FIXING OF ILLEGAL/INVALID RESERVE PRICE IN AUCTION

FIXING OF ILLEGAL/INVALID RESERVE PRICE AND CONSEQUENT AUCTION & VALUER’S INVOLVEMENT

For Professionals in Engineering, Valuation, and Land Administration

M/S Pochiraju Industries Ltd. v. Punjab National Bank & Ors. —detailed analysis

Court: High Court of Andhra Pradesh (pre-Telangana)
Date: 19 January 2018
Nature: Writ petition under Article 226 challenging an e-auction sale held under the SARFAESI regime; plea of illegal/invalid reserve price and consequent auction.

Case summary (concise)

Pochiraju Industries (the borrower) challenged the validity of an e-auction sale of its factory land, buildings and plant & machinery on the ground that the bank (PNB) repeatedly reduced the reserve price and, after an earlier auction failed (and was stayed), issued a fresh sale notice without obtaining a fresh independent valuation as required by the SARFAESI Rules (Rule 8(5)). The impugned auction of 24.07.2017 was held at the same low reserve price of Rs.. 17,25,00,000/-, despite earlier auction efforts at much higher reserves (up to Rs 50,90,07,000/-) that attracted no bidders.

The High Court found that the bank could not legitimately rely on the earlier valuation (01.02.2017) or on an internal valuation dated 27.06.2017 to fix the reserve for the fresh notice, and therefore set aside the 01.07.2017 sale notice and the auction of 24.07.2017. The fourth respondent (sole bidder) had already paid 25% of the consideration; the Court directed a refund of that amount with interest at the bank’s highest fixed deposit rate, and permitted the bank to initiate recovery afresh in accordance with the law.

Chronology of auctions (as found in the record)

Sr. No.	E-Auction Date	Reserve Price (Rs.)	Outcome
1	17/10/2015	50,90,07,000	No bidders
2	21/11/2015	50,90,07,000	No bidders
3	28/12/2015	45,81,00,000	No bidders
4	15/02/2016	41,23,00,000	No bidders
5	12/04/2016	37,11,00,000	No bidders
6	25/02/2016	33,40,00,000	No bidders
7	18/01/2017	22,80,00,000	No bidders
—	31/03/2017	Reserve per notice 14/03/2017: 17,25,00,000	One bidder (successful) — sale not confirmed due to interim order
—	24/07/2017	Reserve per notice 01/07/2017: 17,25,00,000	Auction held; later challenged and set aside

(Note: the Bank relied on a valuer’s report dated 01/02/2017 giving aggregate value ≈ Rs 17,01,00,000 and fixed reserve at Rs 17,25,00,000.)

Relevant facts (clarified and reorganised)

Loan & defaults: Petitioner obtained term and working capital facilities from PNB for bio-pharma and agro divisions. Defaults occurred and the bank proceeded under SARFAESI to enforce security.
Multiple auction attempts: The bank conducted several e-auctions starting October 2015 with high reserves (c. Rs 50.90 crores), which repeatedly drew no bidders; over time the reserve was reduced in stages down to Rs.. 22.80 crores (Jan 2017) and then Rs 17.25 crores (Mar 2017 / July 2017).
Valuations on record:
- An earlier valuation by Precision Chartered Engineers & Valuers (date unspecified here) put a significantly higher fair market and distress value than the bank’s later adopted figure.
- The bank obtained a valuation dated 02.2017 from Maitreyi Asset Management Solutions putting land & building at Rs.. 15,05,00,000 and plant & machinery at Rs.. 1,46,00,000 (total Rs.17,01,00,000). The bank fixed a reserve at Rs.. 17,25,00,000 for the auction notice dated 14.03.2017 (auction on 31.03.2017).
Interim proceedings & effect: The DRT granted conditional interim relief in March 2017 (deposit 30% of dues in two instalments). The petitioner challenged the DRT conditions by W.P. No.11699/2017; this Court issued an interim order on 24.04.2017 restraining the bank from confirming the sale pursuant to the 31.03.2017 auction (which had one bidder — the fourth respondent).
One-time settlement & cancellation: The bank later offered a One-Time Settlement (OTS) for Rs.32,00,00,000 on 09.06.2017; petitioner failed to pay. The bank then cancelled the earlier sale and decided to try selling again, issuing a fresh e-auction sale notice dated 01.07.2017 (auctioned 24.07.2017) with the identical reserve of Rs.17,25,00,000.
Petitioner’s challenge: Petitioner alleged that the 01.02.2017 valuation was procured merely for the failed auction at end-March and that the bank, in a post-haste manner, reissued the sale notice with the same reserve without obtaining a fresh independent valuation (as required by Rule 8(5) of the Security Interest (Enforcement) Rules, 2002) — thus enabling the sole bidder to acquire the assets at an undervalued price. Petitioner pointed to omissions and undervaluation in the Maitreyi report (e.g. civil structures, electricals, fire-hydrant systems undervalued or omitted; plant & machinery not considered fully), and relied on earlier, higher valuations to show gross transgression of Rule 8(5)/(6).
Bank’s case: The bank maintained it had followed the Rules and relied upon the valuation dated 01.02.2017 to fix reserve; despite repeated reductions and auctions, bidders did not participate until the March 2017 auction, which had a single bidder. Following non-confirmation because of the stay and the petitioner’s failure to make the OTS payment, the bank reissued the sale notice, aiming to get bidders, but kept the same reserve figure based on the said valuation.

