Bank Auction Date Is Near: Can DRT Stop the Property Sale?

Why Does a Near Auction Date Create a Serious Property Risk?

Having a near auction date means several deadlines are rapidly approaching for the borrower. The bank has changed its tactics from merely calling for payment. It is now trying to liquidate the asset that it holds security over by way of a statutory sale. Under Section 13, a secured creditor can enforce its security interest without obtaining an ordinary civil-court decree first, if statutory requirements are met.

The most immediate threat is loss of possession of the property. A homeseeker borrower could become displaced. A business borrower could lose the location where employees operate, machinery is stored or inventory is sold.

Often family members also find out about the reality of the situation too late, according to Advocate BK Singh. One family member may have been conducting all communications with the bank. Coowners, successors or guarantors may not have known about notices of possession and auction.

What Does the DRT Examine in an Auction Dispute?

However, it does not automatically mean that every subsequent action was compliant." According to Section 17, the facts, evidence and actions taken by the secured creditor must be examined.

The Tribunal has the authority to look into the loan agreement, mortgage deeds, declaration of NPA, demand notice, hearing of objections if any, record of possession, valuation report and fixing of reserve price and sale notice.

Advocate BK Singh explains "It's about distinguishing between a debt dispute and an enforcement dispute". Subjective factors such as emotional distress or a vague claim of unfair treatment, however, cannot prove an unlawful flaw. Important because DRT examination is linked with the actions taken under SARFAESI Section 17.

How Do Earlier Recovery Stages Build the Problem?

An auction notice is usually not the first event in a series of events. The account gets classified as an NPAs. Notice demanding payment is issued. The borrower can raise objections. Only when the dues are not cleared, can the bank go for takeover and auction as per Section 13(4).

Every notice leaves behind a trail. The demand notice mentions the amount demanded and the secured asset. The possession notice documents the bank's claim on taking control. The auction notice adds the reserve price to the mix along with EMD, date of inspection and date of auction.

Advocate BK Singh has come across cases where borrowers have only retained the auction notice and thrown away all the previous correspondence.

Possession help could have also been sought by bank via Section 14. By then, the case for sale can coincide with the physical possession. So, the issue of DRT possession and Section 14 process can exist along with the auction notice.

Can Defective Service Make the Auction More Complicated?

Service of notice is commonly contested. Borrowers may claim that notices were sent to an incorrect address, served upon an employee or affixed when no one was available. The bank may produce receipts from the Post Office, tracking details, acknowledgement, copies of the newspapers where they were published etc.

Failure to receive notice and improper service are not necessarily identical issues. The position of a borrower who failed to intimated his change of address to the bank may not be the same as someone whose correct address was known but not used.

"Most cases of service disputes relate to different addresses given in the loan application form, the mortgage deed and subsequent correspondence," says Advocate BK Singh. Such variance would impact if the person concerned was given a fair opportunity of knowing about the recovery proceeding and the date fixed for auction.

Why Do Valuation and Reserve Price Disputes Matter?

Rs Resale Round-up: The Reserve Price Is More Than Just A Round Number

The Reserve price is consciously not just some round figure. Security Interest (Enforcement) Rules link sale of immovable property to valuation by an approved valuer and fixing of a reserve price. Material auction particulars are also required to be included in the sale notice.

If set low, the reserve price itself can land the borrower in a position of suffering double loss. He may lose the property for sale at a price lower than what he values it at; but still have a balance to lose.

Advocate BK Singh sees disputes relating to old reports; properties where inspection is incomplete; construction ignored; area shown incorrect or reductions not explained after failed auctions. The Reserve Price and valuation page contains reasons why the age of the report' and description of asset' can become quite crucial.

The challenge is evidentiary: the borrower's complaint and the bank's record of valuation may show up two entirely different versions of the same asset.

What Happens When Tenancy or Co-Ownership Is Disputed?

Tenants, relatives, partners or co owners residing in or using the secured property but whose names are not parties to the loan account may cause conflicts with respect to the nature, existence and validity of their rights as against the bank seizing the property.

A tenant will produce a lease deed and rent receipts in support of his claim. Bank would contend that tenancy was created after mortgage or subsequent to demand notice. Partners/co owners would argue that only part of share was mortgaged. Spouse/ heir would contend that his consent was never taken for mortgage of entire property.

Advocate BK Singh says many such cases become tricky when it is a family arrangement and all transactions were by way of oral agreements or documents were not registered at all.

Section 17 allows DRT to inquire into certain tenancies and leasehold rights arising out of secured assets. The conflict usually arises if the right claimed is bona fide, legally valid and antecedent to the enforcement process.

Why Does Third-Party Bidding Change the Position?

Until entry of the bidder, dispute resolution was between the bank and related parties of the property. Once auction concludes, purchaser can claim an independent interest relying on published terms, accepted bid and deposited amount.

On the one hand, borrower may raise issues regarding defects in notice, valuation or procedure of sale. On the other hand, purchaser may raise defenses that their bid was bona fide.

Advocate BK Singh cautions that borrowers tend to believe property is theirs until registration. Bid acceptance, deposit followed by confirmation and certificate of sale each add another protection for buyers."

An objection to e-auction notice therefore can complicate matters beyond the original loan relationship by including third party claims against each other.

How Do Limitation and Jurisdiction Increase the Risk?

Section 17 relates to an application made within sixty days from the date of such measure. The calculation can be challenged if possession, publication and auction dates are different. Sometimes borrowers compute from the date of auction itself when even an earlier step is challenged.

Territorial Jurisdiction poses another challenge. Factors such as location of the secured asset, place where cause of action arose and place of branch where account was maintained are part of relevant facts. A loan can be sanctioned in Delhi, administered from Noida and the property offered for security can be in Ghaziabad.

BK Singh, Advocate has often noticed borrower getting confused between forum that is legally competent to entertain the matter ie. DRT and the forum that is convenient for borrower.

As per statistics shared on National portal of DRT Lawyer, auction recasts are filed from various DRT jurisdictions but all disputes are linked to respective documents and territorial facts.

Which Missing Documents Make the Problem Harder to Prove?

The borrower might know that something is amiss but may not have documentary evidence to prove it. Commonly missing documents are sanction letter, loan documents, account statements, demand notice, reply to objection notice, possession notice, valuation report, advertisement of sale and settlement letters.

While banks are likely to have organized recovery files, borrowers may have only random messages, half emails and snapshots. BK Singh, an advocate has come across guarantors not having copies of guarantee deeds executed by them and owners not having the full mortgage schedule.

Lost envelopes, email headers or newspaper copies can also leave the date of knowledge ambiguous.

Why Can Settlement Talks Create False Comfort?