest (Enforcement) Rules, 2002].

Possession notice is also required to be published in two leading newspapers in locality, one of which should be in vernacular language of the locality, within seven days from taking possession [rule 8(2) of Security Interest (Enforcement) Rules, 2002].

Provisions in respect of panchanama or inventory, as applicable to taking over of movable assets, are not applicable for taking over of immovable assets.

The property will be taken in custody of authorised person or any authorised person. Care shall be taken as an owner of ordinary prudence would take. The immovable asset should be properly preserved and protected and insured. [Rule 8(3) and rule 8(4) of Security Interest (Enforcement) Rules, 2002]

Constructive possession of property – Rule 8(1) and 8(2) of Security Interest (Enforcement) Rules, 2002 are constructive possession by secured creditor while rule 8(3) is actual physical possession. The borrower can approach DRT under section 17 of SARFAESI Act at the stage of possession notice under rule 8(1) and 8(2) of Security Interest (Enforcement) Rules, 2002. It is not necessary to wait till actual possession under rule 8(3) by secured creditor – Hindon Forge v. State of Uttar Pradesh (2019) 2 SCC 198 = 150 SCL 566 = 99 taxmann.com 76 (SC).

3.1 Valuation of immovable secured asset

After the assets are taken over, the authorised officer is required to obtain estimated value of assets and fix a reserve price of assets to be sold from an approved valuer, in consultation with secured creditor, to ensure maximum realization of dues. [rule 8(5) of Security Interest (Enforcement) Rules, 2002]. There is no provision to consult borrower or involve him in the process of valuation. In case of immovable assets, valuation by approved valuer and fixing of reserve price is mandatory.

Approved valuer means a person registered as valuer under section 34AB of Wealth Tax Act and approved by Board of Directors or trustees of the secured creditor. [rule 2(d) of Security Interest (Enforcement) Rules, 2002]. Thus, appointment of approved valuer is the prerogative of secured creditor.

3.2 Procedure for Sale of immovable secured assets

The immovable assets can be sold by any of the following methods –

(a) Obtaining quotations from parties dealing in secured assets or those who may be interested in buying such asset

(b) Inviting tenders

(c) Holding public auction or

(d) By private treaty [rule 8(5) of Security Interest (Enforcement) Rules, 2002].

If immovable property is situated in State of Jammu and Kashmir, the provisions of Jammu and Kashmir Transfer of Property Act, 1977 shall apply to persons acquiring property in that State [proviso to rule 8(5) of Security Interest (Enforcement) Rules, 2002]

Validity of the rule has been upheld in State Bank of India v. Santosh Gupta (2017) 2 SCC 538.

Even if auction is taking place third time, 30 days notice is mandatory, even if borrower was following delaying tactics – Vasu P Shetty v. Hotel Vandana Palace (2014) 126 SCL 449 = 46 taxmann.com 143 (SC).

A 30 days notice is required to be given to the borrower for sale of immovable secured assets [rule 8(6) of Security Interest (Enforcement) Rules, 2002].

In Sea Plast India v. UOI (2012) 111 SCL 133 = 16 taxmann.com 369 (Bom HC DB), it was held that even if there is no provision to consult borrower in valuation of assets, sufficient safeguards have been provided to borrower and he can object to valuation under rule 8(6) even if no consultation is provided under rule 6(5).

Sale without following mandatory provisions of rule 8 is void – J Rajiv Subramaniyan v. Pandiyas (2014) 126 SCL 346 = 44 taxmann.com 183 (SC).

Notice to borrower regarding auction sale under rule 8(6) of Security Interest (Enforcement) Rules, 2002 is mandatory and failure to issue such a notice would vitiate auction itself – Lalit Mohan Aggrawal v. Andhra Bank (2021) 165 SCL 711 = 127 taxmann.com 286 (Del HC DB).

The authorised officer shall upload the detailed terms and conditions of the sale of movable secured assets in website of financial creditor. This should include details as prescribed in rule 6(4) of Security Interest (Enforcement) Rules, 2002, inserted w.e.f. 17-10-2018.

Notice of sale shall also be fixed on a conspicuous part of immovable property and authorised officer shall upload the detailed terms and conditions of the sale on website of financial creditor. This should include details as prescribed in rule 8(7) of Security Interest (Enforcement) Rules, 2002, inserted w.e.f. 17-10-2018.

Till 18-7-2018, the words were ‘may be put on website of the secured creditor on internet’ [rule 8(7)].

Public notice for sale of immovable property – If sale of such security assets is being affected by either inviting tenders from public or by holding public auction, the secured creditor shall issue public notice in form given in Appendix IV-A, to be published in two leading newspapers including one in vernacular language having wide circulation in the locality   [Proviso to Rule 8(6) of Security Interest (Enforcement) Rules, 2002 as substituted on 17-10-2018]

Till 17-10-2018, the proviso to rule was reading as follows – If sale is by public auction or tenders, secured creditor shall put up a public notice in two leading newspapers, one in vernacular language, by setting out term of sale, which shall include

(a) Description of immovable property to be sold, including encumbrances known to secured creditor

(b) Secured debt for recovery of which property is to be sold

(c) Reserve price below which the property may not be sold

(d) Time and place of public auction or time after which sale by any other mode will be completed

(e) Earnest money deposit

(f) any other material details as considered essential by authorised officer. [Proviso to Rule 8(6) of Security Interest (Enforcement) Rules, 2002 existing upto 17-10-2018]