PNP 1 WP6465-24.11.sxw IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO.6465 OF 2010 Asha Mehta and another ..Petitioners. versus Allahabad Bank and Ors. ..Respondents. ... Mr. V.R. Dhond with Mr. Mayur Khandeparkar, Mr. T.N. Tripathi and Ms. Sapna Rachure i/b T.N. Tripathi & Co. for the Petitioners. Mr. Naresh S. Fadia for Respondent No.1. Mr. Harihar Bhave i/b Bhave & Co. for Respondent No.7 Mr. Sanjay Jain with Mr. Devanshu P. Desai, Mr. Nivit Dhruva, Mr. Prakash Shinde, Mr. Avinath S. Gautama and Mr. G.K. Tripathi i/b Mr. Anoopkumar Sharma for Respondent No.10. Mr. Purav Damania for Respondent No.11. Mr. Prakash Mehta Director of M/s. Bulls Ventura Pvt. Ltd. and – Mr.Uttam Bagadi Bidders present in person. – ..... CORAM : DR.D.Y.CHANDRACHUD & ANOOP V. MOHTA , JJ. 24 November 2010. ORAL JUDGMENT (PER DR. D.Y.CHANDRACHUD, J.) : 1. Rule. The Learned Counsel for the Respondents waive service. On the request of the Learned Counsel and with their consent, the Petition is taken up for hearing and final disposal. PNP 2 WP6465-24.11.sxw 2. The challenge in these proceedings under Article 226 of the Constitution is to an order dated 2 August 2010 of the Debt Recovery Appellate Tribunal. The Recovery Officer by an order dated 20 November 2009 dismissed an application filed by the Petitioners objecting to the confirmation of a sale. The order of the Recovery Officer was upheld by the Tribunal and in appeal by the Appellate Tribunal. 3. The First Respondent, Allahabad Bank filed Original Application 183 of 2004 against the Petitioners for the recovery of its dues. The Application was allowed by the Debt Recovery Tribunal on 1 September 2005 in the amount of Rs.33.51 Crores together with future interest at 12% per annum. On 17 October 2005 a recovery certificate was issued in pursuance of the order of the Tribunal. On 17 December 2007 the Recovery Officer issued an order of attachment of three properties, among them being Flat 603 situated in a building known as Ruby Apartments at Walkeshwar, Mumbai. The attachment was levied in recovery proceedings 248 of 2005 which was in execution of the order of the Tribunal in O.A. 183 of 2004. On 9 April 2009 the First Respondent filed an affidavit before the Recovery Officer stating that another flat being Flat No.402 together with two appurtenant garages situated in a building known as Pleasant Park at Peddar Road, Mumbai had been mortgaged in its favour. 4. The terms and conditions of sale were settled in pursuance of the provisions of Rules 52 and 53 of the Second Schedule to the Income Tax Act 1961 which is made applicable by virtue of the provisions of Sections 28 and 29 of the Recovery of Debts Due to PNP 3 WP6465-24.11.sxw Banks and Financial Institutions Act 1993. The terms of sale provided that the three properties were being sold on an as is where is and ‘ what is basis. Two of those properties which form the subject ’ matter of these proceedings are : (i) Flat No.402, Pleasant Park Co- operative Housing Society Limited, Peddar Road, Mumbai 400 006 with a carpet area of 1540 sq. ft. together with garage Nos. 17 and 18 each admeasuring 165.75 sq. ft; and (ii) Flat No.603 in Ruby Apartments at Walkeshwar Road, Mumbai 400 006 with a carpet area of 450 sq ft. Under the column entitled Details of encumbrances to “ which the property is liable the disclosure that was made was ” “not known . The First Respondent did not disclose details of ” encumbrances of which it had knowledge. The First Respondent was part of a consortium of banks led by the State Bank of India. The State Bank of India had in turn moved an application before the Debts Recovery Tribunal in which on 20 March 2007 a final order had been passed decreeing the claim and in pursuance of which a recovery certificate was issued on 20 April 2007. The recovery certificate in favour of the State Bank of India was in the total amount of Rs.35.68 Crores with interest @ 12% per annum. The recovery certificate stated that the outstandings were secured by a mortgage of several properties in which the First Respondent and Bank of Baroda had a pari pasu charge. Among the properties secured by the mortgage are the two properties which have been adverted to earlier. The statement that the details of encumbrances were not known was untrue to the knowledge of the First Respondent, for the First Respondent had knowledge of the charge in favour of State Bank, with whom it ranked pari pasu. PNP 4 WP6465-24.11.sxw 5. Following the attachment of the property and the finalization of the terms and conditions of sale, the aforesaid properties were listed for