Sanctity attaches to an auction only if it was conducted in accordance with law, the Supreme Court has held, quashing a 2011 SARFAESI sale of an Ooty hill resort in which a bid was taken despite a tribunal’s restraint, the sale was closed before the mandatory 30 days ran out, and the certificate went to a firm that never bid.
New Delhi: The Supreme Court on Wednesday, September 30, set aside the sale of the Fernhill resort at Ooty by IFCI Limited under the SARFAESI Act to M/s P.M. Associates, holding that the auction process was not conducted in accordance with the statutory framework, and allowed the appeals of the borrower, Sterling Holiday Resorts Limited, while dismissing those of the purchaser [Sterling Holiday Resorts Limited v. M/s P.M. Associates and Others].
A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, in a judgment authored by Justice Aradhe, quashed the Madras High Court’s August 2013 judgment, which had upheld the sale certificate.
Background of the case
Sterling Holiday Resorts, engaged in timeshare resorts since 1987, took a loan of Rs 2.06 crore from IFCI and Rs 3.24 crore from Tourism Finance Corporation of India in 1991, mortgaging the Fernhill resort at Ooty, Nilgiris. After a default, both lenders moved the DRT, Delhi in 2000, and IFCI issued a SARFAESI demand notice for Rs 17.71 crore in October 2007, followed by a notice of symbolic possession in August 2009. The DRT, Delhi decreed the lenders’ claim in October 2009, and the borrower settled TFCI’s dues.
In March 2010, IFCI issued an auction notice with a reserve price of Rs 20 crore, for an auction on April 28, 2010. On April 7, 2010, the DRAT, Chennai restrained the authorised officer from “in any way proceeding further” under the SARFAESI Act on the borrower depositing Rs 1 crore, which it did on April 8. IFCI nevertheless received bids under the notice, though it did not open them. The DRAT later set aside the DRT’s order, but on September 6, 2011 the Madras High Court allowed IFCI’s writ petition and set aside the DRAT order.
Within six days, on September 12, 2011, IFCI opened the bids and declared Ms. Rukmani Khemchand the successful bidder, but the full price of Rs 20,00,10,000 was paid by M/s P.M. Associates, and a sale certificate dated September 16, 2011 was issued to that firm. The borrower, meanwhile, settled IFCI’s dues, depositing Rs 8.80 crore on this Court’s permission and a further Rs 3.72 crore in February 2012. On February 8, 2012, IFCI cancelled the sale certificate and refunded the price with interest, which the purchaser encashed. In August 2013, a Division Bench of the High Court held the sale certificate validly issued, ruled that the authorised officer had no power to cancel it, and set aside the cancellation. Both sides appealed, and this Court ordered status quo in September 2013.
What the parties argued
Senior Advocates Dr. Abhishek Manu Singhvi and Rakesh Dwivedi, for the borrower, argued that the purchaser was a stranger to the auction, that the firm was constituted on September 12, 2011 by Ms. Rukmani Khemchand and her brother Mr. Murli Khemchand and did not exist when bids closed, that IFCI proceeded despite the DRAT’s restraint, that no sale was confirmed under Rule 9, and that the borrower’s right of redemption under Section 13(8) survived until registration of the sale. They added that possession had always remained with the borrower and that the purchaser had encashed the refund with interest.
Senior Advocate R. Guru Krishna Kumar, for the purchaser, argued that the authorised officer had no power to cancel a sale certificate once issued, that the borrower’s right of redemption ended on its issuance, that the borrower and IFCI had colluded, and that no prejudice arose from a firm taking the property. Kush Chaturvedi, for IFCI, submitted that the validity of the auction was not before the High Court and that the certificate was cancelled because the borrower had paid the dues.
