Dismissed

The Authorised Officer v. S N Mahadeva

Karnataka HC2 Feb 2021WA/262/2020

Case brief

AI extract

What is this about?

The Karnataka High Court dismissed the Bank of Maharashtra's appeal against an interim order permitting a defaulting auction purchaser to participate in a resale and use the forfeited earnest money. The Court held that forfeiture under the Security Interest (Enforcement) Rules is directory, not mandatory.

What did the court decide?

The appeal filed by the Bank of Maharashtra against the interim order permitting the respondent to participate in a subsequent auction was dismissed.

The Authorised Officer Vs S N Mahadeva — Company and Corporate | Karnataka HC (2021)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 2^ND DAY OF FEBRUARY, 2021

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PRESENT

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THE HON’BLE MRS.JUSTICE B.V.NAGARATHNA

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AND

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THE HON’BLE MRS.JUSTICE M.G.UMA

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W.A.No.262 OF 2020 (GM – DRT)

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BETWEEN:

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THE AUTHORISED OFFICER, BANK OF MAHARASHTRA, ASSET RECOVERY BRANCH, 13, PAXAL TOWERS, KR ROAD, OPP:VANIVILAS HOSPITAL, BENGALURU – 560 002. REPRESENTED BY ASSISTANT GENERAL MANAGER MR.RAVINDRA SONJE. … APPELLANT (BY SRI. VIGNESH SHETTY, ADVOCATE)

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AND:

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S.N.MAHADEVA, AGED ABOUT 53 YEARS, S/O LATE NAGAPPA, RESIDING AT NO.207, 2^ND MAIN ROAD, SINGASANDRA, HOSUR ROAD, BENGALURU – 560 068. … RESPONDENT

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THIS APPEAL IS FILED UNDER SECTION 4 OF THE KARNATAKA HIGH COURT ACT PRAYING TO SET ASIDE THE ORDER DATED 17.02.2020 PASSED BY THE LEARNED SINGLE JUDGE OF THIS HON’BLE COURT IN W.P.NO.2958/2020.

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THIS APPEAL COMING ON FOR PRELIMINARY HEARING THIS DAY, NAGARATHNA, J., DELIVERED THE FOLLOWING:

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JUDGMENT

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The legality and correctness of the interim order dated 17.02.2020 passed in W.P.No.2958/2020 by the learned Single Judge is questioned in this appeal. By the said interim order, the learned Single Judge permitted the writ petitioner to participate in the auction and ordered that the amount of Rs.2,14,92,880/- deposited by the writ petitioner on 05.10.2018 to be treated as earnest money deposit, subject to further orders to be passed by this Court. Being aggrieved by the same, the Bank has preferred this appeal.

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We have heard the learned counsel for the appellant/Bank at length and perused the material on record.

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Briefly stated, the facts are that the appellant/Bank issued a public notice for sale of the scheduled property. Writ Petitioner was the highest bidder. He deposited a sum of Rs.2,14,92,880/- being 25% of the total bid amount which was Rs.8,59,71,520/-. He was supposed to pay the balance amount within a period of 15 days from the date of auction (05.10.2018) i.e., on or before 19.10.2018. However, petitioner sought for extension of time and the same was granted as per Sub-rule (4) of Rule 9 of the Security Interest (Enforcement) Rules, 2002 (for short, hereinafter referred to as ‘2002 Rules’), inasmuch as time was granted till 31.03.2019 being a further period of three months. Admittedly, petitioner did not deposit the balance bid amount by then. Consequently, annexure-C – communication dated 31.03.2019 was issued to the petitioner stating that the amount of Rs.2,14,92,880/- deposited by him towards the earnest money deposit had been adjusted to the appropriate account and the amount stood forfeited. It

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was also stated that the auction purchaser/writ petitioner

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had no charge or right over the property sought to be auctioned and the bank reserved its right to put the property for auction as it deemed fit. Being aggrieved by the said communication, petitioner preferred S.A.No.203/2019 before the Debts Recovery Tribunal (for short, hereinafter referred to as ‘the DRT’). By order dated 18.12.2019, the DRT dismissed the said appeal. Being aggrieved by the same, writ petition was filed in which, the impugned interim order was passed, permitting the writ petitioner to participate in the auction to be scheduled and to treat the amount of Rs.2,14,92,880/- deposited by him on 05.10.2018 as earnest money deposit. Being aggrieved by the same, the Bank has preferred this appeal.

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Learned counsel for the appellant/Bank drew our attention to Sub-rule (4) Rule 9 of 2002 Rules and submitted that a time frame given under the said Rule, being 15 days, for the deposit of the balance purchase

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price or bid amount prior to confirmation of sale, in case, the said amount is not deposited within the said time frame, time could be extended, but not beyond three months. That in the instant case, extension of time was granted for a period of three months and even then, the petitioner did not deposit the balance bid amount and therefore, in view of default in payment, the earnest money deposited by the writ petitioner was forfeited in favour of the Bank and the property was sought to be resold and the writ petitioner, being the defaulting purchaser, has forfeited his claim to the property or to any part of the sum for which it may be subsequently sold.

