Partly allowed

Mr Subramanya Rao K v. the Authorized Officer Canara Bank

Karnataka HC12 Jan 2024WP/3677/2022

Case brief

AI extract

What is this about?

Writ petition filed by successful auction purchasers seeking refund of 25% deposit forfeited by Canara Bank. The Court held that since the bank entered into a One Time Settlement with the borrower and closed the loan account without producing evidence of a second auction sale, it suffered no loss and acted arbitrarily. The Court directed the refund of the deposited amount.

What did the court decide?

Refund of Rs. 3.25 crores deposited by petitioners within 8 weeks; interest payable if bank fails to divulge second sale details.

Mr Subramanya Rao K Vs the Authorized Officer Canara… — Banking and Recovery | Karnataka HC (2024)

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Reserved on : 08.01.2024 Pronounced on : 12.01.2024

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 12^TH DAY OF JANUARY, 2024

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BEFORE

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THE HON'BLE MR. JUSTICE M. NAGAPRASANNA

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WRIT PETITION No.3677 OF 2022 (GM-RES)

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BETWEEN:

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1 . MR. SUBRAMANYA RAO K., S/O LATE K.NARAYANA RAO AGED ABOUT 58 YEARS JAYANTHI NAGARA, 2^ND CROSS

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NEAR TALUK OFFICE, KARKALA – 574 104 UDUPI DISTRICT.

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2 . MRS. H.N.NAGARATHNA

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W/O SUBRAMANYA RAO K., AGED ABOUT 56 YEARS JAYANTHI NAGARA, 2^ND CROSS NEAR TALUK OFFICE, KARKALA – 574 104. UDUPI DISTRICT.

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... PETITIONERS

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(BY SRI. ADITYA SONDHI, SENIOR ADVOCATE FOR SRI. RAVIKUMAR A. S., ADVOCATE)

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AND:

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THE AUTHORIZED OFFICER CANARA BANK, ARM-1 NO. 86, SPENCERS’ TOWER M.G.ROAD, BENGALURU - 560 001.

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... RESPONDENT

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(BY SRI. VIGNESH SHETTY, ADVOCATE FOR C/R)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO DIRECT THE RESPONDENTS TO CONSIDER THE REPRESENTATION DTD.28.1.2022 BY THE PETITIONERS ANNEXURE-E.

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THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 08.01.2024, COMING ON FOR PRONOUNCEMENT THIS DAY, THE COURT MADE THE FOLLOWING:-

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ORDER

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The petitioners/auction purchasers are knocking at the doors this Court seeking a direction for consideration of their representation dated 28-01-2022 or in the alternative, direct refund of an amount of `3.25 crores deposited with the Bank. In this order reference to petitioner would be reference to both petitioners.

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Heard Sri Aditya Sondhi, learned senior counsel appearing for the petitioners and Sri Vignesh Shetty, learned counsel appearing for the respondent.

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Facts adumbrated are as follows:-

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Loan is advanced by the respondent/Canara Bank (‘the Bank’ for short) to one M/s SPR Spirits Private Limited. The borrower defaults in repaying the amount which led the Bank to put up the property of the borrower that was the subject matter of mortgage with the Bank to sale. Accordingly, an e-auction sale proceeding takes place on 29-11-2021. The subject property is sold for `13/crores and the petitioner emerges as the successful bidder for having purchased it for the said sum. In terms of law, the petitioner was directed to deposit 25% of the final bid amount which the petitioner complied with on 30-11-2021 i.e., the next day. Remaining 75% of the amount was directed to be paid within 15 days thereof i.e., on or before 14-12-2021. It is then the petitioner communicates that he is making arrangements for payment of 75% of the amount and sought time. In the same way time was sought by the petitioner on four occasions and finally the Bank declined to

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extend the time and forfeited the entire amount deposited by the petitioner in terms of its communication dated 02-03-2022. The Bank does not stop at that, but a second auction is said to have been conducted of the same property in which the Bank recovers an amount of 11.02 crores(statement of objections). This information is sought by the petitioner which is not divulged by the bank. It is later the petitioner goes on making representations for refund of the amount or consideration of his representation for extension of time. This was not considered. It appears that after the second sale in which the Bank had recovered close to 12/- crores from the auction purchaser therein struck a settlement with the borrower by way of One Time Settlement (‘OTS’ for short) The OTS is accepted by the borrower and an amount of `41,24,99,941.00 is paid by the borrower in full and final settlement of the dues over the property. It is, therefore, the petitioner coming to know about the OTS files an application under the Right to Information Act seeking those documents. The documents are not divulged holding that the petitioner is a third party and is not entitled to those documents. By then, the petitioner had preferred the subject writ petition seeking the aforesaid prayer and on coming to know of OTS files an

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application seeking a direction to refund the entire amount. The Bank files its objections to the petition and also to the application. It is at that stage, the matter was heard.

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The learned senior counsel Sri Aditya Sondhi, appearing for the petitioner would vehemently contend that the petitioner emerged as a successful bidder in the auction, diligently deposited 25% of the total bid amount i.e., 3,25,00,000/- on the next day of the auction sale, but due to pandemic could not fulfill remaining payment immediately. He sought time to make payment and the Bank had accepted the representation of the petitioner for extension of time. The Bank then forfeits the amount contending that law permits such forfeiture. It is at that juncture the petitioner had approached this Court seeking refund. The petitioner then comes to know that the Bank itself had entered into OTS with the borrower and on such fulfillment of the terms closed the account of the borrower. Therefore, if the Bank had entered into OTS with the borrower, it cannot forfeit the amount of 3.25 crores of this innocent auction purchaser. He would seek to place reliance upon

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several judgments which would bear consideration in the course of the order.

