Post-Auction Settlements by Banks — Questions and Case Law
It is very common knowledge that the Banks & Financial Corporations put immovable properties to Public Auctions in the case of defaulting borrowers but post auction sometimes engage in settlement with the defaulters. Is such an action of the Bank patently illegal? Does such an action of the bank put a question mark on the the very Integrity of the Banking Sector? The present Article deliberates on the questions posed and refers to the recent case laws in this regard.
It would be trite to refer to a recent Apex Court judgement, wherein the Court rebuked and pulled up Punjab National Bank (PNB) for entering into a post-auction settlement with a defaulting borrower, thereby jeopardizing the rights of a bona-fide auction purchaser. The case underscores the paramount importance of procedural sanctity in recovery proceedings. The Court characterized the bank’s conduct as a “sorry state of affairs” for a nationalized institution, emphasizing that such lapses erode public confidence in auction processes under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This ruling dated 10/09/2025, delivered in the case of Mohammad Zubair Ahmad v. Punjab National Bank & Anr. (Special Leave Petition (C) No. 7273/2025) ,not only safeguards the auction purchaser’s interests but also mandates systemic reforms to prevent recurrence, including policy decisions and departmental inquiries against erring officials.
The judgment serves as a clarion call for banks and financial institutions to adhere strictly to the statutory framework of the SARFAESI Act, reinforcing the finality of confirmed auctions and limiting post-auction interventions. By directing the issuance of a final sale certificate and the withdrawal of collateral litigation, the Court has reaffirmed the Act’s objective of expeditious debt recovery without undue interference from settlements or alternative dispute resolution forums like Lok Adalats, unless all stakeholders are impleaded.
The SARFAESI Act: A Brief Overview
Enacted in 2002, the SARFAESI Act empowers banks and financial institutions to enforce security interests over secured assets without court intervention, streamlining the recovery of non-performing assets (NPAs). Section 13 of the Act outlines the mechanism, upon default, wherein the secured creditor issues a notice demanding repayment within 60 days (Section 13(2)). If unmet, the creditor can take possession (Section 13(4)) and sell the asset through auction or private treaty (Section 13(5) and Rule 8 of the Security Interest (Enforcement) Rules, 2002). The Act’s non-obstante clause (Section 35) overrides conflicting provisions in other laws, ensuring swift enforcement.
A cornerstone principle is the sanctity of the auction process, which promotes transparency and maximizes recovery for creditors while protecting third-party purchasers. However, the Act balances this with borrower safeguards, such as the right to redemption under Section 13(8), which extinguishes upon publication of the auction notice. Judicial interpretations have consistently upheld this balance, cautioning against post-auction dilutions that could deter investor participation.
Factual Matrix of the Case
The dispute originated from PNB’s invocation of SARFAESI proceedings against a borrower who defaulted on a loan secured by immovable property. Following the borrower’s failure to redeem, PNB took symbolic possession and issued a public notice for auction under Rule 8(6) of the Enforcement Rules. The property was successfully auctioned, with the petitioner, Mohammad Zubair Ahmad, emerging as the highest bidder and depositing ₹42 lakh via RTGS as the sale consideration.
It was neither known nor revealed to the auction purchaser, that the borrower had challenged the proceedings before the Debt Recovery Tribunal (DRT), Dehradun, via a securitisation application under Section 17 of the SARFAESI Act. During the National Lok Adalat proceedings before the DRT, PNB and the borrower reached an out-of-court settlement, agreeing to recall the recovery measures and refund the auction deposit. The bank refunded the amount to the petitioner without issuing the final sale certificate under Rule 9(11), claiming ignorance of the deposit initially.
Procedural History: From DRT to Supreme Court
The saga unfolded across multiple forums, illustrating the perils of fragmented proceedings under SARFAESI:
DRT Proceedings
The borrower’s Section 17 application challenged the notice under Section 13(4). The Lok Adalat settlement, excluding the auction purchaser, effectively nullified the auction, prompting DRT to summon PNB’s Manager and General Manager for non-compliance.
High Court Intervention
PNB filed a writ under Article 226 against the DRT order, securing a mere notice issuance. This interim step delayed finality for the auction purchaser.
Supreme Court Escalation
Noting the “gross” facts, the Court summoned PNB’s Chairman and Managing Director (CMD) for personal appearance. During the hearing, Attorney General R. Venkatramani conceded the lapse, assuring an internal inquiry and policy overhaul.
The Court’s intervention was swift, recording the AGI’s undertaking to withdraw the writ and issue the sale certificate within 48 hours, alongside executing the conveyance deed.
Supreme Court’s Key Observations: A Scathing Indictment
The bench’s oral remarks painted a vivid picture of institutional malaise. Justice Pardiwala lambasted PNB for “turning a blind eye” to procedural norms, warning that such conduct “loses the sanctity of auctions” and deters participation:
“Nobody will participate; financial institutions, banks will be at a loss. No one will come forward to purchase secured assets. They will think why should I get into this trouble, I can invest this money somewhere else.”
The Court decried the settlement as “collusion,” questioning the exclusion of the auction purchaser from Lok Adalat proceedings.