public auction on 25 September 2009. The sale was advertised in the Times of India, the Economic Times and Navshakti. The reserved price of the property in Pleasant Park at Peddar Road was fixed at Rs.4.25 Crores. A challenge by the Petitioners to the valuation was rejected. Eight bids were received in respect of the property. Of them three bidders agreed to revise their bids and the highest bid was that of the Tenth Respondent in the amount of Rs. 4.52 Crores. In respect of the residential flat in Ruby Apartments four bids were received. The reserved price was Rs.1.50 Crores. The highest bid was of the Eleventh Respondent in the amount of Rs. 1,50,11,111/-. These two bids of the highest bidders were accepted. 6. On 17 November 2009 the Petitioners filed their objection to the confirmation of the sale on the ground that (i) the properties in – question had not been mortgaged in favour of the First Respondent; (ii) The sale consideration was under valued; (iii) The material particulars relating to the property had not been disclosed and (iv) A cartel had been formed by the bidders. The Recovery Officer declined to accept the objections by an order dated 20 November 2009. The order of the Recovery Officer was challenged in appeal but both the Debts Recovery Tribunal and in appeal the Appellate Tribunal declined to intervene. Aggrieved, the Petitioners have moved these proceedings under Article 226 of the Constitution. 7. On behalf of the Petitioners it has been submitted that - (i) Though the First Respondent was aware, when it finalized the PNP 5 WP6465-24.11.sxw terms and conditions of sale of the pre existing encumbrances on the property, including the charge held by the State Bank of India, these encumbrances were not disclosed. The terms of sale, as a matter of fact, did not even disclose that the First Respondent itself held a pari pasu charge together with the State Bank of India which was the lead bank in the consortium; (ii) The properties were put up for sale on an as is where is basis which meant that every bidder was on notice of the fact that an investigation into the title of the two flats would have to be made by the bidder himself and that the First Respondent made no representation or warranty in that behalf. Any intending bidder would upon a scrutiny of the records of the Debts Recovery Tribunal have knowledge of the fact that the State Bank of India had a pre existing charge on the properties consequent upon a mortgage executed by the defaulting borrowers; (iii)The recovery certificate in favour of the State Bank of India was for an amount in excess of Rs.35 Crores and the factum of the pre existing charge in favour of the State Bank of India was an important circumstance which would weigh in the making of a bid for the purchase of the property; (iv)At no stage, during the course of the auction process was it disclosed to the intending bidders that the State Bank of India had agreed to participate in the auction process; (v) The fact that State Bank of India had granted its consent was never made known to the intending bidders and as a matter of fact, there is nothing on the record to disclose that such a consent was in fact granted. It was only in the course of the PNP 6 WP6465-24.11.sxw proceedings before the Debts Recovery Appellate Tribunal that the State Bank filed an affidavit stating that it had participated in the recovery proceedings for the recovery of its own dues after the attachment warrants were issued; (vi)The fact that the State Bank was also participating in the auction process for the realization of its own dues in pursuance of the recovery certificates independently obtained in O.A. 240 of 2004 was an important circumstance which would have a bearing on the price which would be realized at an auction sale. This not having been disclosed, there has been a material irregularity in the conduct of the auction sale; (vii)The Petitioners have sustained a substantial injury as a result of the irregularity in the conduct of the auction sale. 8. The Petitioners have before the Court two bidders each of whom is ready and willing to submit a bid in the amount not less than Rs.6.25 Crores. The bidders have brought with them demand drafts each of Rs.50 lacs and Rs.55 lacs and are willing to make a with prejudice offer that in the event that the auction sale is set aside and the property is directed to be readvertised, they will offer atleast a minimum price of Rs.6.25 Crores for the property failing which the earnest money which is offered by them may be forfeited. 