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Per-contra, the learned counsel appearing for the respondent Sri Vignesh Shetty would vehemently refute the submissions contending that the petitioner himself is responsible for such forfeiture. The Bank had put up the property for a second sale in which the Bank had to reduce the price from 13/- crores to 11.02 crores. Therefore, the loss is due to the action of the auction purchaser for having not fulfilled the payment of remaining 75%. He would admit that OTS no doubt is entered into with the borrower and the account is closed. That does not mean that the petitioner can escape the rigour of the statute. It permits forfeiture of the amount. He would seek dismissal of the petition.

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I have given my anxious consideration to the submissions made by the respective learned counsel and have perused the material on record.

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The afore-narrated facts are not in dispute. The issue lies in a narrow compass as to whether the Bank is entitled to forfeit the amount deposited by the auction purchaser on the date of auction and in what circumstances?

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The property was put to auction pursuant to a sale notice issued on 29-11-2021. The petitioner emerges as the successful bidder. The communication of receipt of amount of 25% which would be `3.25 crores reads as follows:

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“Date: 30-11-2021

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To,

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SRI K.SUBRAMANYA RAO S/O SRI KARKALA NARAYANA RAO, SMT. NAGARATHNA HN W/O SUBRAMANYA RAO K # 1-207 2^nd Cross Near Taluk Office, Jayanthinagara Kukkundoor Karkala Udupi Dist - 576 117, Karnataka.

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Dear Sir/Madam,

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Sub: PUBLIC AUCTION OF PROPERTY – IN THE ACCOUNT OF M/S SPR SPRIRITS PVT.LTD. – LAND & BUILDING AT No.19 (OLD NO. 283) 11^TH CROSS, WILLSON GARDEN, BENGALURU – 560 027) – REGD .

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Ref: Sale Notice dated 22-10-2021 and out letter ARM-1/ CR-400/581/2021/AK date 29-11-2021.

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In terms of the above acceptance letter dated 29-112021, you have remitted 25% of the bid amount and we are glad to inform you that the sale is confirmed in

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your favour by the Bank and you are advised to remit the balance of the bid amount at ` 13,00,00,000/- on or before of 14^th December 2021, failing which the 25% amount remitted by you shall be forfeited forthwith without any further notice to you.

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On receipt of the entire sale amount, the Sale Certificate will be issued in your favour as per the procedure.”

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(Emphasis added)

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The Bank directed that the petitioner should pay the entire amount of `13/- crores on or before 14-12-2021 failing which 25% would be forfeited. The petitioner not being in a position to immediately fulfill the payment of entire amount owing to COVID-19 pandemic, submits a representation seeking extension of the period. The representation is submitted on 10-12-2021. It reads as follows:

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“Date:10-12-2021

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From: Smt. Nagarathna H.N., Mr. Subramanya Rao K., Residing at 1-207, 2^nd Cross, Near Taluk Office, Jayanthinagar, Kukkundoor Kukkundoor, Karkala, Karkala Taluk, Udupi District-574 104.

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To, The Authorised Officer, Arm-1 Canara Bank, Bangalore.

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Sir,

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Subject: Regarding the extension of time to pay the balance bid amount;

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As you are aware that, on 29-11-2021 we have purchased the property bearing No.19, 11^th Cross, Wilson Garden Bangalore-560027 in E-Auction conducted by you. We also paid 25% of the bid amount i.e., _3,25,00,000/- (Rupees Three Crores Twenty Five Lakhs only) as per the terms and conditions of the E-auction proceedings. Now we are require to pay the 75% balance bid amount i.e.,_ 9,75,00,000/(Nine Crores Seventy Five Lakhs only) within 15 days as per your auction confirmation letter dated 30-11-2021.

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We have approached for loan to HDFC Bank Limited for payment of balance bid amount of ` 9,75,00,000/- by pledging our other properties which is under process. In the process of loan the HDFC Bank Ltd., sought some details/clarification with regard to the existing loan and furnished the same.

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Since the loan process in HDFC Bank Limited is under process, we request you to grant another 30 more days time to pay the balance bid amount of ` 9,75,00,000/- (Nine Crores Seventy Five Lakhs only) with effect from 14.12.2021. Kindly do the needful.”

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(Emphasis added)

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The petitioner represents to the Bank that he has approached HDFC Bank Limited (‘HDFC’) for a loan for fulfilling the entire bid amount and the HDFC is in the process of granting the said loan and has sought certain clarification. Time of 30 more days was sought from 14-12-2021. This is accepted by the Bank by the following communication:

“Date: 21-12-2021

To,

Smt. Nagarathna H N Sri M. Subramanya Rao K # 1-207, 2^nd Cross Near Taluk Office Jayanthinagar Kukkundoor Karkala Taluk Udupi Dist-574 104.

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Dear Sir,

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*Sub: PUBLIC AUCTION OF THE PROPERTY– IN THE*
*ACCOUNT* OF *M/S* *SPR* *SPIRITS* *PVT.LTD.*
*W.R.T.MORTGAGED SECURITY AT: Land & Building at*
*No.19* *(Old* *No.283) 11^th Cross, Wilson Garden,*
*Bengaluru– 560 027– (Regd.)*

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Reference is made to your letter dated 10-12-2021

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Your request for extension of time for payment of the balance sale consideration of ` 9,75,00,000/is considered favourably and you are permitted time till 28-12-2021 for payment of the said amount.

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It may be noted that failing to deposit the said amount within the extended time frame by you in pursuance to the said action, the amount already deposited will be forfeited without any further notice.

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On receipt of the entire sale amount, the sale certificate will be issued in your favour as per procedure.”