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Learned counsel for the appellant/Bank contended

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that the procedure envisaged under Sub-rules (4) & (5) of Rule 9 of 2002 Rules have been followed in the instant case. That petition ought not to have been entertained at all as the petitioner, if aggrieved by the order of the

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DRT, had to approach the Debts Recovery Appellate

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Tribunal (for short, hereinafter referred to as ‘the DRAT’) under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, ‘the SARFAESI Act’). Instead, he filed the writ petition which could have been dismissed on the ground of availability of alternative remedy. Instead, learned Single Judge by interim order has by-passed Sub-rule (5) of Rule 9 of 2002 Rules and has permitted the writ petitioner to participate in the auction to be rescheduled and also permitted him to utilize the earnest money already deposited in respect of rescheduled auction. Hence, he prayed that the impugned interim order may be stayed for the present and later, set aside the same.

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We have considered the submissions of learned counsel for the appellant/Bank in light of the provisions of the SARFAESI Act and Rules made there under as well as the facts of the case. It is noted that when measures are taken for enforcement of security interest under

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Section 13 of the SARFAESI Act including sale of the secured asset taken place as per 2002 Rules. Rule 9 of 2002 Rules deals with time of sale, issue of sale certificate and delivery of possession. The same reads as under:

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“9. Time of sale, issue of sale certificate and delivery of possession, etc.-

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(1) No sale of immovable property under these rules, in first instance shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of rule 8 or notice of sale has been served to the borrower.

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Provided further that if sale of immovable property by any one of the methods specified by sub-rule (5) of rule 8 fails and sale is required to be conducted again, the authorised officer shall serve, affix

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and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale.

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(2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor:

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Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule(5) of rule 8:

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Provided further that if the authorised officer fails to obtain a price higher than the reserve price, he may, with the consent of the borrower and the secured creditor effect the sale at such price.

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(3) On every sale of immovable property, the purchaser shall immediately, i.e., on the same day or not later than next working day, as the case may be pay a deposit of twenty five per cent. Of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorised officer conducting the sale and in default of such deposit, the property shall be sold again.

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(4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteen day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months.

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(5) In default of payment within the period mentioned in sub-rule(4), the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser shall

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forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.

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(6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the Form given in Appendix V to these rules.

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(7) Where the immovable property sold is subject to any encumbrances, the authorised officer may, if the thinks fit, allow the purchaser to deposit with him to money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him:

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Provided that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of the money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen days from the date of finalisation of the sale.

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(8) On such deposit of money for discharge of the encumbrances, the authorised officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make the payment accordingly.

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(9) The authorised officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7) above.

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(10) The certificate of sale issued under sub-rule(6) shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.

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7. In the instant case, Sub-rules (2), (3), (4) and (5)

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of Rule 9 of 2002 Rules are relevant. As per Sub-rule (2) of Rule 9 of 2002 Rules, the sale of the secured asset shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation and offered to the authorized officer and shall be subject to the confirmation by the secured creditor or the Bank/Financial Institution. As per Sub-rule (3) of Rule 9 of 2002 Rules, on every sale of immovable property, the purchaser shall immediately i.e., on the same day and not later than next working day, as the case may be, deposit 25% of the amount of sale price,

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which is inclusive of earnest money deposited, if any, to the authorized officer who conducted the sale and in default of such deposit, the property shall be sold again. As far as balance amount of sale price payable is concerned, Sub-rule (4) of Rule 9 of 2002 Rules states that the purchaser shall pay to the authorized officer on or before fifteenth day of confirmation of sale of immovable property and in case, the said amount is not paid by that day, the time can be extended as may be agreed upon in writing between the purchaser and the secured creditor up to three months, which means beyond three months, it cannot be extended, as the expression used is ‘in any case not exceeding three months’. But what would be the position, if, by the end of the period of three months which is extended period, the balance amount is not paid by the purchaser. In such a case, as per Sub-rule (5) of Rule 9 of 2002 Rules, the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser

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shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold. In this context, learned counsel for the appellant/bank submitted that the use of the word ‘shall’ in Sub-rule (5) of Rule 9 of 2002 Rules implies that it is mandatory that the deposit amount has to be forfeited and the property has to be resold and the defaulting purchaser would not have any claim to the property, if it is subsequently sold. He contended that such being the mandatory nature of the provision, learned Single Judge has failed to appreciate the same and instead, granted an interim order which implies that the deposit is not forfeited and the bidder, who is in default, is given another opportunity to bid in a subsequent sale to be rescheduled. It was contended that the interim order is contrary to Sub-rule (5) of Rule 9 of 2002 Rules.

