Vasu P. Shetty vs M/S Hotel Vandana Palace & Ors

2. Respondent No. 1 herein had taken loan from Syndicate Bank (hereinafter to be referred as the 'Bank'). Because of its default in repaying the said loan, the bank took action under the provisions of the Securitization and Re-construction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI Act). After taking formal possession of the mortgaged property which was given as a surety for due discharge of the loan, the said property was put to sale. The appellant herein was the highest bidder whose bid was accepted resulting into issuance of the sale certificate. Respondent No. 1 (hereinafter referred to as the 'borrower') challenged the said sale by filing application before the Debt Recovery Tribunal (DRT). This application was dismissed. The borrower filed Writ Petition before the High Court of Karnataka against the order of DRT. The learned Single Judge dismissed the Writ Petition as well. Undeterred, the borrower appealed against the order of the learned Single Judge. This time it triumphed, as the Division Bench has set aside the sale of the property in favour of the appellant. The reason given is that the public notice issued for the said sale was defective as 30 days time which is mandatorily required under Rules 8 and 9 of SARFAESI Act was not given. Concededly the public notice was published in the newspaper on 28.4.2006, fixing the date for sale as 8.5.2006, inviting tenders from prospective buyers at 2.00 p.m. on 6.5.2006.

4. The borrower had availed a loan of Rs. 1,84,70,000/-. This loan was obtained from the bank to construct a hotel in a prominent place in Belgaum. The borrower has constructed the hotel at the said place for a land measuring 1825.25 sq. mtrs. with a built up area of 4749.64 sq. mtrs. At the time of sanction of the loan, the premises were valued at Rs. 3.16 crores. As mentioned above, the borrower committed default in the repayment of these financial facilities granted to it. Notice under Section 13(2) of the SARFAESI Act to take formal possession of the property was issued. Thereafter, the Authorised Officer of the Bank (Respondent No. 2)under SARFAESI Act proceeded to sell this property. Property could not be sold in the first attempt and the efforts were fructified only when it was put to auction third time. Since the earlier endeavour made by the Authorised Officer are used as shield against the borrower's attack on sale in question, it becomes necessary to take a note of these attempts as well.

5. First notice for auction was published on 11.9.2004 fixing the auction date as 15.10.2004. Reserve Price was fixed at Rs. 3.50 crores. This notice, admittedly, was for more than 30 days. At that stage, the borrower filed the Writ Petition in the High Court challenging the said notice 3 days before the proposed sale i.e. on 12.10.2004. Though the High Court did not grant stay against the scheduled auction, it granted stay against confirmation of sale. As per the appellant, in view of the said partial stay order, nobody came forward to participate in the auction and the exercise went into futility.

6. The Writ Petition filed by the borrower was dismissed by the High Court on 28.2.2005 upholding notice dated 27.7.2004 issued under Section 13(4) of the SARFAESI Act. In the meantime, it came to the notice of the Authorised Officer of the bank that there were encumbrances in the form of statutory liabilities to the tune of Rs. 43,01,100/- payable by the borrower and, therefore, the Reserve Price fixed at Rs. 3.50 crores had to be reduced. The borrower was informed about it. The Bank issued fresh notice on 9.3.2005 for auction of the property fixing date of auction as 21.3.2005 with reduced Reserve Price at Rs. 2.39 crores.

7. In the auction held on 21.3.2005 the highest offer which was received was in the sum of Rs. 2.25 crores which was less than even the reduced reserve price. It can well be discussed that this sale notice was for a period of less than 30 days. Be as it may, the bank wrote letter dated 28.6.2005 to the borrower asking it to convey its consent for the sale of property for a sum of Rs. 2.25 crores which was the highest bid. However, the borrower did not respond to this letter. Thereafter, another letter dated 16.8.2005 written by the bank stating the reasons as to why it was constrained to reduce the Reserve Price.