9. On the other hand, it has been urged on behalf of the auction purchasers that - (i) The State Bank of India was impleaded as the Thirteenth Respondent to the application filed by the First Respondent; PNP 7 WP6465-24.11.sxw (ii) Several properties have been sold earlier in realization of the recovery certificate and there was an agreement between the State Bank of India and Allahabad Bank that all the sale proceeds will be shared pari pasu; (iii)In pursuance of the recovery certificate that was issued in favour of the First Respondent a notice was issued on 11 February 2009 under Rules 52 and 53 for settling the terms and conditions of sale. The Petitioners were given notice, but did not file any objection; (iv)A valuation report was obtained on 22 April 2009 in which the property at Pleasant Park was valued at Rs.4.26 Crores in ambient conditions and Rs.3.83 Crores as distress value. A challenge by the Petitioners to the valuation was rejected; (v) The bids were opened and accepted on 25 September 2009 and the Petitioners had only on 17 November 2009 objected to the confirmation on the ground that the properties in question had not been mortgaged; that the properties were being sold at an under value; that material particulars were not disclosed and that a cartel had been formed. (vi)The Recovery Officer dismissed the objections on 20 November 2009 and his orders were confirmed by the Debts Recovery Tribunal and Debts Recovery Appellate Tribunal. The Petitioners had no offers either before the Debts Recovery Tribunal or the Appellate Tribunal and it is only at this stage that offers have been forthcoming. In the meantime, the auction purchasers have made a substantial investment in terms of the payment of the consideration for the purchase of the property. PNP 8 WP6465-24.11.sxw 10. During the course of hearing of these proceedings, the opposition to the Petition has emanated from the auction purchasers. Though the banks had filed replies in the proceedings, there has been no opposition of any merit during the course of the hearing. The rival submissions would now fall for determination. 11. The facts as they emerge on the record before the Court indicate that the State Bank of India as a lead banker of a consortium of banks had initiated recovery proceedings before the Debts Recovery Tribunal. In those proceedings an order was passed on 20 March 2007 by which the claim of the State Bank was decreed in the amount of Rs.35.68 Crores together with interest. The two residential properties at Pleasant Park and Ruby Apartments were declared to be mortgaged and in which the First Respondent, Allahabad Bank and the Seventh Respondent State Bank were held to have a pari pasu charge together with Bank of Baroda and the Canara Bank. The First Respondent had in turn initiated proceedings before the Debts Recovery Tribunal for the realization of its dues. In that proceeding, the claim of the First Respondent had been decreed in the amount of Rs.33.51 Crores, by an order of the Debts Recovery Tribunal dated 1 September 2005. In execution of the recovery certificate a warrant of attachment was issued. The terms and conditions of sale were finalized and notified on 20 August 2009. This was after the recovery certificate had been issued in the other proceeding. State Bank s claim had been decreed for Rs.35.68 Crores ’ with interest. Obviously while finalizing the terms and conditions of PNP 9 WP6465-24.11.sxw sale, the First Respondent was aware of the circumstance that the two properties in question were secured by a mortgage in which the First Respondent together with the State Bank of India held a pari pasu charge. Neither this fact nor the fact that a recovery certificate had been issued on 20 April 2007 was disclosed. The terms of sale stated that the encumbrances to which the properties were liable were not known. The consequence of this would be that every intending bidder would be left to investigate the existing encumbrances if any and the qualitative nature of the title that would be passed on as a result of the auction sale. The duty to make an enquiry and to investigate into title was therefore cast upon each auction bidder. The Tenth Respondent has disclosed in his affidavit dated 10 December 2009 that while bidding in respect of the property at Pleasant Park, he had taken a search of the entire proceedings of the present matter viz. that arising from O.A. 183 of 2004 filed by Allahabad Bank but also of O.A. 240 of 2004 which had been instituted by the State Bank. Clearly this is indicative of the fact that an intending bidder, upon an inspection of the records would be made aware of the circumstance