SARFAESI Act | Sale Certificate Cannot Be Issued In Favour Of A Third-Party Nominee Who Was Not The Auction Bidder: Supreme Court

"An entity which did not exist when bids were invited and received could neither have been assessed for eligibility nor have participated in the auction. To allow the certificate to issue in its favour is to permit, indirectly, what could not have been done directly, a course the law does not countenance." Supreme Court, in a significant ruling dated September 30, 2026, held that a sale certificate under the SARFAESI Act cannot be issued in favour of a person or entity that did not participate in the auction, strictly invalidating the practice of issuing such certificates to "nominees."

A bench of Justice Pamidighantam Sri Narasimhan and Justice Alok Aradhe observed that the procedure prescribed by the Act and the Security Interest (Enforcement) Rules, 2002, is mandatory and that any deviation from these procedural safeguards renders the entire auction process void.

Mandatory Nature of Auction Procedure

The court underscored that the power conferred upon a secured creditor under the SARFAESI Act to sell property without court intervention is an extraordinary one, which is hedged by specific procedural safeguards. Relying on the principle 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, the court held that any breach of these requirements strikes at the root of the sale's validity.

Auction Conducted in Violation of Restraint Order

The dispute arose from a series of litigations regarding a resort in Ooty, where the Authorised Officer of the IFCI proceeded with an auction despite a subsisting restraint order from the Debt Recovery Appellate Tribunal. The court observed that receiving bids in the teeth of a court order is a step "under the provisions of the SARFAESI Act" and is entirely bereft of legal effect, regardless of whether the bank opened the bids or not.

Court Rejects Practice of Issuing Sale Certificates to Non-Bidders

The bench further addressed the illegality of issuing a sale certificate to a third party as a "nominee" of the successful bidder. It noted that the auction notice and Rule 9(2) of the Rules mandate that the sale must be confirmed in favour of the person who actually offered the highest price.

Legal Ineligibility of Non-Existent Entities

The court highlighted that in the present case, the partnership firm receiving the certificate was not even in existence at the time of the auction, making it impossible for the bank to have assessed its eligibility. By allowing the certificate to issue in the name of a non-bidder, the bank essentially bypassed the verification process required under the law.

Material Irregularity Vitiates Auction Sanctity

The court maintained that while it generally supports the sanctity of auction sales to preserve public confidence, such protection is only available to auctions conducted in accordance with the law. A sale vitiated by material irregularity, fraud, or non-compliance with mandatory statutory procedures cannot claim the protection of finality and is liable to be set aside even after confirmation.

"Sanctity is the reward of legality, not a substitute for it."

Ultimately, the Supreme Court quashed the High Court’s judgment, allowed the appeals filed by the borrower, and dismissed the appeals filed by the purchaser. The court concluded that since the entire auction process was conducted in violation of the rules, the right of redemption of the borrower remained, and no legal right accrued in favour of the purchaser, thereby rendering the issue of the sale certificate invalid.

Date of Decision: 30 September 2026