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(Emphasis added)

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The time is extended not for 30 days but 15 days. The petitioner then represented to the Bank on 13-01-2022 stating that HDFC has sought some more days time to complete the loan process and further sought time for making good the remaining 75%. The Bank

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by its communication dated 13-01-2022 contended that it would be

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a final chance by the following reply:

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“Date: 13-01-2022

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To,

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Sri K.Subramanya Rao S/o Sri Karkala Narayana Rao, Smt. Nagarathna HN W/o Subramanya Rao K # 1-207 2^nd Cross Near Taluk Office, Jayanthinagara Kukkundoor Karkala, Udupi Dist-576 117, Karnataka.

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Dear Sir/Madam,

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Sub: M/s SPR SPIRITS PVT. LTD – E.Auction on 29-112021 – REGD.

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Reference is made to your letter dated 13-01-2022.

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In the e-auction held on 29-11-2021 you were declared successful bidder upon payment of 25% of final bid amount and was required to pay remaining 75% within 15 days (i.e., 14^th December, 2021) but you failed to remit the same, instead had requested for 30 days time extension which was considered by the competent authority on special grounds and you were permitted to pay by 28.12.2021.

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It is noted that you had failed to honour the consideration extended as a special case. Thus violating the Terms & Conditions of the sale notice which clearly stipulates that “ The successful bidder shall deposit 25% of the sale price (inclusive of EMD already paid) immediately on declaring him/her as the successful bidder and the balance within 15 days from the date of confirmation of sale by the secured creditor. If the successful bidder fails to pay the sale price, the deposit made by him shall be forfeited by the Authorised Officer without any notice”.

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Now we are once again in receipt of your letter dated 13.01.2022 requesting for 30 days time for payment of balance of sale consideration. The same was placed to competent authority who has noted your action of repeated request as not appreciable and however, as a last and final chance the authority has permitted time till 28 Jan 2022.

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You are hereby advised to remit the balance amount on or before 28 Jan 2022 failing which the amount deposited will be forfeited without any further notice.”

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The petitioner however again represented on 28-01-2022 and on 09-02-2022, explained the circumstances and sought some more time to make good the amount, as the officials of HDFC Bank had all been infected with COVID-19 and sanction process is yet to complete. The representation dated 09-02-2022 reads as follows:

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“Date: 09-02-2022

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From, Smt. Nagarathna H.N., Mr. Subramanya Rao K, Residing at 1-207, 2^nd Cross, Near Taluk Office, Jayanthinagar, Kukkundoor, Kukkundoor, Karkala, Karkala Taluk, Udupi District-574 104.

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To, The Authorised Officer, Arm-1 Canara Bank, M.G. Road, Bangalore-01.

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Sir,

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Subject: Regarding the extension of time to pay the balance bid amount.

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******

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1. As you are aware that on 29-11-2021 we have purchased the property bearing No.19, 11^th Cross, Wilson Garden, Bengaluru 560 027 in E-Auction conducted by you. We also paid 25% of the bid amount i.e., _3,25,00,000/- (Rupees Three Crores Twenty Five Lakhs only) as per the terms and conditions of the E-auction proceedings. Now we are require to pay the 75% balance bid amount i.e.,_ 9,75,00,000/- (Nine Crores Seventy Five Lakhs only) within 15 days as per your auction confirmation letter dated 30-11-2021.

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2. We have approached for loan to Bank Ltd., for payment balance bid amount of ` 9,75,00,000/by pledging our other properties. However, later on the HDFC Bank Ltd., after taking lot of time the HDFC Bank Ltd. refused to grant loan even after furnishing the entire documents by giving reasons of COVID-19 since we purchasing Hotel in Covid situation.

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3. We approached IIFL for loan by mortgaging our property to pay the ` 9,75,00,000/- (Nine Crores Seventy Five Lakhs only).

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4. Meantime we also received letters that the property we have purchased in auction is involved in loan transaction with SVC Cooperative Bank. We request you to confirm the title of the above said property being absolutely clear from any legal issues, attachment. We are investing our hard earned money apart from raising loan on the security of the properties we own.

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5. We request you to permit us to inspect the original title deeds of the property auctioned.

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6. If for any reason the title of the property auctioned is not clear we reserve ours selves the liberty of seeking return of the 25% of the bid amount we have deposited with you.

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7. After taking all the details and also considering the COVID-19 situation, the IIFL has agreed to sanction loan. They have completed all the formalities and agreed to sanction the loan. The IIFL official also communicated the loan process to you over the telephone on the last occasion. You have extended time for payment of ** **_9,75,00,000/- (Nine Crores Seventy Five Lakhs only) only for 10days in spite of our request for 30 days time. The amount to be raised as loan is a huge amount and therefore the process takes longer time. Due to COVID outbreak, the IIFL Bank Officials could not complete the formalities. The officials of the IIFL also infected with COVID and due to these reasons they could not visit the properties and our place in time. Now they have completed all the processes. The IIFL Bank sought 20 more days time to sanction and complete the loan process. Hence, we request you to grant another 30 more days time to pay the balance bid amount of_ 9,75,00,000/- (Nine Crores Seventy Five Lakhs only) with effect from 10-02-2022 or else to refund the bid amount of 25% deposited with you. Further we have already requested you to grant loan from Canara Bank any Branch Bangalore by pledging auction property as well my other two properties, hope we you oblige and do the needful.”

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(Emphasis added)

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After the representation dated 09-02-2022 the petitioner knocked at the doors of this Court on 11-02-2022 in this petition seeking the aforesaid prayer. During the pendency of the writ petition it

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appears that the Bank reiterates its stand and communicates the following order on 02-03-2022:

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“Date: 02-03-2022

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To,

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Sri K.Subramanya Rao S/o Sri Karkala Narayana Rao, Smt. Nagarathna HN W/o Subramanya Rao K # 1-207 2^nd Cross Near Taluk Office, Jayanthinagara Kukkundoor Karkala, Udupi Dist-576 117, Karnataka.

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Dear Sir/Madam,

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Sub: M/s SPR SPIRITS PVT. LTD – E.AUCTION ON 29.11.2021 – REGD.

