High Court Upholds Bank’s NPA Classification and Auction of Mortgaged Property: Critical Judgment on Creditor Rights and Borrower Consent
The Delhi High Court has delivered a landmark judgment on December 6, 2025, affirming the rights of secured creditors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), particularly where borrowers have explicitly consented to the sale of mortgaged properties. The case of Canara Bank (erstwhile Syndicate Bank) v. M/s Karishma Enterprises & Others addresses critical questions about Non-Performing Asset (NPA) classification, regulatory compliance, and the implications of borrower consent in debt recovery proceedings.
The Factual Background: A Failed Credit Facility and Asset Seizure
In September 2007, Canara Bank (then operating as Syndicate Bank) extended a credit facility of Rs. 100 lakhs to Karishma Enterprises, with Vijay Kumar as the proprietor serving as the principal borrower. Respondent No. 2 acted as the mortgagor and guarantor, pledging three mortgaged properties measuring 275, 325, and 400 square yards located at Village Chandrawali in Shahdara, Delhi. The credit facility was renewed multiple times—in 2008 for an additional Rs. 225 lakhs through M/s Madhav Enterprises, again in 2009 for Rs. 100 lakhs, and finally in 2010. All documents were duly executed and recorded according to banking procedures.
By mid-2012, signs of financial distress became apparent. A stock statement filed by Karishma Enterprises for the quarter ending June 2012 indicated nil opening stock of raw material and work-in-process, suggesting no manufacturing activity or regular business operations. By December 31, 2012, the situation had deteriorated substantially. The Overdraft (OD) and Cash Credit (CC) accounts had become highly irregular, with outstanding balances significantly exceeding sanctioned limits. The bank sent repeated reminders on February 27, March 9, and March 19, 2013, demanding regularization of the account and submission of necessary documents for limit renewal, warning that failure would trigger action under the SARFAESI Act.
Despite these warnings and opportunities, the borrower failed to comply. On March 31, 2013, the bank formally classified the account as a Non-Performing Asset. Three weeks later, on April 22, 2013, a notice under Section 13(2) of the SARFAESI Act was issued. A Court Receiver was appointed, and notices were issued for taking possession of the mortgaged properties on September 18, 2013. By October 3, 2013, the bank had taken symbolic possession of two properties measuring 325 and 275 square yards, though the 400-square-yard property had already been taken over by an Asset Reconstruction Company (ARCIL).
Litigation and Proceedings: The Borrower’s Changing Stance
Rather than accept the enforcement action, the borrowers filed Writ Petition (C) No. 5701/2013 challenging the bank’s measures under the SARFAESI Act. This petition was withdrawn on September 10, 2013, and simultaneously, the borrowers filed Securitisation Application (S.A.) No. 325/2013 before the Debt Recovery Tribunal (DRT). The DRT issued an order on September 17, 2013, restraining further proceedings provided the borrowers deposited Rs. 20 lakhs within 30 days, with Rs. 5 lakhs due within the first week. This deposit was conditional—any default would entitle the bank to proceed with enforcement.
On January 10, 2014, the bank issued a sale notice for auctioning the mortgaged properties. In response, the borrowers filed Interim Application (I.A.) No. 376/2014 challenging the auction notice. This is where a critical aspect of the case emerged. At the hearing of this interim application, the borrowers’ counsel submitted that the sale of just one mortgaged property would be sufficient to satisfy the outstanding dues of the bank, and there was no necessity to auction all three properties.
The DRT, accepting this submission made with the borrowers’ explicit consent and recorded on April 16, 2014, disposed of I.A. No. 376/2014 with specific directions that only one property—the one measuring 275 square yards—be put to auction. This was not an order imposed against the borrowers’ wishes; it was directed with their full understanding and agreement.
The Inconsistent Challenge and Appellate Reversal
Despite having consented to the sale of one property before the DRT, the borrowers then filed Appeal No. 303/2014 before the Debt Recovery Appellate Tribunal (DRAT) challenging the very order they had consented to. However, once the property was sold for Rs. 214 lakhs (against a recovery requirement of Rs. 106 lakhs), counsel for the borrowers informed the DRAT that they would not press the appeal. On December 16, 2014, the DRAT disposed of the appeal as infructuous, noting the property had already been sold and recovery had been substantial.
