Court finds bank failed to prove guarantor's liability for restructured loan; Sale process marred by non-service of notices, undervaluation, and delayed payments
In a significant ruling on September 10, 2026, the Patna High Court, presided over by Justice G. Anupama Chakravarthy, quashed the entire sale proceedings initiated by Canara Bank against the property of Rajani Ranjan Sahu, who had stood as a guarantor for a loan granted to M/s Ashok Auto Enterprises Pvt. Ltd. The judgment highlights critical lapses on the part of the bank in complying with the mandatory provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The petitioner had initially guaranteed a loan, offering his flat as security. However, after the loan was restructured and fresh financial accommodation was granted by the bank on revised terms, the petitioner did not renew or extend his guarantee. The court found that Canara Bank failed to produce any evidence that the petitioner consented to or stood liable for the subsequent loan arrangements. This lack of continuing liability fundamentally undermined the bank's authority to enforce security over the petitioner's property.
The court further observed substantial procedural irregularities in the auction sale process. The property, originally valued at Rs. 71.30 lakh in 2011, was sold for a mere Rs. 28.60 lakh in 2015, close to a reserve price of Rs. 27.60 lakh. The valuation was markedly reduced without sufficient explanation, casting doubt on the integrity of the sale. Moreover, the successful bidder did not deposit the mandatory 25% of the bid amount (inclusive of earnest money deposit) immediately upon acceptance of the bid; only Rs. 3 lakh was deposited initially against a required Rs. 7.15 lakh. The bank's acceptance of this delayed payment without transparent reasons further tainted the auction process.
The petitioner also alleged that mandatory statutory notices under Section 13(2) of the SARFAESI Act were not properly served, resulting in denial of an effective opportunity to contest the proceedings. The court underscored the importance of strict compliance with statutory procedures, especially when the foundational authority of the secured creditor is disputed.
Rejecting the bank's argument that alternative remedies under the SARFAESI Act barred writ jurisdiction, the court held that such bar is not absolute when fundamental jurisdictional and procedural issues are raised. Consequently, the court allowed the writ petition, quashed the sale certificate dated December 14, 2015, and directed the bank to restore possession of the property to the petitioner. The judgment also emphasized that the rights of the auction purchaser are subordinate to the validity of the underlying SARFAESI proceedings and ordered the bank to refund the auction amount to the purchaser.
This ruling serves as a landmark affirmation of the necessity for secured creditors to strictly adhere to statutory mandates and procedural fairness under the SARFAESI Act, particularly in cases involving guarantors whose liability may not extend to restructured loans without explicit consent.
Bottom Line:
SARFAESI Act - Sale proceedings by secured creditor quashed due to material irregularities, non-service of statutory notices, and failure to establish continuing liability of guarantor for subsequent financial accommodation.
Statutory provision(s):
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Sections 13(2), 13(4)
Rajani Ranjan Sahu v. Canara Bank, (Patna) : Law Finder Doc Id # 2977266