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Ref: Our letter dated ARM-1/CR-400/586/2021/2021 dated 30-11-2021.

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In the subject e-auction you were declared the highest bidder an auction was confirmed in your favour vide above referred letter upon payment of 25% of the final bid amount and was required to pay the remaining 75% before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between purchaser and the secured creditor.

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The sale was confirmed on 30-11-2021 and upon repeated request from your end for extension of time the competent authority permitted time within the framework of the SARFAESI Act. The requested permission was conveyed to you every occasion quoting the adversities as per the prevailing laws in case of your defaulting the payment within the stipulated time frame. As per the Rule 9(4) of Security Interest (Enforcement) Act, 2002 we have permitted maximum time possible to avoid un-pleasantness.

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As you have failed to make the remaining amount of the auction proceeds within the time frame as stipulated in the Rule 9(4) of Security Interest

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(Enforcement) Act, 2002, the Bank is constrained to invoke Rule 9(5) of Security (Enforcement) Act, 2002.

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Thus, it is informed that provision quoted above has been invoked and amount deposited by you with regard to the said e-auction has been forfeited.”

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(Emphasis added)

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Certain developments take place during the pendency of

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the writ petition. The petitioner however, is kept in dark. The petitioner, on coming to know that another sale has taken place of the very property in respect of which the petitioner had emerged as successful bidder, files an application under the Right to Information Act seeking those details. The stand of the Bank was that in the second sale the Bank had suffered loss as the property had to be sold for a lesser price than what was the amount of bid when the petitioner had participated in the auction. The same was

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not divulged holding that the petitioner was a third party. It is then, the petitioner files an application before this Court on 03-11-2023 appending certain documents including Encumbrance Certificate qua the subject property. The Encumbrance Certificate does not show any name of auction purchaser or transfer of property to the name of the auction purchaser. Therefore, if the

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Bank had put up the property for sale for the second time and has registered a sale certificate in favour of the second auction purchaser, it ought to have been reflected in the Encumbrance Certificate in the least. The Bank has filed its statement of objections but has no where mentions the notification of second sale or name of the successful bidder in the second sale. Therefore, the second sale having taken place at the hands of the Bank itself is in doubt.

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Yet another circumstance that would belie the stand of the Bank is that the Bank generates talks of OTS with the borrower and settles the entire loan that was in due for an amount of `41,24,99,941.00 and it is stated that the entire loan amount is recovered. This is not made known to the petitioner. In reply to the application so filed, the Bank admits the said payment and settlement. The relevant paragraphs of the objections to the application reads as follows:

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“C. With reference to paragraphs 4 & 5 (3 in the I.A) of the said Application, save and except what are matter of record, every allegation contrary thereto and/or inconsistent therewith are denied and

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disputed. The Bank sold the property in a subsequent sale by issuing sale notice dated 02-03-2022. The sale was held on 19-03-2022 in which the successful bidder paid paid Rs.11.02 crores. The Respondent Bank has also issued the sale certificate to the successful auction purchaser. As already stated above, the respondent Bank had incurred loss of Rs.1.98 crores as the property was subsequently sold for Rs.11.02 crores only. The respondent Bank had also incurred a loss of Rs.25.13 crores as extra interest due to non-payment of sale amount within due date till the date of next sale. The petitioners claim that the Bank had incurred only Rs. 1.98 crores is without any proof of the same. It is not the respondent’s duty to inform the petitioner about any transaction entered between the Respondent Bank and the borrower. The petitioners cannot claim it as a right and file such frivolous applications. The respondent Bank has every right to invoke Rule 9(5) of Security (Enforcement) Act, 2002 and forfeit the money if the same is not paid within the stipulated time.

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D. With reference to paragraph 5 of the said Application, save and except what are matter of record, every allegation contrary thereto and/or inconsistent therewith are denied and disputed. The respondent Bank has produced all the documents which are necessary for the present case. However, the documents pertaining to OTS cannot be claimed by the petitioner as the petitioner is a third party to the transactions entered between the respondent Bank and the borrower. Sheer lies and wrong notion of law being narrated by the petitioners to deprive the respondent of its legitimate claim and frustrate the proceedings being initiated under Law. However, the

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respondent Bank states that the account of the borrowers have been settled under OTS on 05.03.2023 and an amount of ` 41,24,99,941.00 (Rupees Forty One Crore Twenty Four Lakhs and ninety Nine Thousand and Nine Hundred Forty One only) has been recovered in the account.

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7. The petitioners have filed the present application with the sole intention to harass the Respondent Bank and restrain of its legitimate claim. There is no substance in the present Application and the same is wholly unmeritorious, contrary to the well settled principles of law. Sheer lies being narrated by the petitioners to deprive the respondent of its legitimate claim and frustrate the proceedings being initiated under law.”

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(Emphasis added)

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Therefore, in the cross fire between the borrower and the Bank who at all times have spoken for OTS and closed the loan, the petitioner is caught and his amount of 3.25 crores is forfeited by the Bank. It would have been an altogether different circumstance if the Bank had not spoken to the borrower and negotiated for OTS. The situation now is that the Bank has initiated OTS and closed the entire loan amount recording full and final settlement, on the borrower paying the entire loan amount. This is the admission in the statement of objections. But, what is projected now is loss of 1.98 crores by the Bank for putting up the property to second sale.

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No document is produced by the Bank along with the objections to the application, except making averment that the Bank sold the property in the subsequent sale by issuing a sale notice on 02-03-2022 and the sale was held on 19-03-2022.