that in the proceedings initiated by Allahabad Bank and by the State Bank recovery certificates had been issued and that both the sets of banks were held to have a pari pasu charge in O.A. 240 of 2004. Whether the State Bank of India had consented to the sale of the properties despite the existence of its own mortgage was a circumstance which was not disclosed either in the terms of sale or at any stage during the course of the sale. During the course of these proceedings we had specifically enquired with counsel appearing on behalf of the PNP 10 WP6465-24.11.sxw State Bank as to whether the State Bank had consented to the sale of the properties to which the learned counsel stated that there was no such record in the proceedings before the Court nor does he proceed on the basis that there was consent. 12. Counsel appearing on behalf of the Petitioners relied upon the provisions of Section 73 of the Code of Civil Procedure. Section 73 enunciates that where assets are held by a Court and more persons than one have, before the receipt of such assets, made application to the Court for the execution of decrees for the payment of money passed against the same judgment debtor and have not obtained satisfaction thereof, the assets, after deducting the costs of realization, shall be rateably distributed among all such persons. Proviso (b), however, stipulates that where any property liable to be sold in execution of a decree is subject to a mortgage or charge, the Court may, with the consent of the mortgagee or encumbrancer, order that the property be sold free from mortgage or charge, giving to the mortgagee or encumbrancer the same interest in the proceeds of the sale as he had in the property sold. However, it may be stated here that Section 22 of the Recovery of Debts Due to Banks and Financial Institutions Act 1993 provides that the provisions of the Code of Civil Procedure are not attracted to any proceedings before the Tribunal. 13. Counsel appearing on behalf of the auction purchaser has fairly submitted before the Court that it is not the case of the auction purchaser that the State Bank had consented to the sale. As a matter of fact, the record before the Court contains an affidavit filed PNP 11 WP6465-24.11.sxw by the State Bank before the Debts Recovery Appellate Tribunal. In its affidavit the State Bank discloses as follows : “I say that once the Attachment Warrants are issued under the Recovery Proceeding initiated by the Respondent No.1, the Respondent No.7 has participated in the said Recovery Proceedings for its recovery as per the due process of law. (emphasis supplied) ” I say that the Respondent No.7 has filed the Original “ Application before the MDRT-II, being the Original Application No.240 of 2004, wherein all the consortium Documents together with the Security Documents were filed and it is adjudicated claim against the Appellants herein and in favour of the Respondent Nos.1, 7 and 8. It is very clearly stated therein that the Respondent Nos.1, 7 and 8 are having pari passu charge over and in respect of the said Mortgage Properties.” 14. The Court is essentially concerned with the question as to whether the sale that was conducted was fair and transparent and in accordance with law. The State Bank made a disclosure for the first time before the Debts Recovery Appellate Tribunal in its affidavit that was filed that once an attachment warrant was issued under the recovery proceedings initiated by the First Respondent it had participated in the recovery proceedings. The fact that the State Bank of India was consenting to the sale of the property was certainly not a fact which was disclosed to the intending bidders. If there was such an agreement, and consent was communicated by the State Bank to Allahabad Bank, this could not have been a matter of private understanding between the banks, but ought to have been placed squarely in the public domain since it was a circumstance PNP 12 WP6465-24.11.sxw which would materially and significantly affect the price which would be offered by a prospective bidder for the purchase of the property in the auction sale. If the sale was subject to the rights which State Bank had arising out of the charge in its favour, this would materially affect the valuation which a bidder would place on the property. On the other hand if State Bank was participating in the sale, that had a material bearing on the price which would be realized at the auction sale. Silence was all that the First Respondent had to offer, much in line with its own ambivalence in suppressing even the details of the encumbrances on the property of which it had knowledge. During the course of the hearing, Counsel for the Bank had no explanation or submission to offer on this aspect. 