Supreme Court Of India Protects Rights of the Auction Purchaser In Recovery Of Dues By Banks By Sale Of Mortgaged Property

By
Delep Goswami, F.C.S., Advocate, Supreme Court Of India 
                                                                                                                   along with

Anirrud Goswami, Advocate, Goswami & Goswami

​
Enactment of Debt Recovery Act to quicken recovery of dues by Banks from defaulting borrowers
 
Advancing of loans by Banks to industrial and non-industrial borrowers is quite common and it is well known that to protect the Bank’s interest in recovering dues from the borrowers, apart from getting many documents signed by the borrower and the guarantors, the lending Bank also keeps the title deeds of the properties which are mortgaged to the Bank to ensure that  if the borrower fails to repay the loan and interest thereon, the Bank can at least auction the mortgaged property and recover its dues from the borrower.
 
To cut short the delay in recovery proceedings filed by the lending Banks to the commercial
borrowers, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (“Debt Recovery  Act" -  as amended from time to time) have been enacted and  specialised
Tribunals, known as, Debt Recovery Tribunal (“DRTs”) have been set up to speedily dispose of the
recovery proceedings filed by the Banks and Financial Institutions.  On the basis of the orders passed
by the DRT, the Recovery Officer attached to the DRT, proceeds to auction the mortgaged property
and the proceeds are handed over to the lender Bank after completion of the attendant formalities.
Unless the auction purchasers of such properties are protected and assured of their rights over the
purchased property, the whole system of sale of mortgaged properties by the Recovery Officer of
the DRT is put to lots of  difficulties and such sale will lose its importance. 
 
Brief facts of the case and Supreme Court’s decision on auction purchaser’s rights

In this regard, the decision of the Hon’ble Supreme Court of India passed in the case of Sadashiv Prasad Singh –vs- Harendar Singh & Others (2014-1CLJ-417-SC) (in short “SP Singh judgement”)
deserves special mention because  this judgement protects the rights of the auction purchaser and insulates  such auction purchaser  from all possible attempts to thwart and deny the rights of the auction purchaser over the property  purchased in a public auction.
 
Brief facts leading to the aforesaid  SP Singh judgement of the Supreme Court are that the Allahabad Bank sanctioned in 1987 a loan of Rs.12.70 lakhs to a Timber Merchant Partnership Firm (viz. Amar Timber  Works), after its partners  had mortgaged certain properties to secure the loan amount. Since the loan amount, along with the outstanding interest, was not paid to the lending Bank, the
said Bank, in 1998, preferred an  application before the DRT.  The DRT allowed the Bank’s application in November, 2000 and issued  direction for recovery of Rs.75.75 lakhs from the borrower firm.
During the pendency of the  recovery proceedings, one of the partners of the borrower firm viz. Jagmohan Singh died on  27.1.2004.  On 16.4.2004, the Recovery Officer attached a plot measuring 1298 sq.ft in the  ownership of Jagmohan Singh, one of the partners of the firm. On 10.6.2004, one Harender Singh,  brother of  deceased Jagmohan Singh, filed an objection petition before the Recovery Officer alleging that the  attached property did not belong to the judgment debtors, but had been purchased by him from his  brother Jagmohan Singh by executing an Agreement of Sale dated 10.1.1991, which was duly  notarized, though not registered.  The said Harender Singh pursued the objection petition filed by  him before the Recovery Officer till 26.10.2005, but choose
to abandon the proceedings thereafter.   
 
The recovery proceedings remained pending for a further period of more than two years.  Finally, the Recovery Officer passed an order dated 5.5.2008 for the sale of the property by way of public auction on 4.7.2008.  The Recovery Officer fixed Rs.12.92 lakhs as the reserve price and also fixed 28.8.2008 as the date of auction. 
 