8. The borrower did not accede to the request of the Bank. Instead, on 15.11.2005, the borrower expressed its intention to settle the matter by making the proposal under One Time Settlement (OTS) scheme of the RBI. It was followed by letter dated 8.1.2006 by the borrower to the Bank requesting for OTS at Rs. 2,13,93,320/-. This proposal of the borrower was sanctioned by the Bank on 8.2.2006 with further stipulation that the amount would be paid on or before 31.3.2006. Cheque of Rs. 20 lakhs which was given by the borrower along with its OTS proposal was encashed by the Bank and was credited to the 'No Lien Account'. However, on 31.3.2006, instead of paying the amount as per the agreed OTS, the borrower requested for extension of time giving its own reasons. Time was extended upto 15.4.2006 for payment as a last chance. However, on 14.4.2006 another request for extension of time by two months was made which was followed by letter dated 22.4.2006 to the same effect. This time the Bank rejected the request of the borrower vide letter dated 25.4.2006. As a consequence, the OTS did not fructify.

9. On failure of OTS due to the fault of the borrower, the Authorised Officer of the Bank sprung into action and took steps for the sale of the property, in question. Notice dated 27.4.2006 was published in Indian Express (English) and in Tarun Bharat (Marathi) on 7.5.2006 for the acution of the property. The Auction date was published as 8.5.2006. Auction was held on 8.5.2006 wherein the bid of the appellant in the sum of Rs. 2.16 crores being the highest, was accepted. The appellant paid 25 percent of the bid amount and the balance amount was paid on 24.5.2006. The appellant also made payment for the encumbrances to the concerned statutory authorities which was in the sum of Rs. 49.91 lakhs. In this way the appellant made total payment of Rs. 283,39,735/-. On receiving the full consideration as per the auction, sale deed conveying the property was executed in favour of the appellant on 26.5.2006 followed by issue of the sale certificate.

15. After recapitulating the facts which have already been narrated above, his submission in this behalf was that the borrower had, in the present case, delayed the sale of the property and he was not entitled to take advantage of its own wrong. He dilated this submission by pointing out that first notice for auction which was published on 11.9.2004, clear 30 days notice was provided therein as the date of auction was fixed as 15.10.2004. However, conduct of the borrower in filing frivolous Writ Petition and obtaining interim order therein, desisted any intending purchaser from coming forward and participating in the auction. Further, even when second notice for auction sale was published on 28.2.2005 and notice of less than 30 days was given therein fixing the date of auction as 23.1.2005, the borrower never challenged the validity of this notice. Instead, at that stage the borrower expressed its intention to settle the matter by offering OTS proposal. The bank succumbed to this request of the borrower treating the same to be a bonafide offer and even accepted the OTS proposal of the borrower. Here again the borrower committed default and never remitted the money as per OTS arrangement agreed to between the parties. In this way, highlighting the aforesaid blameworthy conduct of the borrower, Mr. Ranjit Kumar submitted that it is estopped from challenging the validity of the notice for auction. It was also pointed out that not only entire amount is paid by the appellant towards the sale consideration, the appellant has discharged statutory liabilities/ encumbrances as well; sale deed registered in its favour way back on 26.5.2006; sale certificate issued; and the appellant is in possession of this property ever since. Therefore, the sale should not have been invalidated. Mr. A.B. Dial, learned Senior Counsel for the appellant Bank in other appeal also argued on the same lines.

16. Let us examine the aforesaid submission of the appellant in the light of the judgment in the case of Ikbal on which strong reliance is placed by the learned Senior Counsel. That was a case where R-1 (the borrower) took a housing loan from the appellant Bank by mortgaging certain immovable property. As R-1 committed default in repayment of the said housing loan, the Bank issued a notice to him on 30.6.2005 under Section 13(2) of the Securatisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act) informing him that if he failed to discharge the outstanding dues within 60 days, the Bank may take action under Section 13(4) and the mortgaged property shall be sold. On 18.12.2005 the Bank published the auction notice in the local newspapers and the public auction was conducted on 11.1.2006. The bid of the auction-purchaser for Rs. 8,50,000 was accepted being the highest bid. The auction- purchaser paid 25% of the sale consideration immediately but he did not make the payment of remaining 75% within 15 days of the confirmation of sale. He made the final payment on 13.11.2006 and the Bank issued the sale certificate in his favour. As the proceeds from the sale of the mortgaged property fell short of the total outstanding amount against the borrower, the Bank moved the Joint Registrar of Cooperative Societies for recovery of the outstanding amount. In those proceedings, an ex parte award for the outstanding amount was passed against the borrower R-1. It was then that R-1 challenged the sale certificate issued in favour of the auction purchaser in two writ petitions before the High Court. The Single Judge of the High Court quashed the sale certificate issued in favour of the auction-purchaser on the ground that the mandatory requirements of Rule 9 of the 2002 Rules were not followed and, therefore, despite the remedy of appeal to the borrower provided under Section 17 of the SARFAESI Act, a case was made out for interference under Article 226 of the Constitution, which was affirmed by the Division Bench of the High Court. The Bank and the auction- purchaser had filed the appeals challenging the judgments of the High Court.

