Business Laws

The limits of “As-Is Where-Is” in SARFAESI auctions

| Updated on March 21, 2021

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The SARFAESI Act of 2002 empowers a secured creditor—usually, a bank—to sell the pledged immovable property and recover his dues. Such sales are usually done by a public auction. In these auctions, the bidder bids for the asset on ‘as is where is’ and ‘as is what is’ condition, meaning the winning bidder inherits all the physical and legal conditions of the secured asset; the secured creditor is not responsible for any charge, lien or encumbrance on the auctioned asset.

So, then, can the secured creditor wash his hands off, after concluding the sale. That’s what ‘as is where is’ or ‘as is what is’ would mean. Often, the auction purchaser has found the title defective or some other issue that he was not made aware of; in all these cases the creditors have tried to hide behind the ‘as is where is’ condition. In a bizarre application of the doctrine of caveat emptor, creditors have generally held that the purchaser ought to have made proper due diligence before purchasing the asset. But the courts in the country have always taken a fairer view, protecting the successful bidder.

Legal experts Sachin Gupta and Amir Ali Bavani of Dhir & Dhir Associates cite several case laws to prove this point. Writing in Mondaq, a syndication platform for legal articles, they cite the case of Rekha Sahu Vs UCO Bank the High Court of Allahabad observed that under Section 55(1) of the Transfer of Property Act, 1882, a seller is bound to disclose to the buyer any material defect in the property or title thereto.

The court also noted that “a duty is cast upon the authorised officer of the secured creditor to disclose to the auction purchaser any material defect in the title, failing which it could be construed that the purchaser was misled.”

‘Pending application’

Likewise, in Atishaya Construction Pvt. Ltd Vs Central Bank of India, the dismayed auction purchaser approached the High Court of Gujarat for a refund of the sale consideration, arguing on the premises that the bank was unable to hand over the possession of the property in question as an application was pending with the Chief Metropolitan Magistrate–something he had not been made aware of before the purchase. The bank pointed its index finger at the ‘as is where is’ clause. The court would have none of it. It ordered the refund.

Gupta and Bavani cite the case of Jai Logistics Vs Syndicate Bank, where the property was found to be encumbered. In this case the High Court of Madras observed thus: “We also take this opportunity to suggest that it is for the banks and financial institutions to indicate the encumbrance both by way of alienation in respect of the property or other statutory liabilities of the company or the individual, as the case may be, in the sale notice itself to avoid a situation like this. Equally, the banks and financial institutions could also make it clear in the auction notice in the case of no other liability by the company or individual.”

This consistent stand of the courts is also seen in the cases of Royal Star Trading Co Vs IFCI and Mandava Krishna Chaitanya Vs UCO Bank. In the latter case, the High Court for the State of Telangana and Andhra Pradesh said that caveat venditor was more the norm in the present milieu than the outdated caveat emptor.

Published on March 21, 2021

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