Legal issue(s) framed

Whether the bank was justified in issuing a fresh sale notice dated 01.07.2017 with the same reserve price based on an earlier valuation dated 01.02.2017, after the earlier sale (31.03.2017) had failed and was stayed, or whether Rule 8(5) of the SARFAESI Rules required a fresh valuation before re-issuing the sale notice.
Whether the auction held on 24.07.2017 can stand where the reserve price was fixed on an outdated valuation (or on an internal valuation lacking the mandatory independent fresh valuation), and where the petitioner alleged omissions/undervaluation in the valuation report that produced the lower reserve.
What relief flows if the sale notice and auction are found in violation of the Rules?

Legal framework applied (short)

Section 13 of the SARFAESI Act (power to take possession and sell secured assets) read with the Security Interest (Enforcement) Rules, 2002 — specifically Rule 8(5) (requirement of obtaining valuation from an approved valuer before sale) and Rule 8(6) (components to be considered for valuation such as land, buildings, plant & machinery, realizable/distress values etc.).

Court’s analysis — pointwise findings and reasoning

Requirement of fresh valuation before fresh sale notice:
The Court emphasised that where an earlier sale notice has come to naught (for example, because of interim court orders, failure of sale or any other reason), it is not open to the bank to merely re-issue a fresh sale notice on the basis of the same earlier valuation without lawful foundation. Rule 8(5) contemplates a valuation that is fresh and forms the basis of the reserve price in the sale notice. A bank cannot “cut short the due procedure” by reiterating a previously fixed reserve price unless the bank obtains a fresh valuation or has a lawful, documented foundation for continuing with the earlier figure.
Chronology matters — gap between valuation and subsequent sale notice:
The valuation relied upon (01.02.2017) preceded the March 2017 auction, which was itself not confirmed due to an interim order. Thereafter, when the bank issued the 01.07.2017 notice for auction on 24.07.2017, the Court demanded a fresh valuation because (a) the earlier attempt had failed/been stayed and (b) market conditions and asset components may have changed; it is a matter of fairness and transparency to ensure the reserve reflects current circumstances.
Substance over form — internal valuation insufficient:
The bank’s attempt to rely upon an internal valuation dated 27.06.2017 (or otherwise re-package the old valuation) did not cure the deficiency. Where statutory procedure demands valuation by an approved independent valuer for fixation of reserve price, an in-house or internal note cannot substitute for that requirement.
Allegations of undervaluation and omissions in the valuer’s report:
The petitioner had pointed to specific omissions and undervaluations (civil structures, electricals, fire-hydrant systems, plant & machinery not fully considered) and produced an earlier valuation which put values substantially higher. While the Court did not pronounce on the correctness of each line item, it treated these contentions as sufficient to show that reuse of the earlier valuation without fresh independent verification was unsustainable.
Resultant illegality of 01.07.2017 sale notice & 24.07.2017 auction:
On the above basis, the Court held the sale notice dated 01.07.2017 illegal to the extent the reserve price was concerned (violation of Rule 8(5)), and consequently declared the auction of 24.07.2017 illegal.
Equitable relief concerning the deposit already paid:
Because the fourth respondent (successive bidder) had already paid 25% of the sale consideration, the Court ordered a refund of that amount with interest at the highest rate applicable to the bank’s fixed deposits as on the date. This protected the unsuccessful transferor/unsuccessful process without unduly disadvantaging the bidder beyond restitution.
Leave to the bank to re-initiate measures lawfully:
The Court did not permanently restrain the bank from recovering its dues: it expressly permitted the bank to initiate recovery measures afresh in accordance with the SARFAESI Act and Rules — i.e., after obtaining proper valuations and following the prescribed procedure.

