Gujarat HC issues notice in challenge to rule on sale of secured assets by private treaties

The Gujarat High Court has issued notice in a challenge to Rule 8 (8) of the Security Interest (Enforcement) Rules, 2002 [‘2002 Rules’].In the event of a loan default and subsequent invocation of the Securitisation Act, 2002, Rule 8 (8) of the 2002 Rules effectively enables secured creditors to disregard methods such as a public auction/public tender and sell the immovable secured assets of the borrowed by means of a written settlement or a private treaty with the proposed purchaser. After a 2016 amendment, it states,

“Sale [of immovable secured assets] by any method other than public auction or public tender, shall be on such terms as may be settled between the secured creditor and the proposed purchaser in writing.“

This provision has now been challenged as unconstitutional and ultra vires the Securitization Act on the ground that it permits the sale of secured assets without the consent of all concerned stakeholders.

The petitioner, the Director of pharmaceutical company Umbilical Pharmaceutical Pvt Ltd, is aggrieved by the sale of certain secured property belonging to the company without his consent. The challenged sale was being carried out by means of a private treaty, which was signed off by the company.

The petitioner contends that the sale was carried out at a significantly undervalued price and with the collusion of two other Directors of the company.

Pertinently, he has argued that being a guarantor for the loan in question, his consent ought not to have been bypassed by the private treaty. Challenging Rule 8 (8) which allows for sale by terms of the private treaty/written settlement between the secured creditor and the purchaser, the petition states,

“.. the Amended Rule 8(8) is ultra vires as it is manifestly arbitrary and contrary to Article 14 and 300A of the Constitution of India, 1950 as the same permits the Banks and FIs to sell the secured property of the Borrower (including guarantor) without taking the consent of all the parties i.e. stakeholders.“

The concept of private treaties for the sale of secured assets itself has been criticised by the petitioner as being arbitrary and an anathema to public policy and the Constitution, as it facilitates backdoor dealings as per the convenience of the secured creditor.

He has argued that Rule 8 (8) represents a new substantive disability of sale by mode of private treaty, which affects the interests of borrowers, including guarantors, whereby they are denied maximum recovery from their property by public auction. Such a provision is also beyond the scope of the parent Securitisation Act, he has contended.

The petitioner has also challenged orders of the Debt Recovery Tribunal, Ahmedabad, which had refused to acknowledge his locus in the matter and declined to grant any relief.

Whereas the petition had originally posed a challenge to related provisions in Section 5 of the Securitisation Act and Rule 8 (5) (d) of the 2002 Rules, Senior Advocate SN Shelat along with advocate Masoom K Shah submitted on behalf of the petitioner that they are not pressing the challenge on these provisions. The scope of the challenge before the High Court is confined to Rule 8 (8).

The Bench of Chief Justice R Subhash Reddy and Justice Vipul M Pancholi has issued notice in the matter returnable by December 12.

Corrigendum: The article had erroneously quoted Rule 8 (8) of the Security Interest (Enforcement) Rules, 2002 as it stood before its amendment in 2016. The error is regretted and has been rectified.

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