Understanding the ‘As is’ Clause of Auction: SARFAESI Act, 2002

The principle of ‘as is where is’ and ‘as is what is’ are clauses that are used together, against which Non-Performing Assets (NPA) are auctioned as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.

When a borrower defaults in paying a debt due to a banking institution (Secured Creditor),[i] the loan account is then converted into a Non- Performing Asset.[ii] Thereafter, the Secured Creditor has the power to issue a notice informing the borrower to repay the debt amount within 60 days of issuance of said notice.[iii] When the borrower fails to pay the secured amount, the secured creditor then has the authority to sell the secured asset[iv] under Section 13(4) of the SARFAESI Act.

The sale of such an asset is done via a public auction after the issuance of a public auction notice[v] which incorporates a condition stating that the secured asset in question is being sold on an ‘as is what is’ and ‘as is where is’ basis unless specified otherwise. It means that the highest/successful bidder will be granted total control over the asset alongside all its physical and legal conditions, thereby nullifying the Secured Creditor’s responsibility related to encumbrances, charges etc.[vi]

A big reason why Secured Creditors use this particular clause is to insulate themselves from subsequent refund requests, cancellation of sale based on pending encumbrances and improper title, amongst others. The assertion on behalf of the Secured Creditor is that the ‘as is where is’ and ‘as is what is’ clause upholds the principle of caveat emptor (a Latin phrase which means that the buyer is responsible for checking the nature and quality of goods and undertaking due diligence before the sale is complete).[vii]

In recent times, however, the principle is finding very little takers as the clause has seen misuse, resulting in improper sales effectuated by wilfully misleading the buyer.[viii] Courts have highlighted that banks cannot claim immunity on the pretext of the clause and that the Secured Creditor has to carry out their respective due diligence and make sure that the asset is free of all encumbrances. The precedents have also indicated that in case encumbrances make the asset transfer impossible, the sale will not be validated, and the sale consideration will have to be refunded to the bidder.[ix]

Interestingly, courts have found that instead of the ‘as is where is’ and ‘as is what is’ principle used in such auction transfers, the concept of caveat venditor (let the seller beware) is gaining more significance.[x] Hence, it has been stated that as per Rule 8(6)(f) of the Security Interest (Enforcement) Rules, the Secured Creditor should set out all the encumbrances and material facts so that the purchaser can then adjudge the nature of the property and make an informed decision.

Liability in such cases however, does not rest with the seller alone as courts have also held that there is a duty upon the intending purchaser as well to verify the liabilities of the asset since they will not be allowed to cancel the purchase upon discovery of encumbrances later or it might result in forfeiture of security deposit.[xi] As a result, the threshold of due diligence has now been increased. Even if the encumbrance certificate is shown before the auction, it will not amount to stringent compliance as per Rule 8(6), and all material factors have to be enlisted in the notice as per Rule 8(6)(a) and (f).[xii]

Even after the court’s directions and enlistment of procedures which negate the usage of the ‘as is where is’ and ‘as is what is’ clause, it is a common market practice to use the same. However, its existence is gradually getting overshadowed by the principles of due diligence and caveats.

This post is written by Varda Saxena, law student at Jindal Global Law School and Member, Legal Entrepeneurship Cell.

References

[i] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, s. 2 (1) zd. [ii] Id. at s. 2(1) o. [iii] Id. at 13 (2). [iv] Id. at 2 (1) zc. [v] Supra note 3. [vi] S. Shanmuganathan vs The Authorized Officer, Indian Overseas Bank, Asset Recovery Management Branch, AIR 2017 Mad 228. [vii] The Corporation Bank & Another vs Dr. Jayesh Kumar Jha, M.A.T 291 of 2019 [viii] Rekha Sahu v. UCO Bank, (2014) BC 221 (DB) (ALL). [ix] Atishaya Construction Pvt. Ltd. v. Central Bank of India, 2014 SCC OnLine Guj 9204. [x] Mandava Krishna Chaitanya v. UCO Bank, Asset Management Branch, 2018 SCC Online Hyd 196. [xi] Jai Logistic v. The Authorised Officer, Syndicate Bank, (2010) 7 MLJ 353 [xii] Chemstar Chemicals & Intermediates (P) Ltd. v. The Commercial Tax Officer, Chennai and State Bank of Mysore, 2010 SCC OnLine Mad 5136.