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Two circumstances would again belie the statement of objections even. The first objection by the Bank was filed on 28-03-2022. It is verified by the Assistant General Manager and the authorized officer through an affidavit appended to the statement of objections which is also dated 28-03-2022. The objections filed to the application quoted supra mentions two dates of subsequent sale, one is the sale notice on 02-03-2022 and holding the sale on 19-03-2022. Both these dates are prior to 28-03-2022. No document of sale notice or confirmation of sale or sale certificate issued in favour of any auction purchaser in the second sale is appended. It is neither appended to the statement of objections nor to the objections filed to the application. It is only an averment by the Bank. To the contrary, the petitioner has produced Encumbrance Certificate which shows no confirmation of sale being registered in favour of any auction purchaser.

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Therefore, when the documents produced by the petitioner demonstrate that the Bank has not registered confirmation of sale in favour of any auction purchaser, it cannot be said that the Bank has suffered any loss for it to forfeit the amount. What the Bank has done is keeping the petitioner in the dark, as also this Court, by not divulging any documents with regard to the second sale and confirmation of sale in favour of any subsequent auction purchaser. Therefore, it is construed that there is no such sale and if there is no such sale, it is axiomatic that there is no loss caused to the Bank. The Bank then initiates OTS and closes the loan of the borrower. Therefore, according to the Bank all was well and ended well. It is only the petitioner who is now shown end of the stick by forfeiture in the circumstances. In the considered view of the Court, the Bank being a State under Article 12 of the Constitution of India, has conducted itself in a manner which does not behoove its status. The petitioner thus becomes entitled to the refund of the amount deposited by him on the date of auction.

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Judgments are relied on by the learned counsel for the respondent/Bank to contend that it is entitled to forfeit the amount. There can be no qualm about the principles laid down therein. The applicability of those judgments is what is to be seen. In

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AGARWAL TRACOM PRIVATE LIMITED v. PUNJAB NATIONAL

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BANK¹ the Apex Court holds as follows:

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“…. …. ….

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28. We also notice that Rule 9(5) confers express power on the secured creditor to forfeit the deposit made by the auction-purchaser in case the auction-purchaser commits any default in paying installment of sale money to the secured creditor. Such action taken by the secured creditor is, in our opinion, a part of the measures specified in Section 13(4) and, therefore, it is regarded as a measure taken under Section 13(4) read with Rule 9(5). In our view, the measures taken under Section 13(4) commence with any of the action taken in clauses (a) to (d) and end with measures specified in Rule 9.

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… . …. ….”

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Reliance by the learned counsel for the respondent is placed on the afore-quoted paragraph. It only permits forfeiture of the amount deposited in the event of default by the auction purchaser. The Bank entering into OTS and closing the loan of the borrower did not form consideration before the Apex Court.

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1 (2018) 1 SCC 626

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On the other hand, certain judgments relied on by the learned senior counsel for the petitioner are apposite to be considered. This Court in the case of E.ALI v. THE SYNDICATE BANK² has held as follows:

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“11. Chapter III of the Act provides for enforcement of security interest. Sub-Section (1) of Section 13 states that notwithstanding anything contained in Sectioas 69 or 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal by such creditor in accordance with the provisions of the said Act.

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Sub-Section (2) of Section 13 provides for issuance of notice to the borrower to discharge his full liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-Section (4).

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The expression ‘borrower’ has been defined in subSection (1)(f) of Section 2, which means any person who has been granted financial assistance by any Bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any Bank or financial institution and includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any Bank or financial institution in relation to such financial assistance. Thus, the person, who has given guarantee or created any mortgage or pledge as security for the financial assistance granted by the Bank is also a borrower.

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2 ILR 2015 KAR 3060

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Sub-Section (3) of Section 13 provides for the particulars to be given in the notice to the borrower and subSection (3 A) provides for the consideration of objections, if any, filed by the borrower.

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Sub-Section (4) of Section 13 lays down the consequences in case the borrower fails to discharge his liability in full within the period specified in sub-Section (2). It states that in case the borrower fails to discharge his liability in full within the period specified in sub-Section (2), the secured creditor may take recourse to one or more of the measures mentioned in Clauses (a) to (d) of the said provision to recover his secured debt. Under sub-Section (4)(a) of Section 13, the secured creditor is authorized to take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset and sub-Section (4)(b) provides for taking over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.

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Sub-Section (6) of Section 13 states that any transfer of secured asset after taking possession thereof or take over of management under sub-Section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the transferee all rights in or in relation to the secured asset transferred as if the transfer had been made by the owner of such secured asset.

¶161

The other two relevant provisions are sub-Sections (8) and (13) in Section 13. Sub-Section(8) states that if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.

¶162

Sub-Section (13) states that no borrower shall, after receipt of notice referred to in sub-Section (2), transfer by way or sale, lease or otherwise, other than in the ordinary course of his business, any of his secured assets referred to

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in the notice, without prior written consent of the secured creditor.

¶165

12. Section 14 authorises the Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset. It states that where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of the said Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof and the Chief Metropolitan Magistrate or as the case may be the District Magistrate shall on such request being made to him take possession of such asset and documents relating thereto and forward such assets and documents to the secured creditor.

¶166

13. Rule 8 of the Security Interest (Enforcement) Rules, 2002 (‘Rules’ for short) provides for sale of immovable secured assets and Rule 9 provides for time of sale, issue of sale certificate and delivery of possession. Sub-Rule (9) of Rule 9 states that the authorized officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in subRule (7).