Mandatory procedure under SARFAESI
The Court framed the determinative question as whether the auction culminating in the sale certificate was conducted in accordance with law, and did not decide the other issues argued, namely the authorised officer’s power to cancel a sale certificate, the need for its registration, and when redemption rights end. It held that the safeguards in Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 are the very condition on which the extraordinary power of sale without court intervention exists:
“Rules 8 and 9 of the Rules are mandatory and must be scrupulously followed.”
The thirty days’ notice, it said, gives the borrower a real and final opportunity to redeem the asset under Section 13(8), and a sale in breach of these requirements cannot be sustained.
Five infirmities in the auction
First, the Court held that receiving bids and earnest money was a step under the SARFAESI Act that the DRAT’s order forbade, and that IFCI’s not opening the bids did not cure it. It held that the High Court’s later judgment could not retrospectively validate what was done while the restraint was in force.
Second, applying the maxim that an act of the court shall prejudice no one, it excluded the restraint period from April 7, 2010 to September 6, 2011 from the 30 days under Rule 9(1). That left the borrower 17 days, to expire on September 23, 2011, yet the bids were opened and the sale concluded on September 12, and the certificate issued on September 16. The Court called this not a technical lapse, as the window is the very period in which the borrower may redeem.
Third, the borrower received no notice of the opening of bids on September 12, 2011, some seventeen months after the date fixed for the auction, which the Court said defeated the object of Rules 8(6) and 9(1) and offended basic fairness. Fourth, Rules 9(2) and 9(6) require the sale to be confirmed and the certificate issued in favour of the bidder, and neither the Rules nor the auction notice allows a nominee. Yet the certificate was issued, at Ms. Rukmani Khemchand’s request, to a firm that came into being only on September 12, 2011 and, under Clause 3.1 of the notice, could not have been assessed for eligibility as a registered firm.
Fifth, IFCI described the sale first as a private treaty and then as a public tender, and never produced the original records despite directions of November and December 2011, nor any details of other bidders, inter se bidding under Clause 2.10, or written terms under Rule 8(8). The Court held that either way the process could not be reconciled with the Rules.
Finality of auction sales
The Court acknowledged its repeated emphasis on the sanctity of auction sales, but held that the principle of finality presupposes an auction conducted in accordance with law, and that a sale vitiated by material irregularity, fraud or non-compliance with mandatory procedure can be set aside even after confirmation. It observed:
“Sanctity is the reward of legality, not a substitute for it.”
The Court said its conclusion was fortified by four further considerations: the borrower paid IFCI’s entire dues by February 3, 2012 while the certificate remained unregistered and possession stayed with it, which is the opportunity Section 13(8) preserves; the plea of collusion between the borrower and IFCI was devoid of substance, since the settlement was placed before the High Court; the purchaser’s money was refunded with interest within five months, whereas the borrower’s undertaking continues to depend on the resort; and under Article 300A a person can be deprived of property only by authority of law, which a sale disregarding mandatory procedure is not.
Directions
The Court quashed the High Court’s judgment of August 23, 2013, allowed the borrower’s appeals and dismissed the purchaser’s. It declined to proceed with the purchaser’s contempt petitions alleging breach of the September 2013 status quo order, given that the auction was vitiated, and dismissed the purchaser’s special leave petition against the High Court’s sanction of the borrower’s merger with Thomas Cook (India) Limited, as the purchaser’s claim had failed in its entirety. There was no order as to costs.
Case Title: Sterling Holiday Resorts Limited v. M/s P.M. Associates and Others
Case Number: Civil Appeal Nos. 10077-10078 of 2014, with Civil Appeal Nos. 10246-10247 of 2014, Contempt Petition (C) Nos. 834-835 of 2015 and Special Leave Petition (C) No. 508 of 2016
Citation: 2026 INSC 1071
Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, Supreme Court of India
Date of Judgment: September 30, 2026
Appearance: Senior Advocates Dr. Abhishek Manu Singhvi and Rakesh Dwivedi for the borrower; Senior Advocate R. Guru Krishna Kumar for the purchaser; Kush Chaturvedi for IFCI Limited