Supreme Court Directed The Bank To Return The Money Of Rs.50.25 Lakhs To The Appellant Deposited In Reference To The Auction Notice And Further Invalidated The Re-auction

Case title:

MOHD. SHARIQ Vs PUNJAB NATIONAL BANK AND OTHERS 

Date of Order:

APRIL 11, 2023.

Bench:

Hon’ble Justice Rastogi

Parties:

APPELLANT: MOHD. SHARIQ 

RESPONDENT: PUNJAB NATIONAL BANK AND OTHERS

SUBJECT:

The current appeal is directed against the judgment and order dated March 10, 2016, issued by the Division Bench of the High Court of Uttarakhand, Nainital, whereby the High Court, while overturning the decision made by the learned Single Judge under its order dated July 21, 2015, upheld the reauction proceedings started by the first respondent (Punjab National Bank, a secured creditor), held on May 1, 2014, and granted the first respondent's request for a stay of proceedings.

IMPORTANT PROVISIONS:

The Security Interest (Enforcement) Rules, 2002

Rule 9(5)- In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.

Article 226 of the Indian Constitution:

Power of High Courts to issue certain writs (In this case- Mandamus) 

OVERVIEW:

• The first respondent lent money to the third respondent.     A notice was eventually issued under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the "Act 2002"), and then assets of the borrower were taken into possession under Section 13(4) of the Act, 2002. 
• However, the third respondent later became defaulter, and its bank accounts became NPA.     To that end, on June 18, 2013, the Bank released an auction notice with a reserve price of Rs. 1.19 crores requesting offers in relation to the borrower's mortgage property.
• The appellant, who submitted his bid of Rs. 2,01,00,000/­ on July 22, 2013, and deposited earnest money of Rs. 11,19,000/­, as required by the terms of the bid/auction, which the successful bidder was required to deposit (25% of the bid amount) upon acceptance of the bid.
• The third respondent filed an appeal against the 18th June 2013 auction notice with the Lucknow-based Debt Recovery Tribunal on July 25, 2013.  Following a hearing with the borrower's counsel, DRT issued an interim order on July 26th, 2013 directing that the Bank is free to proceed with the auction as planned on that day (i.e., July 26th), but that confirmation of the sale be postponed while DRT issues further instructions.
• The auction took place on July 26, 2013.  It is acknowledged that the appellant had no knowledge of the temporary order issued by DRT on July 26, 2013.   The appellant had to put 25% of the bid amount as the highest bidder, which he did on July 27, 2013, totaling Rs. 38,35,000 (the remaining 25% of the price), which the first respondent accepted.
• The appellant made a total deposit of Rs. 50,25,000, which was made up of earnest money and 25% of the winning bid.   On October 14, 2013, the DRT revoked the interim order due to a lack of prosecution, although the substantive procedures were still ongoing. When the auction was held on July 26, 2013, and the appellant was asked to deposit the earnest money and 25% of the bid amount, no such information was provided because the appellant was completely unaware of the ongoing proceedings before the DRT initiated at the instance of the third respondent (borrower) and it was nowhere indicated in the auction notice, which ordinarily in the instant fact situation would not have been possible.
• The appellant was informed for the first time through a correspondence dated October 18, 2013, in which he was ordered to pay the remaining sum because the interim relief had been denied by DRT.
• In response to the communication, the appellant offered his willingness to pay the remaining sum, subject to the resolution of the DRT-related issue.  There were some communications between the appellant and the first respondent.
• However, the first respondent subsequently warned the appellant in a message dated October 28, 2013, that the first respondent might lose the earnest money if the appellant failed to deposit the remaining auction bid amount.
• There is no evidence in the file to support the assertion that the first respondent ever taken the decision to forfeit the funds deposited by the appellant in accordance with the message dated October 28, 2013, to which there has been reference.
• The first respondent launched the re­auction proceedings without waiting for further action, citing a notice dated March 5, 2014.  When this fact was brought to the appellant's attention, he immediately approached the High Court by filing a writ petition under Article 226 of the Constitution seeking Mandamus to withhold re­auction proceedings initiated and further prayed to direct the first respondent to execute the sale deed in favor of the appellant on deposit of the balance money.  
• The High Court interim ruling allowed the re­auction processes to continue but made the auction dependent on the outcome of the writ proceedings.     
• According to the record, in the pending proceedings before the High Court, to test the appellant's bona fides, the High Court directed the appellant to deposit Rs.1.77 crores, after adjustment of the sum already deposited with 10% interest, which the appellant undisputedly deposited on March 10, 2015.   
• It is notified that the highest bid of Rs.1,70,50,000/­ at the re­auction against a reserve price of Rs.1.70 Crore was confirmed, and the sale deed was executed by the first responder in favor of the subsequent purchaser on May 1, 2014.
• Taking note of the appellant's good faith, as a final bid amount was deposited in accordance with the High Court's order, the learned Single Judge set aside the re­auction proceedings, keeping in mind the paramount principle that the mortgaged property must fetch the maximum realizable value on which the security interest was created, and directed the first respondent to execute the sale deed in favour of the appellant.
• The order of the High Court's Division Bench was challenged in an appeal before the Supreme Court of India.