At the auction held on 28.8.2008, one Sadashiv Prasad Singh was the highest bidder.  Accordingly, the Recovery Officer ordered the sale of the property in his favour on 28.8.2008.  On 22.9.2008, the
Recovery Officer, in the absence of any objections, confirmed the sale of the property in favour of Sadashiv Prasad Singh, the auction purchaser and the Recovery Officer ordered the handing over of
physical possession of the property to the auction purchaser.  The auction purchaser Sadashiv Prasad Singh, took physical possession of the property on 11.3.2009.  Thereafter, in furtherance of the proceedings initiated through Mutation Case No.295/2/09-10, the land in question was mutated in favour of the auction purchaser.  The auction purchaser, in the mutation proceedings, duly supported his application with a letter dated 14.10.2008, of the Ministry of Finance, Government of India, Realisation Authority, Patna.  No objections were filed in the mutation case preferred by
Sadashiv Prasad Singh, by or on behalf of  Harender Singh, who had initially filed the objections Earlier  before the Recovery Officer, DRT.      
 
High Court’s decision on the petition filed by the objector to the auction sale
The said Harender Singh filed a Writ Petition  in the High Court assailing the order of the Recovery Officer ordering sale of mortgaged property by public auction in discharge of the debts owed by the borrower Amar Timber Works.  The said Writ Petition got dismissed on 27.11.2010 holding as under:-

“The above facts do weigh with the Court in not interfering with the sale or the proceeding where it has been reached.  The Petitioner has no satisfactory explanation for not approaching the Court well within time challenging such a decision or the subsequent proceedings or orders of the Recovery Officer at an appropriate time.  The conduct of the Petitioner by itself has precluded and prevented this Court from passing any order in his favour at this belated stage.  The writ application has no merit.  It is dismissed accordingly.”  
 
Dissatisfied with the dismissal order by the single Judge, the petitioner Harender Singh preferred an appeal before the Division Bench  of the High Court.  In the proceedings before the Division Bench of the High Court,  the said Harender Singh  offered a sum of Rs.39 lakhs.  In the proceedings before the Division Bench,  the lender Bank had accepted  to finally settle the matter on being paid a sum of Rs.45 lakhs, subject to the condition that the  appellant Harender  Singh pays a sum of Rs.15 lakhs immediately, and the balance amount of Rs.30 lakhs within a period of two years in a phased manner.  Even though the learned counsel representing the appellant  Harender Singh was agreeable to proposal of the Bank, the rival parties could not amicably settle the matter. 

 The Division Bench noted that the auction purchaser has purchased the mortgaged property by paying Rs.13.20 lakhs.  The Court also noted that on a suggestion as to whether the Bank would accept Rs.45 lakhs in totality  to settle the dispute and the Bank conveyed its no objection to settle the same, if the appellant paid  Rs.15 lakhs immediately, so that the  same can be paid to the auction purchaser, and Rs.30 lakhs should be paid within a period of two  years in a phased manner.  During the course of appellate proceedings, the High Court referred to  Section 29  of the Debt Recoveries Act.  The High Court, while interpreting section 29 of the Debt Recovery  Act concluded that certain provisions of the Income Tax Act and Income Tax (Certificate  Proceedings) Rules would be applicable mutatis mutandis in the matter of recovery of debts under  the Debt Recovery Act.  The High Court then referred to Rule 11 of the Income Tax  (Certificate  Proceedings) Rules and arrived at the conclusion that sub-rule (2) of rule 11 had not been complied  with by the Recovery Officer, inasmuch as the objection raised by Harender Singh had not been adjudicated upon.  As such, the Division Bench of the High Court  concluded that the proceedings before the Recovery Officer were in flagrant violation of the provisions of rule 11(2) of the Income Tax (Certificate Proceedings) Rules. 

Having  so concluded, the High Court set aside the proceedings  conducted by the Recovery Officer, including the sale of the property by public auction. 
 
