The Andhra Pradesh High Court has held that Section 31(i) of the SARFAESI Act begins with a non-obstante clause and exempts any security interest created in agricultural land from the coercive recovery mechanism of the Act, with the twin objects of protecting agriculturists’ livelihood and discouraging creditors from accepting such land as security. The Court clarified that the classification of land as agricultural in revenue records is not conclusive; the question must be determined as a matter of fact from the nature of the land, the use to which it was being put on the date of creation of the security interest, and the purpose for which it was set apart.
Moving ahead, the Court emphasised that the burden lies on the borrower to prove that the secured properties were agricultural lands and that agricultural activities were actually being carried on at the time of creation of the security interest, and this burden can be discharged through a combination of revenue records, Adangal/Pahani, pattadar passbook, third-party affidavits, cultivation certificates, soil health cards, and contemporaneous Advocate Commissioner inspection reports.
The Division Bench comprising Justice Battu Devanand and Justice Sunitha Gandham considered the principles laid down by the Supreme Court in ITC Limited vs. Blue Coast Hotels Limited and Indian Bank vs. K. Pappireddiyar, observing that the classification of land in revenue records as agricultural is not conclusive, and that the question must be determined as a matter of fact from the nature of the land, the use to which it was being put on the date of creation of the security interest, and the purpose for which it was set apart.
The Court further pointed out that the secured creditors, especially leading banks, are expected to exercise due diligence before accepting agricultural land as security, they must cross-check the description in the registered sale deeds, verify the nature of the land, and where necessary obtain legal opinion. The Court also cautioned that where an auction notice is set aside due to procedural lapses or statutory violation, the auction purchaser is entitled to a full refund of the sale money along with interest from the date of deposit till the date of payment, and his prior legal rights must be restored, leaving the parties to work out their substantive remedies before the Civil Court.
Briefly, the petitioner, Jampani Satyanarayana, is the absolute owner of two parcels of agricultural land, situated in Nadimpalem village, Prathipadu Mandal, Guntur district, acquired through registered sale deeds. He runs a proprietary business in the name of M/s. Akhila Cotton Traders, which availed a loan facility from Canara Bank (Respondent No.1), with the petitioner standing as personal guarantor. The loan account was classified as a Non-Performing Asset (NPA), prompting the bank to issue a Demand Notice under Section 13(2) of the SARFAESI Act, followed by a possession notice and ultimately an E-Auction Sale Notice.
The petitioner challenged the sale notice in respect of some items before the High Court, contending that the secured properties are agricultural lands and therefore cannot be put up for sale under Section 31(i) of the SARFAESI Act. Before filing the writ petition, the borrower had already filed application seeking to declare the prior sale notice as void ab initio, which was pending. In the meantime, the bank issued a fresh Sale Notice and conducted an auction, at which Respondent No.2, Balagani Venkata Rao, emerged as the successful bidder by purchasing the secured assets for Rs. 81.50 lakhs. The sale certificate, however, had not yet been registered in favour of Respondent No.2 at the time of the writ proceedings.