ISSUES RAISED:

Whether the grievance of the appellant can avail remedy under any other law.

ARGUMENTS ADVANCED BY THE APPELLANT:

• The appellant's legal representative has argued that the High Court's decision did not make any findings against the appellant's claim to the money forfeited by the first respondent. 
• Therefore, the appellant still has the option to pursue legal remedies to claim the forfeited amount. The legal representative argues that there is no need for any other legal mechanisms when there is no dispute over the fact that the appellant is entitled to seek a refund of the forfeited amount. 
• The High Court's decision is an apparent error and the appellant is at least entitled to a refund of the deposited amount. The legal representative argues that forcing the appellant to adopt any other remedial mechanism would cause great injustice and requires intervention from the court.

ARGUMENTS ADVANCED BY THE RESPONDENT:

• The legal counsel for the first respondent Bank argues that the decision to forfeit the earnest money was made in accordance with the terms and conditions of the auction notice dated 18th June 2013, which stated that the appellant must deposit the balance amount within a specified time. 
• Since the appellant failed to do so, despite being given a reasonable opportunity, the first respondent is justified in forfeiting the earnest money. 
• The legal representative cites Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, to support the decision to forfeit the amount deposited. 
• The legal representative argues that the first respondent did not commit any error in forfeiting the amount and that the Division Bench of the High Court's finding on this matter should not be interfered with. 
• Additionally, the legal representative points out that due to the appellant's litigation, the distress value of the property was deflated, resulting in a lower bid in the subsequent auction proceedings. Therefore, it is only fair that the appellant bears the loss, and directing the first respondent to refund the forfeited money may be against Rule 9(5) of the Rules, 2002.

JUDGEMENT ANALYSIS:

• The writ petition was successful and is allowed by the High Court. The re-auction that was held in favor of respondents 7 and 8 pursuant to the re-auction notice dated March 5, 2014, is valid. The sale executed in favor of respondents 7 and 8 on May 27, 2014, is held invalid. 
• As a result, the sale certificate dated May 1, 2014, issued in favor of respondents 7 and 8, and the sale deed executed on May 27, 2014, are declared void and of no effect. 
• The bank is directed to execute a sale deed in favor of the petitioner as soon as possible, within two weeks at most. The bank may withdraw the amount deposited by the petitioner with the Registrar General of this Court. 
• Furthermore, the bank is directed to refund the amount taken from respondents 7 and 8, along with a 10% interest thereon within two weeks from today. However, it is clarified that the sale in favor of the petitioner is subject to the final decision in the case pending before the D.R.T. No costs will be imposed.
• The subsequent auction purchaser contested the learned Single Judge's order before the Division Bench of the High Court to which The High Court listened to both sides and concluded that no mistakes were made during the re-auction process. 
• The new buyer was not at fault, and if the decision-making process of the first respondent was error-free, there was no reason to cancel the re-auction. 
• Therefore, the High Court upheld the re-auction and ordered the first respondent to return the Rs. 1.77 crores deposited by the appellant along with accrued interest. 
• However, the amount that was forfeited can be recovered through the appropriate legal channels by the appellant.
• The above order of the High Court's Division Bench was challenged in an appeal before the Supreme Court of India.
• Supreme Court states that the appellant made the highest bid of Rs. 2.01 crores at an auction held on June 18, 2013, with a reserve price of Rs. 1.19 crores. The earnest money of Rs. 11.19 lakhs was deposited on July 22, 2013, and the bid was finalized on July 26, 2013. 
• The appellant deposited 25% of the bid amount, i.e., Rs. 38.35 lakhs, on July 27, 2013. However, the proceedings had already been initiated and were pending on the date of the auction, which was not brought to the appellant's notice. 
• When subsequent auction proceedings were initiated with a reserve price of Rs. 1.70 crores, the appellant deposited the balance amount of Rs. 1.77 crores on March 10, 2015. The learned Single Judge set aside the subsequent auction and directed the first respondent to execute the sale deed in favor of the appellant for the final bid of Rs. 2.01 crores. 
• The Division Bench of the High Court reversed the finding on the subsequent auction but accepted the fact that the money deposited by the appellant towards earnest money and the first installment of 25% in terms of the auction notice dated June 18, 2013, is not in dispute.
• The appellant's main complaint is that he is forced to seek restitution for the sum forfeited, which is unjustified given the circumstances.

CONCLUSION:

• The Supreme Court ruled that when there is no dispute on the facts presented, the appellant should not be forced to use other remedial mechanisms to recover the undisputed amount. 
• The Division Bench had made a mistake in not exercising its power under Article 226 of the Constitution and instead of resolving the dispute, the Bench kept the issue alive. 
• The Court also noted that the appellant had a bona fide defense and was not informed that substantive proceedings were pending before the DRT instituted at the instance of the borrower. 
• The Court allowed the appeal and directed the first respondent to return the money of Rs.50.25 lakhs to the appellant within two months. The appellant was not entitled to any interest on the amount forfeited by the first respondent due to the delay in filing the present appeal.