Having dealt with the controversy in the manner expressed in the foregoing paragraphs, the Division Bench of the High Court was of the view that the matter in hand ought to be settled by working out
the equities between the parties.  Accordingly, the High Court disposed of the matter in the
following manner :-
“Though we have held the same could not have been sold in auction, yet equities are to be worked out.  Regard being had to the fact that the respondent-purchaser has deposited Rs.13.20 lakhs between 28.8.2008 to 22.9.2009 and thus the amount is with the Bank for almost more than one year and 10 months and thereafter there had been challenge to the order in the writ petition and after dismissal of the writ petition, the present LPA has been filed in quite promptitude and that the amount of the respondent purchaser was blocked, it will be obligatory on the part of the appellant to compensate the respondent-purchaser at least by way of payment of interest at the Bank rate.  We are disposed to think that if a sum of Rs.17 lakhs is paid to the auction-purchaser, it would sub-serve the cause of justice and house of the appellant shall be saved and, accordingly, it is directed that the appellant shall deposit a sum of Rs.17 lakhs within a period of four weeks from today in the Bank.  After such deposit, the Bank shall hand it over to the purchaser by way of a bank draft.  The same shall be sent by registered post with acknowledgement due.  Thereafter, the appellant shall deposit a further sum of Rs.32 lakhs within a period of two years; sum of Rs.16 lakhs by 25th March, 2011 and further sum of Rs.16 lakhs by 25th March, 2012.  Needless to say, pro-rata interest shall accrue in favour of the Bank for the said period.  After the amount is paid to the purchaser, it would be duty of the Recovery Officer to hand over the possession to the Appellant.”   
 
The said Division Bench order of the High Court was assailed in the Supreme Court  by the said auction purchaser Sadashiv Prasad Singh to protect his rights on the property purchased in public auction and separately by the Appellant  Harender  Singh on the ground that the impugned High Court order places him in the shoes of the auction purchaser and as such he could have only been asked to pay a sum of Rs.17 lakhs and that requiring him to pay a further sum of Rs.32 lakhs is unsustainable in law and accordingly deserved to be set aside. 
 
Decided judgements of the Supreme Court on auction purchaser’s rights
In the Supreme Court, counsel for the auction purchaser contended that in terms of the law declared by the Supreme Court , the property purchased by a third party auction purchaser, in compliance of a court order, cannot be interfered with on the basis of the success or failure of the parties to a proceeding, if auction purchaser had bona-fide purchased the property and relied on the judgement rendered by the Supreme Court in Ashwin S Mehta and Another –vs- Custodian and Others (2006-2 CLJ-193-SC), and stressed on the following observation made therein :- 
 
“In that view of the matter, evidently, creation of any third-party interest is no longer in dispute, nor the same is subject to any order of this Court.  In any event, ordinarily, a bona-fide purchaser for value in an auction-sale is treated differently than a decree-holder purchasing such properties.  In the former event, even if such a decree is set aside, the interest of the bona-fide purchase in an auction-sale is saved : see Nawab Zain-ul-abdin Khan –vs- Mohd.Asghar Ali Khan (1887-15-IA 12).  The said decision has been affirmed by the court in Gurjoginder singh –vs- Jaswant Kaur (1994-2 SCC 368)”
 
The Counsel of the auction purchaser also relied on another decision of the Supreme Court in Janatha Textiles and others –vs- Tax Recovery Officer and Another (2008-12-SCC 582), wherein the
conclusions  drawn in Ashwin S. Mehta (supra) came to be reiterated.  In the above judgement, the Supreme Court relied upon the decisions of the Privy Council and other judgements  of the Supreme Court wherein it was concluded that  it is an established principle of law that a third party auction purchaser’s interest, in the auctioned property continues to be protected, notwithstanding that the underlying  decree is subsequently set aside or otherwise.  In the aforesaid  S.P. Singh judgement, the Supreme Court  therefore observed as under :-
 
“Law makes a clear distinction between a stranger who is a bona-fide purchaser of the property at an auction-sale and a decree-holder purchaser at a court auction.  The strangers to the decree are afforded protection by the Court because they are not connected with the decree.  Unless the protection is extended to them, the court sales would not fetch market value or fair price of the property.”
 
