Can DRAT protect property before bank completes auction formalities?

A bank auction does not usually start on auction day with the auction-day bid. By that stage the borrower may already have received a demand notice, lost symbolic possession, seen an auction advertisement published and witnessed prospective buyers examining the property. Each step intimidates borrowers further with the reality that their home, factory, shop or family asset is about to change hands beyond practical redemption.

The question then is whether DRAT – Debts Recovery Appellate Tribunal—can save the property when the bank has finished most of the formalities and is about to complete auction. The short answer is that DRAT can grant interim protection from sale if sought in an appeal, but such relief is discretionary. It depends on the nature of the DRT order under challenge, maintainability of the appeal, requirement of statutory pre-deposit, urgency involved and the stage of sale reached.

DRAT is not usually the first forum to challenge a secured creditor’s action. Subject to certain exceptions, an aggrieved person would first approach the Debt Recovery Tribunal itself under Section 17 of the SARFAESI Act, 2002. DRAT’s jurisdiction under Section 18(1) arises only against an order of the DRT. This distinction becomes important when the bank’s auction schedule rolls on as the borrower files an appeal.

For instance, once auction publication is complete a borrower may think that the sale process is still at an early stage and can be stopped without affecting the published auction. This belief is misplaced. Publication of auction, receipt of a valid bid by auctioneer, payment by the successful bidder, confirmation of sale by creditor and issuance of sale certificate are all distinct but linked stages. The legal and practical problems escalate with each stage.

BK Singh – an Advocate at Punjab & Haryana High Court has handled numerous such matters where distraught families would ignore every prior step in the auction process focusing only on the sale certificate itself. This article attempts to highlight problems related with bank auctions at various stages but is not intended as a filing manual which would guarantee stopping of every auction sale.

The home could be lost by a residential borrower. Factories sold could deprive businessmen of the assets needed to service their debts. Guarantors might have their property sold too, even if the loan was used by a corporation or relative.

City and state boundaries introduce one more factor. Delhi has several DRTs and DRATs where petitions can be filed. The property’s location, branch where records are stored, DRT ordering sale and the DRAT with appellate jurisdiction should all correspond. Jurisdiction errors can eat into the brief period to act before an auction moves forward.

“The borrower often misconstrues ongoing negotiations as a shield against SARFAESI actions,” said advocate BK Singh. “Banks may still move forward with auctions even if they are reviewing an OTS settlement. They may give reassuring replies but continue with scheduled recovery efforts.”

Once bidding begins, the third party must consider their stake in the proceedings. Before the sale, it’s a matter between the lender, borrower and owner of the property. Once the amount is paid, someone else claims rights to the auctioned assets. That doesn’t justify an illegal auction but could make temporary injunctions harder to argue and undo.

• The appeal does not automatically stay the bank’ proceedings for auction/possession.
• Grant of interim protection is at the discretion of the DRAT and is decided on the basis of the record of appeal and urgency.
• The borrower’ statutory pre deposit is ordinarily 50% of the relevant debt due and payable, which can be relaxed to any amount not less than 25%.
• DRAT cannot ordinarily relax the statutory pre deposit requirement in full in favour of the borrower.
• Successful bidder deposits the amount or confirmation of sale amplifies the risk of the auction.
• An auction-in-process is not necessarily an auction immune from legal challenge.

DRAT is not reviewing every loan issue de novo. It reviews an appeal against a DRT order. Therefore, the quality and extent of the prior proceedings are significant. An auction protest, valuation difference, or flaw in notice that was not part of the DRT proceedings can resurface in the appeal hearing leading to arguments on pleadings, evidence and maintainability.

Borrowers sometimes misuse the term “stay” by interpreting it as immunity against all recovery steps. Borrowers should realize that an interim order can be more specific. For example, it may only apply to an upcoming auction, approval of sale, taking possession or upholding status quo. Unclearities regarding the precise scope of stay sought or allowed can lead to forfeiture even when the borrower thinks the entire recovery process is on hold.

Timing can cause a second issue. Borrowers might label auction “dossier” as “incomplete” even if the bank has already accepted the top bid or received a considerable payment amount. One cannot determine the legal effect of the pending act by viewing the sale certificate in isolation.

Such misconceptions cause great damage. The borrower believes that the appeal has been frozen on receipt/diary number / date of listing. On the other hand, the authorised officer goes ahead with accepting the bid / deadline for payment / confirmation.