18. In the facts of that case it was found that the letter dated 13.11.2006 sent by the borrower to the Bank clearly depicted that the borrower had waived his right under Rule 9 (1) and the provisions contained in Rule 9(3) and Rule 9(4) as well. It was also found that at the time of auction sale on 11.1.2006, the borrower was present but did not object to the auction being held before expiry of 30 days from the date of which public notice of sale was published. Not only this, he agreed that the bid given by the auction purchaser, which was the highest bid, be accepted as the auction purchaser happened to be his known person. Another important feature which was noted was that the borrower expressly gave consent in writing that the balance sale price may be accepted from the auction purchaser even when tendered after some delay and the sale certificate be issued to him. There was a written agreement between the borrower and the Bank for extension of time upto 15.4..2006 within which the auction purchaser had made the payment. On these facts, the court came to the conclusion that condition in Rule 9(4) viz. “such extended period as may be agreed upon in writing between the parties” would be treated as substantially satisfied. Again, pertinently, the Writ Petition was filed by the borrower more than 4 years after the issuance of the sale certificate. On these facts the court concluded that there was a waiver of the aforesaid mandatory provisions by the borrower.

15. There is no question of estoppel, waiver or abandonment. There is no specific plea of waiver, acquiescence or estoppel, much less a plea of abandonment of right. That apart, the question of waiver really does not arise in the case. Admittedly, the tenants were not parties to the earlier proceedings. There is, therefore, no question of waiver of rights by Respondents 4-7 nor would this disentitle the tenants from maintaining the writ petition.”

26. The moment we find that the mandatory requirement of the Rules had not been waived by the borrower, consequences in law have to follow. As held in Mathew Varghese’s case, when there is a breach of the said mandatory requirement the sale is to be treated as null and void. Moreover, the appellant have no answer to many other infirmities pointed out by the High Court. We, therefore, are of the opinion that present appeals lack merit.

27. Before we part with, it is imperative to mention that the purchaser has paid a sum of Rs.1.86 crores towards purchase of property and Rs.30 lakh towards moveable items to the Bank. He has also spent Rs.1,86,335/- towards registration fee and Rs.15,62,400/- towards stamp duty. In addition, dues towards municipal tax, Sales Tax liability, dues of Employees State Insurance Corporation, Employees Provident Fund and Belgaum Industrial Cooperative Bank have also been paid. A total whereof comes to Rs. 49,91,000/-. These were the liabilities of the borrower. In this way, total amount of Rs. 2,83,39,735/- is paid by the purchaser. He has also discharged municipal tax liability in the sum of Rs.2,86,078/- for the period 1.4.2007 to 31.3.2009. As we have affirmed the order of the High Court setting aside the sale, we grant two months time to the borrower to discharge the entire liability of the Bank. The borrower shall also reimburse the amount of registration fee and stamp duty to the purchaser. The direction to pay this amount is given having regard to the conduct of the borrower on earlier occasions. If the borrower pays the amount due to the Bank, registration charges, stamp duty as well as amount of encumbrances paid by the purchaser, which was the liability of the borrower i.e. a sum of Rs.49,91,000/- + 2,86,078/-, the property shall revert back to the borrower. If the aforesaid amounts are not paid within the aforesaid two months, the Bank shall be at liberty to proceed with the sale of the property following due procedure under the law. In so far as the purchaser is concerned, he shall be refunded entire amount spent by the purchaser, as mentioned above. We have consciously not granted interest to the purchaser on the aforesaid amount, as the purchaser has, in the meantime, utilized the property in question.

28. Subject to the above, the appeals are dismissed.