Even after the sale was completed and the auction purchaser (Respondent No. 3) was confirmed as the new owner on September 30, 2015, the borrowers were given yet another opportunity. On April 13, 2015, the DRT asked whether the borrowers wished to save their property by depositing the outstanding dues—an offer they did not accept. Nevertheless, after the DRT dismissed Securitisation Application No. 325/2013 on September 29, 2015, the borrowers preferred yet another appeal (Appeal No. 37/2016) before the DRAT.
This time, on March 2, 2016, the DRAT reversed the DRT’s order, setting aside the dismissal and ostensibly allowing the appeal. This reversal, according to the bank, ignored the borrowers’ explicit prior consent, their participation throughout the proceedings, and the principle of estoppel. The high court was moved in writ petition to address this reversal and examine whether the DRAT had acted within the bounds of law.
The High Court’s Analysis: The NPA Classification Issue
The bench of Justice Anil Kshetarpal and Justice Harish Vaidyanathan Shankar undertook a detailed analysis of two main legal issues: first, whether the bank’s NPA classification on March 31, 2013, was premature, and second, whether the DRAT erred in ignoring the borrowers’ consent to the auction.
Regarding NPA classification, the court examined the regulatory framework governing this determination. Under the Reserve Bank of India’s (RBI) prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP), an Overdraft or Cash Credit account becomes an NPA when the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for more than 90 days. This requirement has the force of law under Sections 21 and 35A of the Banking Regulation Act, 1949.
The court noted that as of December 31, 2012, the borrowers’ OD and CC limits had been clearly breached—an excess that was neither marginal nor temporary. There was no evidence that the account was brought back within sanctioned limits at any point during January, February, or March 2013. Computing the 90-day period from January 1, 2013, the court confirmed it extends through March 31, 2013, completing exactly 90 days on that date.
The bench held: “The declaration of NPA on 31.03.2013 was accordingly lawful, justified, and in strict consonance with the RBI’s prudential norms.” The court noted that even if March 31, 2013, is treated as precisely the 90th day, classification on that date or immediately thereafter satisfies the regulatory requirement. The bank had not acted prematurely; it had acted at the precise threshold mandated by regulatory law.
The Doctrine of Consent: A Critical Principle
The court’s most significant contribution lies in its articulation of the doctrine of estoppel through consent. Justice Kshetarpal emphasized that the borrowers had provided explicit written consent to the sale of the mortgaged property, as “duly recorded in the order dated 16.04.2014.” This consent was not grudgingly given or extracted under pressure; it was made on the borrowers’ own legal representation that one property would be sufficient to recover their dues.
The judgment states: “When the borrower has expressly consented to the sale of the secured asset, the rigour of strict compliance with certain procedural safeguards under the SARFAESI Act and the SARFAESI Rules, particularly Rules 8 and 9, stands materially diluted.”
The court recognized that while the SARFAESI Act mandates adherence to requirements governing asset valuation, publication of sale notices, fixation of reserve price, and conduct of auctions, these safeguards are primarily intended for the protection of the borrower. Therefore, where a borrower voluntarily consents to the sale—either through written consent, statements before tribunals, or conduct amounting to unequivocal acquiescence—the borrower effectively waives objections relating to minor procedural irregularities, provided no material prejudice is demonstrated.
The bench observed: “Once the borrower has accepted that the secured creditor may proceed with the sale, the emphasis shifts from procedural exactitude to the substantive fairness of the process and the bona fides of the creditor.” This principle is grounded in the established legal doctrine that parties cannot blow hot and cold—they cannot consent to a course of action and then challenge it when circumstances turn unfavorable.
The Implications for SARFAESI Compliance
By establishing this framework, the court has clarified that strict procedural compliance under the SARFAESI Act is not absolutely rigid when borrowers have explicitly consented to the enforcement action. Where consent is informed and explicit, technical lapses in observing Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002—relating to valuation notices, publication requirements, and auction procedures—cannot invalidate the sale unless mala fides (bad faith) or demonstrable prejudice to the borrower can be established.
In this case, the borrowers had not shown any prejudice. The property was sold for Rs. 214 lakhs when only Rs. 106 lakhs was outstanding—a surplus of Rs. 108 lakhs. This recovery was substantially higher than their outstanding dues, directly contradicting any claim of prejudicial treatment.