¶167

14. From sub-Section (4)(a) of Section 13, it is clear that if the borrower fails to discharge his liability in full within the period specified in sub-Section (2), the secured creditor may take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset. If the dues of the secured creditor are paid under sub-Section (8) of Rule 13 before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor. Therefore, if the secured assets are in lawful possession of the third party, for example, a tenant or a mortgagee, etc., the secured creditor can only take symbolic possession of the property under the SARFAESI Act. Sale of immovable property with vacant possession will always fetch better

¶168

¶169

price. The object of sale by holding public auction or by inviting tenders from the public under sub-Rule (5) of Rule 8 is to fetch the best price. The secured asset has to be sold in public auction after taking physical possession as far as possible and transfer the same to the purchaser is spelt out in sub-Section (6) of Section 13 and sub-Rule (9) of Rule 9. It is also clear that before the date fixed for sale or actual transfer of the property, if the borrower pays the dues to the secured creditor, the secured asset shall not be sold or transferred by the secured creditor. In my view, if the property is in possession of the borrower or if it has been transferred to third parties contrary to sub-Section (13) of Section 13, the secured creditor has to first take vacant possession under Section 14 from the borrower or the third party as the case may be and thereafter it has to be sold by holding public auction or by inviting tenders.

¶170

15. In the instant case, the secured creditor has not taken physical possession of the property though it was in possession of the borrower. Before actual transfer of the possession of the property could be made, the borrower has paid the entire dues to the secured creditor in terms of the settlement arrived at between them. In the circumstances, question of the bank transferring the property to the petitioner does not arise. This is in conformity with subSection (8) of Section 13. In view of the same, the bank cannot retain 25% of the amount deposited by the petitioner in pursuance of the auction made in terms of the sale notice at Annexure ‘A’.

¶171

The afore-quoted judgment was a case where an auction purchaser

¶172

had defaulted in payment and the borrower later cleared entire dues to the secured creditor in terms of a settlement arrived at. The co-ordinate Bench holds that the Bank could not have forfeited the amount or retained the amount of 25% in pursuance of the auction sale, in the light of the settlement. Another coordinate bench of

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this Court in P.BALAJI BABU v. STATE BANK OF INDIA³ , while considering an identical circumstance of the Bank entering into OTS, has held as follows:

¶175

12. The next substantial contention urged by the learned counsel for the petitioner is that respondent No. 1 has settled the loan account of borrower Sri. Jignesh Patel by accepting the proposal of OTS and receiving the amount under the same. Respondent No. 1 has filed an affidavit on 26.03.2022, wherein para 2 and 3 of the said affidavit read as follows:

¶176

“2. I state that there was a loan account of M/s Bangalore Timbers, represented by its Proprietor (Mr. Jignesh N. Patel). On verification, I came to know that the said loan account was settled under One Time Settlement Scheme and under the said scheme the Bank has waived interest and other charges.

¶177

3. I state that when the outstanding loan amount was due from the borrower M/s Bangalore Timbers, the then Asset Recovery Branch initiated proceedings under the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and I came to know during the course of proceedings under SARFAESI Act, the property was auctioned and one Sri. P. Balaji Babu was one of the bidders and the same was accepted by the Asset Recovery Branch and it is not within my knowledge the further development of the public auction. However, from the records available in the Branch, I state that the loan account was closed through compromise under One Time Settlement Scheme by third party Dr. Ramanuja and the Bank under the said scheme has waived interest and other charges.”

¶178

3 2022 SCC OnLine Kar 853

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13. The above shows that loan account for realization of which the sale was held was ultimately settled to the full satisfaction of respondent No. 1 by receiving the payment favouring the account of the borrower Sri. Jignesh N. Patel by third party Dr. Ramanuja and closed the account. Since payment has been accepted and loan account has been closed, respondent No. 1 cannot now say that it has suffered any loss or damages. If that is so, there is no justification on the part of respondent No. 1 in retaining the amount deposited by the petitioner in whose favour respondent No. 1 in any case was not in a position to pass full title on account of the borrower/mortgagor transferring the property in favour of Smt. Naina J. Patel. Respondent No. 1 has taken a position in the writ petition that since the assets were taken over by it under the provisions of SARFAESI Act, the gift deed executed by Sri. Jignesh N. Patel in favour of Smt. Naina J. Patel would not have any legal effect on the efficacy of sale and transfer of title in favour of highest bidder pursuant to sale notification dated 15.10.2010 (Annexure-A). The validity of such contention need not be gone into for two reasons namely, firstly, respondent No. 1 has settled the loan account with its borrower by making OTS proposal and accepting payment towards the account of the borrower Sri. Jignesh N. Patel on the premise of full and final settlement and once that is done the security given for the due payment of the loan gets released rendering it no more available for sale. Secondly, even if the contention of respondent No. 1 on the legal effect of sale under the SARFAESI Act is correct, the petitioner was justified in entertaining a doubt regarding the outcome of such a sale on passing title to him and on the said basis insisting upon respondent No. 2 to clear the title and withholding the balance sale price and in such a situation respondent No. 1 having settled the loan account with the borrower cannot mulct the further part consideration amount deposited by the petitioner. Since respondent No. 1 has not suffered any loss or damage, it is not entitled to retain the amount of Rs. 24,10,000/deposited by the petitioner UNION OF INDIA v. RAMPUR DISTILLERY AND CHEMICAL CO. Ltd.

….”

… . ….

Further, it becomes apposite to refer to the judgment of the Apex Court in the case of ALISHA KHAN v. INDIAN BANK⁴ wherein the Apex Court has held as follows:

¶185

“…. …. ….

¶186

3. Having gone though the impugned judgment and orders passed by the High Court, we are of the opinion that the High Court ought to have allowed the refund of the amount deposited being 25% of the auction sale consideration. Considering the fact that though initially the appellant deposited 25% of the auction sale consideration, however, subsequently she could not deposit balance 75% due to COVID-19 pandemic. It is required to be noted that subsequently the fresh auction has taken place and the property has been sold. It is not the case of the respondents that in the subsequent sale, lesser amount is received. Thus, as such, there is no loss caused to the respondents.

¶187

4. Considering the aforesaid facts and circumstances, we allow these appeals and set aside the order of forfeiture of 25% of the amount of auction sale consideration and direct the respondent Bank to refund/return the amount earlier deposited by the appellant, deposited as the part auction sale consideration (minus 50,000/- towards the expenditure which were required to be incurred by the respondent Bank for conducting the fresh auction) within a period of four weeks from today.”

