“Sanctity Is The Reward Of Legality”: Supreme Court Invalidates IFCI’s SARFAESI Auction Of Ooty Resort Conducted in Breach of Rules
The auction had proceeded despite a subsisting restraint, concluded before expiry of the mandatory 30-day period and resulted in a sale certificate being issued to a firm that neither submitted the bid nor existed when the auction was scheduled.
Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, Supreme Court
The Supreme Court has invalidated IFCI Limited’s auction sale of an Ooty resort under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, holding that the sanctity and finality accorded to confirmed auction sales presuppose compliance with law and cannot protect a sale conducted in breach of mandatory procedure.
It consequently set aside the Madras High Court judgment which had declared the sale certificate valid and directed delivery of possession to the purchaser.
The Court also dismissed the purchaser’s challenge to the scheme amalgamating Sterling Holiday Resorts Limited with Thomas Cook (India) Limited. It clarified that the challenge did not survive after the purchaser’s claim arising from the auction failed in its entirety.
The Court was hearing cross-appeals arising from the Madras High Court’s decision restoring the sale certificate issued in favour of the purchaser, along with contempt petitions and a challenge to the order sanctioning the composite scheme of arrangement and amalgamation.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed: “We are conscious that this Court has repeatedly emphasised the sanctity of auction sales and has cautioned against lightly setting aside confirmed sales, lest public confidence in such sales be eroded. However, the principle of finality presupposes an auction conducted in accordance with law. The same line of authority recognises that a sale vitiated by material irregularity, fraud, or non-compliance with the mandatory statutory procedure does not attract that protection and may be set aside even after confirmation. Sanctity is the reward of legality, not a substitute for it.”
Senior Advocates Abhishek Manu Singhvi and Rakesh Dwivedi appeared for the borrower. Senior Advocate R. Guru Krishna Kumar appeared for the purchaser, while AOR Kush Chaturvedi appeared for IFCI Limited.
Background
Sterling Holiday Resorts Limited had mortgaged its resort property known as “The Fernhill” at Ooty to secure loans obtained from IFCI Limited and the Tourism Finance Corporation of India Limited. Following a default, IFCI initiated proceedings under the SARFAESI Act and issued an auction notice carrying a reserve price of ₹20 crore.
During proceedings before the Debts Recovery Appellate Tribunal, the borrower deposited the amount stipulated by the Tribunal, activating an order restraining IFCI from proceeding further under the SARFAESI Act. IFCI nevertheless received bids pursuant to the auction notice, though it did not immediately open them.
After the restraint ceased to operate, IFCI opened the old bids without issuing fresh notice to the borrower. An individual was declared the successful bidder, but the entire consideration of ₹20.001 crore was paid by a subsequently constituted partnership firm. The sale certificate was also issued to that firm.
The borrower subsequently discharged IFCI’s entire dues. IFCI cancelled the sale certificate and refunded the consideration with interest, which the purchaser encashed. The Madras High Court nevertheless set aside the cancellation, held the sale certificate valid and directed that possession and registration be granted after repayment of the refunded consideration.
During the Supreme Court proceedings, the Madras High Court sanctioned a composite scheme involving the amalgamation of the borrower with Thomas Cook (India) Limited. The purchaser separately challenged that order and also alleged breach of the Supreme Court’s interim status quo direction.
Court’s Observations
The Court observed that where a statute requires an act to be performed in a particular manner, it must be performed in that manner alone. The Bench held that this principle applies with particular force to the SARFAESI Act because it permits a secured creditor to take possession of and sell a borrower’s property without court intervention.
The Bench remarked: “It is a principle of long standing that where a statute requires a thing to be done in a particular manner, it must be done in that manner or not at all, and other modes of performance are necessarily forbidden. The principle applies with particular rigour to the SARFAESI Act, which confers upon a secured creditor the extraordinary power to take possession of and sell the property of a borrower without the intervention of a court. The constitutional validity of the SARFAESI Act was upheld precisely because the power so conferred is hedged in by procedural safeguards designed to protect the borrower. The safeguards are thus the very condition upon which the power exists.”
Relying on Mardia Chemicals Ltd. v. Union of India (2004), Mathew Varghese v. M. Amritha Kumar (2014) and J. Rajiv Subramaniyan v. Pandiyas (2014), the Court held that Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 were mandatory and required scrupulous compliance.
The Bench stated that the 30-day notice contemplated by Rules 8(6) and 9(1) gives the borrower a real and final opportunity to redeem the secured asset. A sale conducted in breach of that period could not be sustained.
The Court found that the Debts Recovery Appellate Tribunal had restrained IFCI’s Authorised Officer from proceeding further under the SARFAESI Act after the borrower deposited the amount stipulated by the Tribunal. Despite this restraint, IFCI received a bid and earnest money under the auction notice.
The Bench rejected the contention that the illegality was cured because IFCI did not open the bid until later. It held that receiving the bid was itself a prohibited step in the sale process.
