As the legal framework for curtailing and controlling mounting Non-Performing Assets ("NPA") started becoming inadequate, there was a spike in the number of the slow recovery of defaulting loans by the Financial Institutions.The Government of India, therefore, constituted the Narasimhan Committee I and II and Andhyarujina Committee ("Committees") to examine banking sector reforms. The Committees inter-alia, have suggested enactment of new legislation for securitization and empowering banks and financial institutions to take possession of the securities and sell them without the intervention of the Courts.  Based on the recommendations of the Committees, Central Government enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("SARFAESI Act"),which came into force on 21st June 2002.

Main Objectives of The SARFAESI Act

The SARFAESI Act entitles a Secured creditor to enforce Security Interest created in its favour in a time-bound manner, decrease asset-liability mismatches, and transfer of NPA accounts to Asset Reconstruction Companies.It further lets the Secured creditor formulate a legal framework for Securitisation of Assets and provides for a speedy adjudicating mechanism for addressing the grievances of the aggrieved parties.

Enabling Provisions Under SARFAESI Act for Enforcing Security Interest for Realizing Defaulted Amount

After availing financial assistance from a Secured creditor, if a borrower defaults in repaying the secured debt, the loan account of the borrower will be classified as NPA. Section 2(1) (o) of the SARFAESI Act provides that NPA is a loan that has been organized by a bank or financial institution as sub-standard, doubtful, or loss asset. Further, a master circular released by the Reserve Bank of India ("RBI") in 2014 stated, "to move towards international best practices and to ensure greater transparency, 90 days'  overdue  norms for identification of NPAs have been made applicable". This means that a loan account would be categorized as an NPA if the interest and/or installment of principal remain overdue for more than 90 days.

After that, asecured creditormay enforce its rights under SARFAESI Act by issuing a notice under Section 13(2) to the borrower calling upon it to pay the outstanding/defaulted amount withinsixty (60) days from the date of the notice.If theborrower fails to discharge its liability according to receipt of notice under Section 13(2) of the SARFAESI Act, a secured creditor can take one or more recourses contemplated under Section 13(4) of the SARFAESI Act in compliance with rules stipulated under Security Interest (Enforcement) Rule, 2002 ("Rules").

A secured creditor can proceed with the sale of the secured immovable asset only following the procedure contemplated under the Rules. If the sale of secured asset is being effected by either inviting tenders from the public or by holding a public auction, a secured creditor shall cause a public notice as per rule 8(6)a to rule 8(6)fof the Rules. As per rule 8(6) of the Rules,the secured creditor has to inter-alia disclose in the public auction notice the description of the secured asset, which is to be auctioned, along with details of the encumbrances known to the secured creditor.

Sale of Secured Asset by Public Auction 

As a general practice,in most of the public auction notices, in addition to other conditions mentioned, a secured creditor incorporates a condition that the secured asset is auctioned on an "as is where is" and "as is what is" basis unless specified otherwise. This means a successful bidder of the secure asset will inherit all the physical and legal conditions of the secured asset,and a secured creditor shall not be responsible for any charge, lien, and encumbrance, etc. for auctioned secured asset. A successful bidder of the secured asset under the public auction has to pay the sale consideration as per the timelines provided under rule 9(3) and rule 9(4) of the Rules.If the auction purchaser does not comply with it, the amount already paid shall be forfeited by the secured creditor as perrule 9(5).

Under purchasing the auctioned asset/property and before paying balance sale consideration, there may be certain noteworthy instances.The auction purchaser may either demand the refund of the amount already paid or request for cancellation of the sale if sale certificate is already issued, inter-alia on the ground that there exists an encumbrance on the auctioned property by way of litigation, defect in title or on the apprehension that title may not be proper. Furthermore, also in a situation that the secured creditor may not be in possession to deliver physical and vacant possession of the auctioned asset/property.

When such claims are raised by the auction purchaser, the secured creditor generally rejects such claims on the ground that the secured asset was sold on "as is where is" and "as is what is" basis and would furtherassert that the auction purchaser ought to have undertaken proper due diligence before purchasing the secured asset.

The applicability of the phrase "as is where is" and "as is what is" basis in  a public auction has been taken upon for consideration in many cases by the  Hon'ble High Courts of the Country.

In the matter of Rekha Sahu vs. UCO Bank & Ors.[2013 (7) ADJ 642] ,the Hon'ble 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 further observed that a duty is cast upon the authorized 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. The Hon'ble Court further observed that the immunity claimed by the bank is evident on the pretext of as is where is and as is what is basis was dying a slow death and the secured creditor has to make due diligence before proposing its sale.

In the matter of Atishaya Construction Pvt. Ltd vs. Central Bank of India & Ors. the petitioner filed the case before Hon'ble High Court of Gujarat for a refund of the sale consideration of the property purchased in an auction conducted by the respondent bank. This was on the ground that the respondent bank was unable to hand over the possession of the property in question as an application is pending with the Chief Metropolitan Magistrate. That possession could only be given after obtaining necessary orders from the learned Chief Metropolitan Magistrate, and this vital information was not brought to the knowledge of the petitioner in the public auction notice.

The respondent bank claimed that the property was an auction on as is where is basis. The Hon'ble Gujarat High Court held that the respondent bank could not be permitted toretain the sale consideration and,additionally, not hand over the possession of the property to the petitioner. The action of the respondent bank in not handing over the property in question to the petitioner despite the total sale consideration having been deposited in terms of sub-rule (6) of rule 9 is in apparent contradiction of the Rules. In these circumstances, the Hon'ble Court opined that the petitioner is entitled to refund of the amount.

In the matter of Royal Star Trading Company vs. IFCI Limited, the Hon'ble High Court of Delhi held that as the assets had been offered for sale on an 'as is where is' or 'whatever there is'basis, it cannot be said that financial institution will not be liable.

In the matter of Jai Logistic vs. The Authorised Officer, Syndicate Bank [2010 (4) CTC 627], the Hon'ble High Court of Madras held that it was for the bank to indicate the encumbrances on the property sold under the provisions of the SARFAESI Act and it had failed to do so. Hence,for the property that was sold with undisclosed encumbrances to the detriment of the auction purchaser, the bank is not entitled to forfeit the earnest money deposit of such auction purchaser. Further, the Hon'ble Court made the following remark:

"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."

In the matter of Mandava Krishna Chaitanya vs. UCO Bank, Asset Management Branch [2018 (3) ALD 266], the Hon'ble High Court of Hyderabad for the State of Telangana and Andhra Pradesh held that the concept of 'as is where is' and 'as is what is' basis has lost its significance in the current commercial milieu, and the principle of caveat venditor is more on the rise as compared to the outdated principle of caveat emptor.


Given the judicial precedents explained hereinabove, it is safe to conclude that a duty is cast upon the secured creditor to disclose all encumbrances relating to the property, which is to be auctioned in the public notice. If a secured creditor fails to disclose encumbrances relating to the property being auctioned, it cannot later claim protection on the pretext of "as is where is" and "as is what is"basis for the fact that the same has lost its significance in the current commercial set-up. The principle of caveat emptor cannot be made applicable to the properties purchased in an auction conducted under the SARFAESI Act.

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.