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We have perused the provisions of the Rules and also the intention of the SARFAESI Act as well as the Rules bearing in mind the facts of the case. No doubt,

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the SARFAESI Act itself is a special enactment for recovery of debts and the special enactment has been enacted by the Parliament having regard to overwhelming non-performing assets that were generated in the economy and non-recovery of debts by the Financial Institutions. Therefore, over and above, the existing available law for recovery of debts such as Recovery of Debts Due to Banks and Financial Institutions Act, 1993 SARFAESI Act was enacted and Rules have been made thereunder. No doubt, the SARFAESI Act as well as 2002 Rules provide a time bound program for recovery of outstanding debts including by sale of secured assets. There are stipulations even on the auction purchaser or the bidder or the purchaser of the secured asset vis-à-vis payments to be made. There is no dispute about those aspects of the matter. However, Sub-rule (5) of Rule 9 of 2002 Rules categorically states that the secured creditor can forfeit the earnest money deposited in the event the

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auction purchaser does not deposit/pay the balance purchase price.

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The question is, whether, in every case the secured

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creditor has to forfeit the earnest money deposited, merely because of the use of the word ‘shall’ in Sub-rule (5) of Rule 9 of 2002 Rules. On a reading of the same, we find that the expression ‘shall’ has to be read not in a mandatory way, but is only an enabling provision, which is directory. It should be read as ‘may’ giving a discretion to the secured creditor to either forfeit or not to forfeit the earnest money deposit, keeping in mind the facts and circumstances of each case. In the event, the earnest money deposited is not forfeited, then the defaulting auction purchaser can be given an other opportunity to participate in the subsequent sale and if he turns out to be highest bidder, the earnest money already deposited by him can be adjusted towards the bid amount subsequently bid by the auction purchaser

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and thereafter, the provisions of Sub-Rules (2) to (4) of Rule 9 of 2002 Rules shall apply.

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10. The object of reading the expression ‘shall’ as ‘may’

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in Sub-rule (5) of Rule 9 of 2002 Rules is to give the auction purchaser one more opportunity to bid for the secured asset offered for sale and a free play to the secured creditor, so that ultimately the secured creditor will be able to sell the secured asset and if circumstances are such, the auction purchaser, who was a defaulter, may ultimately clinch the deal in a subsequent sale, in which event, he must be given the benefit of earnest money that he has already deposited. The reason as to why we say so is, if discretion is given to the secured creditor not to forfeit the earnest money deposited and instead, give the defaulting purchaser another opportunity to bid for the secured asset, that would ensure that there is a bidder who would ultimately bid for the secured asset, as there are many occasions, when the secured asset would not attract any bidder at

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all. In such a case, any number of bids or sale notices put up by the secured creditor would be frustrated when there are ultimately no bidders or takers for the said secured assets. Under the circumstances, we feel that discretion should be given to the secured creditor not to forfeit the bid amount in the event there is default in payment of balance bid amount and instead, if the property is offered for sale subsequently, an opportunity must be given to the defaulting bidder to have an other opportunity to bid for the said secured asset and in the event, such a defaulting bidder happens to be the highest bidder, the benefit of the earnest money deposited earlier must be given to such a bidder and adjusted accordingly.

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We also find that the object of the Act and the Rules made thereunder are for recovery of outstanding debts by sale of the secured assets and bearing in mind the same, we do not think that the object and purpose of Sub-Rule (5) of Rule 9 is to punish the auction purchaser

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or to cause hardship to him, rather, the Rule must be read in such a manner that the secured creditor ultimately has the discretion to ensure that there is certain auction purchaser or bidder, who is interested in buying the secured asset, which would ultimately ensure recovery of outstanding debts from the borrowers. Thus the Sub-rule (5) of Rule 9 must be given a purposeful and a practical interpretation rather than a literal or pedantic one. In this context, it is relevant to observe usually, use of the expression “may” is directory requirement and the expression “shall” would mean mandatory requirement. Normally, mandatory enactment must be obeyed or fulfilled exactly. But, it is sufficient that directory enactment be obeyed or fulfilled substantially. However, a directory provision must be distinguished from a discretionary power. A directory provision gives no discretion and has to be obeyed, but, failure to obey it does nor render in disobedience of it, a nullity. But, a discretionary power would leave the

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donee of the power free to use or not to use it at his discretion. A mandatory provision could also be read as giving discretion to the authority to exercise power having regard to the object of the Act. Usually, use of expression “shall” would raise a presumption that the particular provision is imperative. However, this prima facie inference about the provisions being imperative may be rebutted by other considerations such as object and scope of the enactment and the consequences flowing from such construction. (Source: Justice G.P.Singh “Principles of Statutory Interpretation” 13^th Edition) Thus, there are numerous instances where the word “shall” has been construed as merely directory. Rule 9(5) of the 2002 Rules is one such example. This would be so on ascertaining the real intention of the legislature by carefully understanding the object of the provision.

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In the circumstances, we find that the learned Single Judge was justified in entertaining the writ

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petition and passing the interim order and further it is noted that the impugned interim order is only subject to further orders to be passed in the writ petition. Therefore, we do not find any infirmity in the impugned interim order. There is no merit in the appeal. The appeal is, hence, dismissed.

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Sd/JUDGE

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Sd/JUDGE

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PKS

The Authorised Officer v. S N Mahadeva

Case brief

What is this about?

What did the court decide?

The Authorised Officer v. S N Mahadeva

Case brief

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