The Supreme Court while hearing the aforesaid case, also referred to one exception recorded in Velji Khimji & Company –vs- Official Liquidator of Hindustan Nitro Product (Gujrat) Limited and Others (2008-9 SCC 299), wherein it was held as under :-
“In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction purchaser.  However, where the auction is subject to subsequent confirmation by some authority (under a statute or terms of the auction), the auction is not complete and no rights accrue until the sale is confirmed by the said authority.  Once, however, the sale is confirmed by that authority, certain rights accrue in favour of the auction purchaser, and these rights cannot be extinguished, except in exception cases such as fraud.  In the present case, the auction having been confirmed on 30.7.2003 by the Court, it cannot be set aside, unless some fraud or collusion has been proved.  We are satisfied that no fraud or collusion has been established by anyone in this case.”
 
Supreme Court’s judgement upholding the rights of the auction purchaser
The Supreme Court, in the aforesaid judgement noted that it is apparent that the rights of an auction purchaser in the property purchased by him cannot be extinguished, except in cases where the said purchase can be assailed on grounds of fraud or collusion. The Supreme Court noted that the auction purchaser was not a party to the loan given by the Bank to the borrower and was not a party to the controversy with regard to the adjudication of the dues of the Bank recoverable from the borrowers.  The auction purchaser purchased the property in a public auction and there was no objections raised about the said auction process, nor was there any allegation of fraud or collusion.  The property purchased in public auction was handed over to the auction purchaser and he got the same mutated in his name.  The Supreme Court also noted that the impugned High Court order was passed in order to work out the equities between the parties and the entire deliberations in the High Court were based on offers and counter offers, inter-se, between the Allahabad Bank on the one hand and the Objector viz. Harender Singh, on the other, whereas the rights of the auction purchaser Sadashiv Prasad Singh were not at all taken into consideration and was deprived of the property which came to be vested in him as far back as on 28.8.2008.  It revealed that the escalation of prices had taken place thereafter and the value of the property purchased by Sadashiv Prasad Singh was presently much higher than the bid amount.  It was nobody’s case that the auction purchaser purchased the property at a price lesser than the then prevailing market price, there was no justification whatsoever to set aside the auction purchase made by him on account of escalation in the price of the property thereafter.  The Supreme Court held that the High Court in ignoring the vested rights of the auction purchaser committed an error in depriving him to the property which he had genuinely and legitimately purchased at a public auction.  The High Court clearly overlooked the equitable rights vested in the auction purchaser while disposing of the appeal filed by Harender Singh.  The Supreme Court also noted that if  the objector Harender Singh had any grievance against the auction sale, he could have invoked the provisions of Section 30 of the Debt Recovery Act, which he failed to do so.  The Supreme Court therefore observed that in exercise of its Writ Jurisdiction, the High Court ought not to have interfered with the matter agitated by Harender Singh in hiswrit petition.   Also, because of third party rights which had emerged in the meanwhile, the High Court ought to have dismissed/rejected Harender Singh’s petition on the ground of delay and laches. 
The Supreme Court  therefore  came to the conclusion that the High Court clearly erred while setting aside the auction ordered in favour of the auction purchaser.  The High Court’s impugned order dated 17.5.2010 was therefore set aside and sale of the property in favour of Sadashiv Prasad Singh was therefore confirmed.
 
CONCLUSION     
The aforesaid judgement of the Supreme Court confirms the rights of the auction purchaser of properties sold by the Recovery Officer of the Debt Recovery Tribunals in terms of the Debt Recovery Act and  the aforesaid S.P. Singh judgement  will instil confidence of the third party auction purchasers in the auction sale and will go a long way in finality of  sale of mortgaged properties of the defaulting borrowers.  At a time when the Central Government has promulgated the Ordinance to enforce  “The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill 2015”, such clear cut rational decision by the Supreme Court in settling commercial disputes will go a long way in giving finality to auction sale of mortgaged properties to recover dues by Banks from the defaulting borrowers. 

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