¶188

The Apex Court holds that the High Court ought to have allowed refund considering the fact that the petitioner had deposited the amount of 25% and the balance of 75% was not paid owing to COVID-19 pandemic and the Bank had subsequently sold the

¶189

4 2021 SCC OnLine SC 3340

¶190

¶191

property in a fresh auction. `50,000/- expenditure was permitted to be withheld and the remaining amount was directed to be refunded. It is these judgments that would become applicable to the facts of the case on hand and not the one relied on by the learned counsel for the respondent.

¶192

The High Court of Andhra Pradesh in the case of SYED HIDAYATHULLA V. AUTHORIZED OFFICER, CANARA BANK⁵ has held as follows:

¶193

“This writ Petition is filed for the following relief:

¶194

‘to issue an appropriate order, writ or direction more particularly one in the nature of writ of Mandamus declaring the inaction on the part of the respondent Bank in not considering the representation submitted by the petitioner dated 11.10.2019 through e-mail for refund of part sale consideration amount paid by the petitioner pursuant to the auction held by the respondent Bank on 26.08.2019 for sale of vacant site admeasuring 302.50 square yards situated at D. No. 21/B and 21/B2, near D. No. 45-32/16, Near Little Flower School and Chennakesava Towers, Ring Road, 1^st Line, Vidya Nagar, Guntur in respect of Loan A/c No. 2492261010159 of M/s. Perumallu Agro Industries as illegal, arbitrary and contrary to law and consequently direct the respondent Bank to refund the part sale consideration amount paid by the petitioner pursuant to the auction held by the respondent Bank on 26.08.2019 for sale of vacant site admeasuring 302.50 square yards situated at D. No. 21/B and 21/B2 near D. No. 45-32/16 Near Little Flower School and Chennakesava Towers, Ring Road, 1^st Line, Vidya Nagar, Guntur in respect of Loan A/c

¶195

5 2023 SCC OnLine AP 1048

¶196

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No. 2492261010159 of M/s. Perumallu Agro Industries in the interest of justice…’

¶198

…. … …

¶199

4. Relying upon two judgments reported in Mandava Krishna Chaitanya v. UCO Bank, Asset Management Branch¹ and Adhya Industries v. Vijaya Ban k² , learned senior counsel argues that the writ must be decided in his favour as the Rule is now caveat venditor and not caveat emptor.

¶200

…. … …

¶201

6. COURT: The procedure of sale of immovable property is spelt out in Rules 8 and 9 of the Rules framed under the SARFAESI Act. Rule 9 talks of the deposit to be made. As per Rule 9(3) of the Rules, the purchaser has to pay 25% of the sale price immediately in addition to the EMD that is already deposited. The balance amount shall be paid on or before 15^th day of confirmation of sale or such extended period. The time for payment of balance consideration cannot go beyond three (3) months as per Rule 9(4) of the Rules. Rule 9(5) states that in default of the payment within the period in sub-rule (4) of the Rules, the deposit shall be forfeited to the secured creditor and the property shall be re- sold.

¶202

16. However, this Court also notices the submission about the One Time Settlement. The Bank had entered into a One Time Settlement with the primary borrower and settled the case. The details of the same are not fully furnished despite petitioner's requests. The alleged postponement of auction urged by the respondents is not borne out by any record. Since he made an offer under the One Time Settlement, the Bank had decided to close the issue. The title deed of the property is also returned to the original borrower. A sum of Rs. 15 lakhs which was paid by the present writ petitioner was not adjusted and it is still lying separately as per the counter affidavit filed. The Bank argued that this issue of One Time Settlement has nothing to do with the petitioner's

¶203

¶204

claim for refund. This Court has to therefore decide it. Since the Bank does not have any further claim and has voluntarily given up its claim against the original borrower by its One Time Settlement proposal, which is an accord and satisfaction, the Bank cannot lay any claim on the amount of Rs. 15 lakhs lying in the Bank's custody. This is to be refunded to the writ petitioner. For their own reasons the Bank has accepted a lesser sum of money; compromised the matter and returned the title deeds to the borrower.

¶205

17. As far as the original Rs. 22.50 lakhs is concerned, here also, the Bank acted in a high handed manner. The right to forfeit the amount would only arise if the failure is clear. Before 25.10.2019 the right to forfeit will not arise, since as per the Rule in question, the amount had to be forfeited if the deposit is not made ‘within the period’ and the end date for payment is on 25.10.2019. Hence, till that date, it is the amount belonging to the writ petitioner and it cannot be adjusted towards the loan account of the ‘defaulting borrower’. Even after 25.10.2019, it could be adjusted to the secured creditor only amended Rule 9 (5) of the Rules). This Rule 9 (5) has been specifically amended by GSR 1046 (E) on 03.11.2016 and the words ‘secured creditor’ were included in the Rules. They cannot credit it to the borrowers account. This action of the Bank is questionable and high handed besides being contrary to Rule 9 (5) of the Rules. As a nationalized Bank, their actions must be fair and transparent. This is also to be refunded since the Bank did not have any right over the amount on that date. The final accord and satisfaction in the form of One Time Settlement also goes against them. They have not pleaded and proved that due to a ‘loss sustained’, they could forfeit the amount. Their conduct in accepting a lesser amount as One Time Settlement estops them from claiming the amounts deposited by the writ petitioner.

¶206

18. It transpires that the defaulting borrower has benefited twice (a) by the part bid amount (Rs. 22.50 lakhs) being credited to his loan account and (b) by the reduction in the liability due to the One Time Settlement proposal being accepted while the writ petitioner is penalized by adjustment etc.