Broader Systemic Critiques
The judgment emphasized that constitutional courts, including High Courts, must exercise “restraint” in SARFAESI matters, citing a “catena of decisions” against routine writ jurisdiction. The Court urged banks to internalize this, directing PNB’s CMD to formulate a policy decision “at the earliest” to curb such filings. It further mandated departmental action against erring officials, probing for “mischief or collusion,” though ultimately leaving it to the bank’s “better discretion.”
The ruling clarified that while borrowers retain remedies against flawed auctions (e.g., via fresh Section 17 applications post-sale certificate), post-confirmation settlements cannot retroactively vitiate completed sales.
Directions Issued: Restoring Procedural Equilibrium
The operative order was unequivocal:
- PNB to unconditionally withdraw its writ from the Allahabad High Court.
- Issue the final sale certificate under Rule 9(11) within 48 hours of withdrawal.
- Execute the deed of conveyance as per law.
- Initiate departmental proceedings against responsible officials.
- Formulate and implement a policy on settlements and writ filings in SARFAESI cases.
These directives not only vindicate the auction purchaser but also fortify the Act’s enforcement architecture.
Elaborate Analysis of Relevant Case Laws – Reinforcing Auction Sanctity
The Supreme Court’s ruling draws from a rich tapestry of precedents, emphasizing finality, transparency, and limited judicial interference in SARFAESI proceedings. Below is an elaboration of key judgments:
Key Judgments
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Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd. (2023) 10 SCC 397
In this seminal decision, a Constitution Bench resolved the conflict between Section 13(8) of the SARFAESI Act (post-2016 amendment) and Section 60 of the Transfer of Property Act, 1882 (TPA). The Court held that the borrower’s right to redeem the mortgage extinguishes irrevocably upon publication of the auction notice under Rule 8(6). Any attempt to redeem thereafter constitutes a “clog on redemption,” rendering such efforts void. The bench underscored the “sanctity of public auctions,” noting that diluting this would undermine creditor confidence and deter bidders, mirroring the concerns in the instant case.This precedent directly bolsters the exclusion of post-auction settlements without impleading purchasers.
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Sanjay Sharma v. Kotak Mahindra Bank Ltd. (2025) INSC 12
A recent ruling (January 2025) reiterated the finality of confirmed auctions, holding that minor procedural irregularities (e.g., valuation discrepancies) do not warrant setting aside sales unless vitiated by fraud, collusion, or gross underbidding. The Court affirmed that Section 13(8) limits redemption to pre-auction stages, emphasizing that “public auctions must not be set aside lightly to preserve stakeholder trust.” In the PNB matter, this aligns with the bench’s refusal to countenance the settlement as a valid ground for refunding the deposit.
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Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. (2014) 6 SCC 1
This nine-judge bench clarified the rights of third-party occupiers in auctioned properties, holding that bona fide purchasers under SARFAESI acquire indefeasible title free from encumbrances, subject to limited eviction protections. The Court stressed the Act’s non-obstante effect, prohibiting post-sale claims that erode auction sanctity. Applied here, it protects the petitioner’s deposit and entitles him to conveyance, overriding the borrower’s settlement.
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Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311
Upholding the constitutional validity of SARFAESI, this landmark case established that the Act’s measures are “fair, reasonable, and non-arbitrary,” provided procedural compliances are met. It cautioned against borrower-favoring dilutions post-notice, a principle echoed in restricting Lok Adalat settlements without stakeholder notice.
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Phoenix ARC Pvt. Ltd. v. Vishwa Bharati Vidya Mandir (2022) 5 SCC 345
The Court ruled that sale certificates under Rule 9(11) are conclusive proof of title, not requiring mandatory registration under the Registration Act, 1908, unless disputed. This expedites conveyance, directly informing the instant directive to issue the certificate forthwith.
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M/s. ITC Ltd. v. Blue Coast Hotels Ltd. (2018) 6 SCC 762
Addressing writ jurisdiction, the Court held that High Courts must exercise “great circumspection” under Article 226 in SARFAESI matters, intervening only for jurisdictional errors or patent illegality. This reference in the PNB judgment cites such precedents to deter banks from forum-shopping via writs, as PNB did here.
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Recent Affirmations: Confirmed Sales and Irregularities (2024 INSC 978)
In a December 2024 judgment, the Supreme Court outlined exceptions for setting aside confirmed sales—collusion, fraud, inadequate pricing, or underbidding—excluding unilateral settlements. Justice Pardiwala’s “collusion” remark invokes this, probing the Lok Adalat pact.
These precedents collectively fortify the ruling, ensuring SARFAESI’s efficiency while curbing abuse.
Implications and Conclusion: Towards Robust Recovery Mechanisms
The Mohammad Zubair Ahmad judgment is a watershed, compelling nationalized banks to introspect and reform. By mandating policy decisions, it addresses systemic vulnerabilities, potentially influencing RBI guidelines on NPA recovery. For auction purchasers, it instills confidence; for borrowers, it clarifies redemption timelines without foreclosing legitimate challenges.
Ultimately, the Court has recalibrated the scales: Expeditious enforcement under SARFAESI must prevail over ad-hoc settlements, preserving the Act’s sine qua non—sanctity and finality. As nationalized banks grapple with mounting NPAs, this directive is not merely admonitory but transformative, urging a “house in order” for fiscal prudence and judicial economy.