BK Singh feels this presumption becomes more sinister when the auction date is scheduled prior to the date of the first effective appellate hearing. Filing before the administrative authorities and protection by the court are two different things.

Important sale related issues such as valuation, reserve price, sale notice and payment by successful bidder are regulated by the Security Interest (Enforcement) Rules, 2002. Disputes often arise with regard to compliance with procedure particularly whether the bank followed the required sequence and whether the borrower was given the opportunity mandated by statute. A significant appellate hurdle is found in the provisos to Section 18 which deal with pre deposit requirements. In order for a borrowers appeal to be heard, 50% of the debt due – as determined with reference to a statutory provision- would normally have to be deposited. DRAT may lower that amount for reasons to be recorded by it but not below 25%.

Advocate BK Singh cautions that financial distress and eligibility to appeal can coincide at this stage. The very person whose property is being sold may not be in a position to come up with the minimum amount. A genuine grievance does not in itself wipe out this statutory condition.

Contention can also come on how much is considered “amount due”. The amount can depend on what has been demanded, adjudicated and disputed. Borrowers sometimes believe that money given by the auction buyer directly offsets their deposit liability, but this belief could become untenable in law, especially where the auction itself is being contested.

BK Singh Advocate has witnessed homebuyers realise this hurdle only when the auction notice goes up. By then, inability to pay is coupled with limitation, merging priority and the bank’s sale schedule.

If a borrower challenges the reserve price as unfair, that may be tied to an obsolete or weak valuation. However, simply alleging that the auction terms were too low doesn’t prove wrongdoing. Consideration shifts to the evidence surrounding valuation, inspection, and terms of sale.

Service is another common battleground. The borrower may say they did not get the sale notice. The bank may point to records of how the notice was sent, affixed to property, emailed, or published in a newspaper. A stale address, bounced envelope, or incomplete possession document can turn arguments into a question of disputed fact.

“In cases involving family assets,” Advocate BK Singh observes, “ownership is often shared with a spouse, co-owner, tenant, legal heir, or guarantor. Any of these parties can claim their own right and the bank will see the asset as fully liable.” This will impact who the aggrieved party is, whose evidence is relevant, and if all parties are present at the Court.

Likewise, an appeal premised largely on hardship, stands weak. Losing one’s home or place of business is tragic. But appellate review typically focuses on the order of the DRT, compliance with statutes and the legality of the creditor’s actions. Pain and suffering cannot substitute for a proper record.

Here are some problem areas with respect to the record.

• Failure to clearly identify the order of the DRT being challenged
• Absence of auction notice or incomplete copies of publication
• Discrepancies between the outstanding amounts shown in bank records
• Allegations of undervalue or conspiracy that are not supported by the record
• Failure to differentiate between symbolic possession and physical possession
• Claims of ownership, tenancy or that as a guarantor, you have rights that are not supported by the record from that time period.
• Believing that correspondence around OTS equates to an agreement to suspend auction.

Advocate BK Singh cautions that contradictions can also torpedo an appeal. The borrower might disavow the mortgage in one pleading and elsewhere request to redeem the same mortgaged property. Or he might challenge the sale, but also request that proceeds from auction be modified to account for pre-deposit in appeal. These positions are legally inconsistent.

Other red flags are issuance of notice of sale, request for inspection by interested bidders, notice that a highest bid has been accepted, request for payment of outstanding purchase amount or efforts to take physical possession. Every subsequent event elevates what is at stake practically.

Retailers operating away from the city where petition is pending are at additional risk. Assumptions about travel, delayed retrieval of documents and uncertainty about which DRAT has jurisdiction can eat into precious time. Corporate borrowers are also likely to require internal authorization, minutes of the board of directors and syncing up with guarantors. Those delays can open the door for conflict at the worst time.

BK Singh, Advocate clarifies "No response from bank does not imply stay. Pending representation before the Bank cannot be treated as injunction from court of law. No fresh recovery notice can simply imply that the authorised officer is seeing the auction process internally."

You can approach DRT Lawyer for a professional review of your DRT/DRAT cases related to possession, auction or SARFAESI actions. All advice would be subject to local jurisdiction, limitation, facts and terms of existing orders.

BK Singh will not treat each and every loan repayment issue as an auction-defect opportunity. The important difference is whether a legally sustainable appealable grievance exists and whether there is a specific immediate action against the property. Results may differ.