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19. In a decision reported in Ram Kishun v. State of U.P.⁵ , the Hon'ble Supreme Court in para 13 clearly held that while auctioning such property in such circumstances, the financial institution should not behave like property dealers; should act in a fair manner and in strict conformity with the statutory provision. Undoubtedly, public money should be recovered and recovery should be made expeditiously. But it does not mean that the financial institutions which are concerned only with the recovery of their loans, may be permitted to behave as they please and be permitted further to dispose of the secured assets in any unreasonable or arbitrary manner or in flagrant violation of the statutory provisions. In this case, in conclusion, it is held that the petitioner is entitled to relief for the reasons mentioned in paras 6 to 9 and in paras 16-17.

¶209

20. For all the reasons mentioned above, the writ petition is allowed. No order as to costs. As a sequel, the miscellaneous petitions if any shall stand dismissed.”

¶210

The High Court of Calcutta in the case of S.L. ISPAT PRIVATE

¶211

LIMITED V. PUNJAB NATIONAL BANK⁶ , has held as follows:

¶212

“9. He argues that on one hand the bank was considering the OTS proposal of Brilliant and on the other hand was proceeding with the auction process. Such OTS of Brilliant was ultimately accepted after receipt of 25% amount from the appellant. It is not a case that the bank through such OTS had received a lesser amount than the bids offered in the e-auction by Ispat. In support of his arguments, Mr. Dutta has placed reliance upon the judgments delivered in the cases of Alisha Khan v. Indian Bank (Allahabad Bank), reported in 2021 SCC OnLine SC 3340 and V. Sridhar v. The Authorized Officer Indian Bank, Chennai, reported in AIR 2018 Mad 87.

¶213

6 2023 SCC OnLine Cal 33

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14. The appellants have contended that though the property has been auctioned on ‘as is where is basis’ and ‘as is what is basis’, the bank could not have shirked its responsibility to disclose the encumbrances from taking clear possession moreso when there was no clause in the public notice to the effect that the properties were being transferred ‘without any representations and warranties on the part of the bank relating to encumbrances/statutory liabilities etc. attached to the properties’. The bank could not have forfeited 25% of the total bid amount having proceeded simultaneously with the e-auction process and the OTS proposal as submitted by the original owner/borrower.

¶216

15. The word ‘forfeiture’ has not been defined under the SARFAESI Act but it amounts to loss of a legal right by means of some breach of an obligation. If left absolutely unfettered to the discretion of the authority, it may possibly result in an extremely harsh order. The power of resumption and forfeiture needs be exercised only as a last resort and in a reasonable manner. Such reasonability has to be established on the basis of the facts and circumstances of the case. We are not satisfied with the manner in which the bank had ultimately forfeited the earnest money paid by the appellant. The appellants' apprehension that there was a dispute as regards possession of the properties put up for sale could not have been ruled out since admittedly for non-payment of the dues the bank made an attempt to sell the mortgaged properties of the borrower, namely, Brilliant in the year 2016 and at that juncture Brilliant applied for OTS upon depositing an amount of Rs. 20 lakhs, as would be explicit from the letter dated 1^st August, 2017 by which an enhanced proposal for OTS was submitted by the borrower.

¶217

16. That on the date of e-auction i.e., on 6^th September, 2017, the bank was in seisin of a proposal towards OTS submitted by Brilliant on 1^st August, 2017. The initial OTS proposal dated 1^st August, 2017 was enhanced from Rs. 6 crores to Rs. 7.9 crores upon retaining the upfront amount of Rs. 60 lakhs deposited by Brilliant on 23^rd August, 2017 and the final decision was taken by the bank to accept the same on 29^th December, 2018. The ‘no due certificate’ was also issued in favour of Brilliant on the said date with an advice to withdraw all cases. In view of such sequence of facts, it cannot be argued that there was no continuity and link

¶218

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between the first OTS proposal and the subsequent enhanced proposal.

¶220

18. For the reasons as discussed hereinabove, we are of the opinion that the impugned notice/e-mail dated 7^th October, 2017 and the order impugned in the present appeal are not sustainable in law and the same are, accordingly, set aside. The bank is directed to refund the forfeited amount being Rs. 1,70,80,250/- to the appellants within a period of four weeks from the date of communication of this order.”

¶221

In the light of the afore-narrated facts and the judgments rendered by the Apex Court and co-ordinate Benches of this Court and the High Court of Andhra Pradesh and Calcutta, I am of the considered view that the petitioner would become entitled to refund of the amount. The Bank projects a second sale said to have been conducted, but the same is nowhere seen in the documents appended to the objections to the petition or to the application. Therefore, if the Bank actually conducted a second sale and documents are divulged to the petitioner, he would not become entitled to any interest on the amount that is with the Bank even as on today. The petitioner would then become entitled only to the principal amount. The expenditure that the Bank has incurred for

¶222

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the second sale, if any, shall be adjusted towards the interest on

¶224

`3.25 crores which is lying with the Bank for the last 24 months.

¶225

17. For the aforesaid reasons, I pass the following:

¶226

O R D E R

¶227

(i) Writ Petition is allowed in part.

¶228

(ii) A mandamus issues to the respondent to refund the amount of `3.25 crores to the petitioner within 8 weeks from the date of receipt of a copy of this order.

¶229

(iii) Interest on the aforesaid amount shall be paid to the petitioner on the Bank failing to divulge the details of second auction and confirmation of sale in favour of the auction purchaser to the petitioner.

¶230

(iv) It is made clear that if no such document is divulged, the petitioner would become entitled to interest at the savings bank rate for the refund amount.

¶231

¶232

Consequently, I.A.No.1 of 2023 also stands disposed.

¶233

Sd/JUDGE

¶234

bkp CT:SS

Mr Subramanya Rao K v. the Authorized Officer Canara Bank

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Mr Subramanya Rao K v. the Authorized Officer Canara Bank

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