Bank of Baroda-Sunny Deol row: When can a bank auction your property and why?

Banks have a right to possess the property without the involvement of a court on the condition that the borrower has defaulted on the loan.

Last week Bank of Baroda  withdrew a property auction notice for Bollywood actor and BJP Member of Parliament, Sunny Deol's Mumbai Juhu property. The state-owned bank had initially announced the auction on as a measure to recover Rs 56 crore owed by the actor but later retracted the notice citing technical grounds. 

Deol had reportely taken a loan keeping his property as collateral, following which the bank invoked the SARFAESI Act to recover the outstanding dues. Subsequently, the notice was retracted, reportedly following the actor's deal with the bank to settle dues. But can banks really auction your property if u fail to pay your dues?

When can a bank auction your property?

"Banks usually auction the properties under the provisions of and the procedure prescribed under the SARFAESI Act and the rules made thereunder. Under these provisions a property is auctioned when the borrower, who has mortgaged his/her properties to the bank, fails to pay back to the bank.," said Shashank Agarwal, Advocate, Delhi HC.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002, was enacted to help lending institutions recover their dues from defaulting borrowers. Hence, if a borrower fails to repay the loan, the lender can take control of the assets allocated as security for the loan.

"The SARFAESI Act provides that banks can seize the property of a borrower without going to court except for agricultural land. SARFAESI Act, 2002 is applicable only in the cases of secured loans where banks can enforce underlying securities such as hypothecation, mortgage, pledge etc. An order from the court is not required unless the security is invalid or fraudulent. In the case of unsecured assets, the bank would have to go to court and file a civil case against the defaulters," explains ClearTax.

For example, if an EMI of a loan remains unpaid for over 30 days, and the non-payment persists for over 90 days, the account is then deemed a non-performing asset, following which the borrwer will be issued a formal demand. If the response is not satisfactory, a legal notice follows through a lawyer. 

What should the legal notice mention?

"The notice must mention the outstanding amount, the default date, and the details of the property to be auctioned. The notice should also be published in two newspapers, one of which must be in the vernacular language of the area where the property is located. The notice should be issued at least 30 days before the auction," said Shriya Mehta, corporate and finance lawyer.

 

The notice is served to the customer to respond within 60 days that why the bank should not initiate a auction of property due to default in payment. Borrower can pay the installments and this notice is withdrawn. Otherwise Borrower can submit his objection within 60 days with justification for non-payment of EMI. In case, no reply is received from borrower or bank is not satisfied with the reply then bank can initiate bank auction process. Once this notice expire after 60 days, bank can auction the property after 30 days.

"A demand notice is typically sent to the borrower as part of the procedure, giving them 60 days to pay the debt. If the borrower doesn't follow through, the bank has the right to seize the home and sell it at a public auction. The entire procedure typically takes 4-6 months, but it can take longer too," said Ravi Prakash, Head, Legal, Hero Realty.

Rights of Borrowers

1. The borrowers can at any time remit the dues and avoid losing the security before the sale is concluded.
2. The lender starts the process of auctioning your property to recover dues if you fail to clear what you owe or respond during the 60-day notice period. 
3. After that lender has to give another 30 days’ public notice of the upcoming sale before they can affect the final sale. The notice also has to specify the fair value of the secured asset as assessed by the banks’ valuers, along with other details like reserve price, date and time of auction. You have the right to object and declare the price which you believe to be correct if you believe the selling price is too low. The bank considers your right to receive fair value for your property and then re-values it. If you believe the asset is undervalued, you have the right to seek out a replacement buyer and introduce them to the lender.
4. You also have the right get a high sale price for your bank-repossessed property. You have the right to the balance amount if the bank has some balance left over after recovering the outstanding balance. Even if your asset is repossessed, lenders have to refund any excess amount realised after recovering their debt to you.

Regulations governing the auction process
Mehta explains the several regulations governing the auction process that banks must adhere to:

1.  The bank must issue a demand notice to the borrower that the loan is due for payment
2. The bank must issue a 60-day notice before initiating legal proceedings against the borrower
3. The bank cannot auction the property before following due legal process
4.  sale notice must be issued publicly, inviting bids for the property.
5. The bank cannot sell the property at below the reserved price. In case the auction does not fetch the reserved price, the property can be sold to the highest bidder.

"No sale can be concluded before expiry of 60 days from the date of issuance of notice of sale. If a person has won the bid and this time of 60 days has expired then the sale can be effected and the possession can be handed over to the bidder immediately, subject to payment of entire sale consideration/bid amount," said Agarwal.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act