15. The contention which has been urged on behalf of the auction purchaser is that certain properties had been sold earlier in which, both the State Bank as well as Allahabad Bank had participated. A reference to this is to be found in paragraph 9 of the order passed by the Recovery Officer. The order of the Recovery Officer notes that one of the properties at Prasad Chambers was sold by the Defendants, meaning thereby the defaulting borrowers during the course of the one time settlement (OTS) and the permission of the State Bank of India being the lead bank was taken for lifting the attachment. This was therefore a situation where the defaulting borrower had sought and obtained the permission of the State Bank for lifting the attachment. The Recovery Officer has adverted to the sale of a second property at Majestic Shopping Center, Girgaum which was sold in public auction by the Tribunal and the sale proceeds were shared by the consortium of banks. This circumstance by itself PNP 13 WP6465-24.11.sxw is not indicative of the fact that the State Bank had consented to the sale of the two properties in question. Any such consent could not have been a matter of an undisclosed understanding. The factum of consent if any had a material bearing on the conduct of the auction sale and the price that would be realized during the course of the sale. The failure to disclose this material circumstance would in our view vitiate the sale. Counsel for the auction purchaser submits that the auction purchaser had engaged a team of lawyers who found out the state of affairs. The nub of the issue is that the auction purchaser had knowledge of a state of affairs which was not made known to intending bidders. Private understandings, and selective access to information are an anathema to any process which is founded on the rule of law. Allowed to persist, such a state of affairs will be destructive of public confidence. At issue is not only the expectation of the defaulting borrower that his property can be put to sale by a transparent process which follows objective crieteria. Equally at issue is the public interest in ensuring that financial institutions realize the best possible price at auction sales for the recovery of dues. A lack of fair disclosure and ambivalence of the kind involved in this case affects the interest of the financial institutions as well. That is why there has been virtually no contest on the part of the Allahabad Bank and the State Bank in the oral submissions at the hearing. 16. Rules 60, 61 and 62 of the Second Schedule to the Income Tax Act lay down the procedure to be followed on an application to set aside a sale. In the present case, it was sought to be urged by the auction purchaser that the Petitioners had not within a period of PNP 14 WP6465-24.11.sxw thirty days from the date of the sale applied to the tax Recovery Officer to set aside the sale. The application made by the Petitioners was on 17 November 2009 when the proceedings came up for confirmation of sale before the Recovery Officer. The important circumstance to be noted in this case, however, is that the disclosure by the State Bank of India that it had participated in the auction sale was made for the first time in the affidavit which was filed before the Debts Recovery Appellate Tribunal. It was only at that stage that the State Bank of India disclosed before the Court that it had indeed agreed to participate in the sale process. The material irregularity in the sale process emanates precisely as a result of the failure to disclose this circumstance during the course of the auction sale. For the aforesaid reasons, we are of the view that the intervention by this Court in the extraordinary jurisdiction of this Court under Article 226 of the Constitution is warranted. 17. During the course of the hearing, counsel appearing on behalf of the Petitioners has stated before the Court that the Petitioners have before the Court two bidders each of whom is willing to submit a minimum bid of Rs.6.25 Crores. Two demand drafts in the total amount of Rs.55 lacs have been furnished by M/s. Bulls Ventura Private Limited and a demand draft in the amount of Rs.50 lacs has been submitted by Mr. Uttam Bagadi. The first of the bidders is represented by an authorized person while the second is personally present before the Court. The first of the bidders is represented by Mr. Prakash Mehta, a director of the company. Both the bidders have