Broader Legal Principles Articulated
The judgment reinforces several established legal principles while clarifying their application to secured creditor rights:
1. Estoppel through prior conduct: A party cannot benefit from positions it has abandoned or consented to. The borrowers, having explicitly agreed to the sale of one property before the DRT, were estopped from later challenging the very order they had consented to.
2. Regulatory compliance obligations: Banks must strictly comply with RBI’s prudential norms regarding NPA classification. The court confirmed that the 90-day computation must follow a straightforward, arithmetical approach without importing equitable considerations. The bank cannot defer classification once the statutory period has elapsed.
3. The protective function of procedural safeguards: The court recognized that procedural requirements under the SARFAESI Act exist to protect borrowers. When borrowers waive such protection through explicit consent, the protective function becomes redundant, and strict compliance cannot later be insisted upon.
4. The duty on borrowers to act: The court noted that banks are not obligated to prod borrowers into compliance or to grant ad-infinitum opportunities to regularize accounts. Once an account has slipped into NPA status, continued default reinforces the correctness of enforcement action. The borrowers in this case were given multiple opportunities—reminders in February and March 2013, interim relief contingent on deposit, and even a post-sale opportunity to save the property on April 13, 2015.
Practical Implications for Borrowers, Banks, and the Credit System
This judgment has significant implications across multiple stakeholder groups:
For borrowers: The ruling clarifies that while procedural safeguards exist to protect their interests under the SARFAESI Act, they cannot deliberately consent to a course of action and later challenge it on technical grounds. Borrowers must be cautious about statements made before tribunals, as these can operate as admissions or consent, potentially waiving their right to raise procedural defenses later. The judgment also underscores that once an account becomes an NPA, the bank’s enforcement action is justified and will be upheld by courts if proper procedures have been followed.
For banks and creditors: The judgment strengthens the hand of secured creditors by clarifying that where borrowers have explicitly consented to asset sales, minor procedural irregularities will not vitiate the transaction. Banks can rely on such consent as a shield against challenges based on technical non-compliance. However, the judgment also confirms that NPA classification must be done precisely according to RBI norms—no shortcuts or approximations are permitted in the 90-day computation.
For the credit system: By upholding the bank’s enforcement action and the validity of the auction despite later challenges by the borrower, the judgment reinforces the reliability and predictability of the secured lending system in India. This is critical for the continued supply of credit, particularly to small and medium enterprises. If borrowers could indefinitely challenge enforcement actions through litigation despite prior consent, the security interest itself would be diluted, and banks would be reluctant to lend.
The Court’s Reasoning on Prior Conduct
The court also placed significant weight on the borrowers’ prior conduct throughout the proceedings. They had not only consented to the sale in April 2014 but also filed an appeal in December 2014, which they then did not press. This inconsistent behavior—first consenting, then challenging, then abandoning the challenge—demonstrated to the court that the borrowers were attempting to gain time through litigation rather than engage in good-faith resolution of their defaults.
The judgment notes: “The record clearly demonstrates their participation in the sale process, and the learned DRAT ought to have duly taken these circumstances into account while passing the Impugned Order.” This suggests that tribunals must weigh not just the technical compliance with rules but also the equitable conduct of the parties involved in the proceedings.
Conclusion: Balancing Rights and Remedies
The Delhi High Court’s judgment in Canara Bank v. Karishma Enterprises represents a significant articulation of the balance between creditor rights and borrower protections under the SARFAESI Act. While the Act contains robust procedural safeguards designed to prevent abuse by banks, these safeguards are ultimately meant to benefit borrowers. When borrowers voluntarily waive these protections through explicit consent, courts will not resurrect them on technical grounds, particularly when the borrower has suffered no material prejudice and recovery has exceeded the outstanding dues.
For government employees and other borrowers in India, the lesson is clear: statements made before tribunals, consent to asset sales, and litigation positions all carry legal weight and can operate as estoppel against later contradictory claims. Borrowers should seek counsel before agreeing to enforcement proceedings and should not take inconsistent positions in successive appeals, as courts will view such conduct skeptically. The judgment reinforces that while procedural protections exist, the law also expects parties to engage in good faith and stand by their submissions, once made in formal proceedings before judicial or quasi-judicial authorities.
