IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.07.2010 CORAM THE HONOURABLE MR.JUSTICE D.MURUGESAN AND THE HONOURABLE MR.JUSTICE M.SATHYANARAYANAN W.P.No.27079 of 2009 Jai Logistics rep.by its Partner G.Bhaskar No.21/22, First Cross Street Chennai 600 010 .. Petitioner -vs- The Authorized Officer Syndicate Bank No.105-106, Ponnurangam Road (West) R.S.Puram, Coimbatore .. Respondent Petition under Article 226 of the Constitution of India, praying for the issue of a Writ of Certiorarified Mandamus, calling for the records of the respondent in his letter dated 21.11.2009 bearing reference 3108/6132/CRO/REC/2009 and quash the same and consequently direct the respondent to refund the sum of Rs.2,63,000/- paid as Earnest Money Deposit by the petitioner. For Petitioner :: M/s.P.T.Asha for M/s Sarvabhauman Associates For Respondent :: Mr.P.Sreenivasulu ORDER (Order of the Court was delivered by D.MURUGESAN, J.) This writ petition raises an interesting question as to whether a bank or financial institution, while invoking the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Rules made thereunder, is entitled to bring the property for sale by way of auction without disclosing the encumbrance. 2. The petitioner is a firm engaged in the business of providing logistics services. They came across a publication in one of the issues of 'The Daily Thanthi' dated 7.10.2009 for the sale of an extent of 4.38 acres of land comprised in S.F.No.291/2, Ichipatti Village, Kothumuttupalayam Road, Palladam Taluk, Tirupur District. That property belonged to one M/s Sowmya Textiles, which had availed loan from the respondent-Syndicate Bank. As there were https://hcservices.ecourts.gov.in/hcservices/ defaulted repayments, the bank proceeded under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, "the SARFAESI Act"), which ultimately culminated into publication of the sale notice. The petitioner participated in the bid when the auction was conducted on 9.11.2009. They also paid the earnest money deposit of Rs.2,63,000/- on the same day. When the petitioner applied for encumbrance on 10.11.2009, they came to know that a settlement deed had been executed by the owner of the said land on 21.9.2009. As there was encumbrance over the property, the petitioner did not pay the balance of sale consideration and approached the respondent-bank seeking as to why the encumbrance was not notified in the sale notice. The petitioner was informed orally that the bank itself was not aware of the encumbrance created upon the property and consequently it was further assured that the earnest money deposit would be refunded. Contrary to the said assurance, vide the impugned letter dated 21.11.2009, the petitioner was informed that as per the terms of the auction, the earnest money deposit stands forfeited. 3. While challenging the said order, the learned counsel for the petitioner would submit that had the respondent put the petitioner on notice as to the encumbrance, they would not have participated in the auction and therefore the failure on the part of the petitioner to deposit the balance sale consideration was not willful. Hence the impugned order of forfeiture is liable to be set aside. 4. On the other hand, the learned counsel for the respondent- bank would submit that even when the sale notice was issued, the bank was not aware of the encumbrance and therefore only the publication did not carry the encumbrance. As far as the bank is concerned, it is entitled to forfeit the earnest money deposit in the event the balance sale consideration is not paid in time. The auction bidder cannot have any right to seek for either the amount deposited towards earnest money to be refunded or to purchase the land after the clearance of encumbrance by the bank or financial institution. The learned counsel would rely upon the judgment of the Supreme Court in United Bank of India v. Official Liquidator and others, (1994) 1 SCC 575 and particularly, paragraphs 13 and 14 in this regard. 5. We have considered the submissions. Of course, in the aforesaid judgment, the Supreme Court, while considering a sale by the Official Liquidator, has held that it is the duty of the intending purchaser to satisfy himself as to the encumbrance before participating in the bid. Having participated in the bid, the intending purchaser cannot later on turn around and question the Official Liquidator on the ground that the encumbrance was not notified. In that case, the provisions of the Rules as applicable in the present case are not applicable to the Official Liquidator. But in the case on hand, once possession is taken over under Section 13(4) or under Section 14 of the SARFAESI Act, whenever the secured creditor contemplates a sale of immovable property, they https://hcservices.ecourts.gov.in/hcservices/ will have to follow Rule 8 of the Security Interest (Enforcement) Rules, 2002. Rule 8(6)(f) mandates the secured creditors to set out in the terms of sale notice any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. A reading of the said rule, in our opinion, would also include the encumbrance relating to the property. We are inclined to read the rule in that way keeping in mind the interest of the intending purchaser to be put on notice as to the encumbrance, as otherwise he/she will be purchasing the property and simultaneously buying the litigation as well and an intending purchaser may not bid in the event he/she came to know of any encumbrance over the property. That is why the rule specifically contemplates a provision for the authorised officer, while notifying the sale, to specifically state as to the encumbrance. It will be a different issue in the event the auction notice indicated that it is the duty of the intending purchaser to verify not only the encumbrance by way of alienation of the property, but also the other statutory liabilities and in that case, the intending purchaser cannot later on turn around and seek for either the refund of the earnest money deposited or insist the bank to clear the encumbrance. In the absence of such indication in the sale notice, in our considered view, the respondent-bank would not be justified in compelling a purchaser to go ahead with the sale by depositing the balance sale consideration together with the encumbrance. 6. In that view of the matter, the challenge in the writ petition merits acceptance. Accordingly, the impugned order of forfeiture is set aside and the writ petition is allowed. The respondent is directed to refund the earnest money to the petitioner. We also take this opportunity to suggest that it is for the banks and financial institutions to indicate the encumbrance both by way of alienation in respect of the property or other statutory liabilities of the company or the individual, as the case may be, in the sale notice itself to avoid a situation like this. Equally the banks and financial institutions could also make it clear in the auction notice in the case of no other liability by the company or individual. No costs. Sd/ Asst.Registrar /true copy/ Sub Asst.Registrar ss https://hcservices.ecourts.gov.in/hcservices/ To The Authorized Officer Syndicate Bank No.105-106, Ponnurangam Road (West) R.S.Puram, Coimbatore +1cc to Mr.P.Sreenivasulu, Advocate Sr 50084 +1cc to M/s. Sarvabhauman Associates Sr 49596 MRD(CO) km/20.7. W.P.No.27079 of 2009 https://hcservices.ecourts.gov.in/hcservices/