Valuation and Methods of Sale under SARFAESI: Rule 8(5)

How the secured asset is valued and sold decides how much of the debt is recovered and how much the borrower loses. Rule 8(5) requires a valuation by an approved valuer and a reserve price, then allows four methods of sale, with private treaty hedged by the need for written terms. In J. Rajiv Subramaniyan the Supreme Court voided a sale that ignored these rules. This note sets out valuation, the methods, and the case.

1. Valuation and Reserve Price

Figure 1: Value first, then sell

• Approved valuer, Rule 8(5). Before sale, the authorised officer must obtain a valuation from an approved valuer, so the price rests on a professional estimate (Topic 25)
• Reserve price. The reserve price is fixed on that valuation in consultation with the secured creditor, and the asset may not be sold below it.
• Public notice, Rule 8(7). The notice must state the property and encumbrances, the secured debt, the reserve price, the time and place of sale, the earnest money and other material terms.
• Thirty days' notice, Rule 8(6). The borrower must be served thirty days' notice of the sale, as Mathew Varghese held mandatory (Topic 52)

2. The Four Methods of Sale

Figure 2: Rule 8(5) and the Rule 8(8) safeguard

• Quotations. Quotations from persons dealing with similar secured assets, useful where there is a trade market for the asset.
• Public tender. Tenders invited from the public, preceded by a public notice in two newspapers, one in the vernacular.
• Public auction. Public auction, including e-auction, again on public notice, the most common and most transparent method.
• Private treaty, Rule 8(8). A sale other than by public auction or tender must be on terms settled between the parties in writing, so a bank cannot strike a private deal on its own.

3. J. Rajiv Subramaniyan v Pandiyas (2014)

Figure 3: A private sale that ignored the Rules

• What went wrong. The bank sold by private treaty, through its agent, without written terms agreed with the borrowers, who were not even present when the sale was fixed.
• Rules 8 and 9 breached. The borrowers were denied the notice that lets them redeem or ensure the best price, and the Rule 8(8) requirement was ignored.
• The creditor as trustee. The Court held the secured creditor must take bona fide measures to obtain the maximum yield from the asset, for the borrower's benefit as much as its own.
• Sale void. The sale was declared null and void; the purchaser was refunded the price and stamp duty with interest, and possession went back on payment.

4. Frequently Asked Questions

What methods of sale are allowed under the SARFAESI Rules?

Rule 8(5) of the Security Interest (Enforcement) Rules 2002 allows the authorised officer, after obtaining a valuation from an approved valuer and fixing the reserve price in consultation with the secured creditor, to sell the immovable secured asset by obtaining quotations from persons dealing in similar assets, by inviting tenders from the public, by public auction including e-auction, or by private treaty. Public tender and auction require a public notice in two newspapers, one in the vernacular. Under Rule 8(8), a sale by any method other than public auction or tender must be on terms settled between the parties in writing.

Can a bank sell the secured asset by private treaty on its own?

No. Rule 8(8) requires that a sale other than by public auction or public tender be on terms settled between the parties in writing. In J. Rajiv Subramaniyan v Pandiyas (2014), the bank sold the property by private treaty through its agent without written terms agreed with the borrowers and without the notice the Rules require. The Supreme Court declared the sale null and void, holding that the secured creditor must take bona fide measures to obtain the maximum yield from the asset. The purchaser was refunded the price and stamp duty with interest.

5. Related Topics

• Topic 25: The Enforcement Rules 2002. The overall possession and sale procedure.
• Topic 52: Mathew Varghese. The mandatory thirty-day sale notice.