The Bench stated: “It is settled law that an act done in violation of an order of a court or tribunal is not merely irregular but is bereft of legal effect, and that the court will not permit a party to retain the advantage secured by such defiance. The fact that IFCI refrained from opening the bids does not cure the illegality; the solicitation and receipt of the bid was itself the forbidden step. The later judgment of the High Court dated 06.09.2011 in favour of IFCI did not, and could not, retrospectively validate what was done while the restraint was in force. A bid received in contravention of a subsisting restraint cannot form the foundation of a valid sale.”
The Court observed that only 13 days of the prescribed 30-day period had elapsed when the restraint order came into force. The period during which the restraint operated had to be excluded from the calculation because the borrower was entitled to proceed on the basis that the sale stood suspended.
After excluding that period, the Bench found that the borrower still had 17 days available to exercise its right of redemption. IFCI, however, opened the bids, concluded the sale and issued the certificate before those 17 days had expired.
The Court held that this was not a technical lapse because curtailing the 30-day period directly impaired the borrower’s substantive right of redemption under Section 13(8) of the SARFAESI Act as it then stood.
The Bench further found that the borrower had not been notified when IFCI revived the auction process and opened the bids after a prolonged interval. The Court stated that conducting the sale behind the borrower’s back defeated the purpose of Rules 8(6) and 9(1).
The Court noted that Rule 9 requires confirmation of the sale and issuance of the sale certificate in favour of the purchaser who submitted the highest bid. Neither the Rules nor the auction notice permitted the successful bidder to nominate a third party.
The Bench found that an individual had participated in the auction and was declared the successful bidder, whereas the consideration was paid and the sale certificate issued in favour of a partnership firm constituted by the successful bidder and another person.
The Court further recorded that the partnership firm did not exist on the date fixed for the auction. It could neither have been assessed for eligibility nor participated in the bidding process. Permitting the certificate to be issued in its favour would indirectly allow what could not have been done directly.
The Court observed that IFCI had initially described the transaction before the High Court as a private treaty and subsequently as a public tender. Despite specific directions, the original sale records were not produced.
The Bench found that no details of other bidders or records of the inter se bidding required by the auction conditions were furnished. If the transaction were treated as a private treaty, there was equally no written record of the terms required under Rule 8(8).
Summarising the defects, the Court held: “The cumulative effect of the foregoing infirmities is unmistakable. The bid was received in defiance of a subsisting restraint; the sale was concluded before the expiry of the mandatory thirty days’ period; the certificate was issued to an entity that neither submitted the bid nor existed on the date of the auction; and the record of the auction, if any, was withheld from the court. The sale has thus taken place in violation not only of the Rules but also of the terms and conditions of the auction notice. No sanctity in law can be attached to such an auction process.”
The Court also noted that the borrower had subsequently paid IFCI’s entire dues while the certificate remained unregistered and possession continued with the borrower. The purchaser had encashed the refund of the consideration together with interest, restoring its investment within five months.
The Bench observed that the right to property remained a constitutional right under Article 300A of the Constitution and could be taken away only by authority of law.
The Bench underscored: “The right to property, though no longer a fundamental right, remains a constitutional right under Article 300A, and a person can be deprived of property only by the authority of law. A sale that disregards the procedure mandated by the statute is not a deprivation by the authority of law.”
Having found the auction process itself illegal, the Court considered it unnecessary to decide whether the Authorised Officer possessed power to cancel the sale certificate, whether the certificate required registration or the precise point at which the right of redemption stood extinguished.
Conclusion
The Supreme Court set aside the Madras High Court judgment and allowed the borrower’s appeals. It dismissed the purchaser’s cross-appeals after holding that no right had accrued from the illegal auction process.
The Court declined to proceed with the contempt petitions. Since the purchaser’s auction claim failed entirely, its challenge to the scheme amalgamating the borrower with Thomas Cook (India) Limited no longer survived and was dismissed.
Cause Title: Sterling Holiday Resorts Limited v. M/s P.M. Associates & Ors. (2026 INSC 1071)
Appearances
Appellants: Senior Advocates Guru Krishna Kumar and Haripriya Padmanabhan; AORs Amit Pawan and K.K. Mani; Advocates Anand Nandan, Hassan Zubair Waris, Udai V.S. Rathore, Aastha Shrestha, Vishesh Goel, Shivangi Singh Rawat, Suchit Singh Rawat, Pushkar Karni Sinha, V. Shyamohan, Aditi Gupta, Tushar, Anshika Bajpai, T. Archana and Rajeev Gupta
Respondents: Advocates Shalini Kaul, Amit Pawan and Kush Chaturvedi; Advocates Prerna Priyadarshini, Syed Faraz Alam, Ayesha Choudhary, Pramothesh Mukherjee, Sonali Kumari and Ishita Singh Tomar