Final order (essence)

Writ petition allowed.
E-auction sale notice dated 01.07.2017 declared illegal insofar as the reserve price fixed therein is concerned (violation of Rule 8(5) of the Rules, 2002).
The auction held on 24.07.2017 is declared illegal.
The fourth respondent’s 25% deposit to be refunded with interest at the highest bank FD rate as on date.
Bank is free to take steps afresh in compliance with SARFAESI/Rules.
Miscellaneous petitions closed; no order as to costs.

Legal & practical significance — what this judgment establishes (book-style commentary)

Strict compliance with Rule 8(5): Pochiraju is an authoritative exposition that banks must obtain a fresh valuation from an approved valuer before issuing a fresh sale notice where a prior sale attempt has failed or been interrupted. The judgment underlines that the fixation of reserve price is not a mere formality — it must be grounded in a contemporaneous valuation.
Reserve price cannot be mechanically recycled: The Court rejects the practice of mechanically recycling an old reserve price to benefit an intended or sole bidder. Re-issuing sale notices on the basis of stale valuations opens the process to allegations of collusion and undervaluation; courts will scrutinise such conduct.
Transparency and protection against undervaluation: Where a borrower points to material omissions or undervaluations in a valuer’s report, courts will require the bank to justify reliance on that valuation. This protects borrowers from a possible scheme where a valuer’s report (defective or incomplete) is used to suppress the reserve price and facilitate an undervalued sale.
Balance between finality and fairness: The Court strikes the middle path — it does not freeze the bank’s recovery power, but intervenes to ensure that auctions are not conducted on legally defective foundations. The remedy is to set aside the defective sale and allow the bank to proceed lawfully.
Practical consequence for bidders: A bidder who participates in an auction that is later set aside is entitled to return of deposits with interest — this prevents unjust enrichment while protecting the borrower’s right to challenge defective sales.

Guidance for stakeholders (short checklist)

For Banks / Authorized Officers

Always obtain and place on record a fresh valuation by an approved independent valuer before issuing a fresh sale notice if any earlier auction/sale attempt has failed, been stayed, or not been confirmed.
Maintain a clear written record explaining why an earlier valuation is still relied upon (if ever), with contemporaneous market justification — do not rely on internal notes to replace statutory valuation.
Ensure valuation reports expressly include components required by Rule 8 (land, building, plant & machinery, realizable and distress values).
Serve valuation report (or at least communicate the reserve basis) to the borrower to minimise later disputes.

For Valuers

Prepare comprehensive reports covering civil works, electricals, fire systems and each component of plant & machinery; avoid omissions that may be argued as undervaluation.
Maintain independence and document methodology, approvals, dates of inspection and break-up of component costs.

For Borrowers

Preserve earlier valuation reports and the chronology of auction notices and reserves.
If you suspect undervaluation, immediately challenge the sale/notice before DRT or High Court with specific particulars: dates, valuations, line-item discrepancies, and an explanation why the reserve is unfair.
Seek interim protection early; courts scrutinise the record and may grant relief if statutory procedure is not followed.

Suggested pleading paragraph (model language for challenging reuse of valuation)

“That the Reserve Price fixed in the subsequent sale notice dated 01.07.2017 (annexed) is based upon a stale valuation dated 01.02.2017 obtained for the earlier auction which was not confirmed and which was the subject matter of pending litigation before this Hon’ble Court/Tribunal. The respondent-bank has not procured any fresh valuation from an approved independent valuer as mandated by Rule 8(5) of the Security Interest (Enforcement) Rules, 2002 before re-issuing the new sale notice. The valuation report dated 01.02.2017 itself suffers from material omissions and under-statement of values (civil structure, electrical works, fire safety installations and plant & machinery), and therefore the fixation of the said Reserve Price amounts to a colourable exercise of power and an attempt to sell the petitioners’ assets at a throw-away price for the benefit of a favored bidder. The petitioner therefore prays for a declaration that the sale notice dated 01.07.2017 and the auction held on 24.07.2017 are illegal and void, refund of amounts paid by any purchaser with interest, and a direction that any further sale be undertaken only after a fresh valuation by an approved independent valuer and subject to supervision by this Court/Tribunal.”

Closing observation (authorial note)

Pochiraju is a practical, borrower-protective decision that emphasises procedural fidelity in asset enforcement. The core lesson for bankers and valuers is plain: valuation is not a technicality to be disregarded — it is the backbone of a fair auction process. For borrowers, the case provides a template of how to successfully attack a re-cycled reserve price: show the valuation chronology, point to material omissions or inconsistencies, and invoke Rule 8(5). For courts, the remedy adopted in Pochiraju (set aside defective sale but allow re-initiation lawfully) exemplifies judicial balancing between protecting property rights and maintaining the efficacy of secured recovery.

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