2012 (5) TMI 569 - SC - Indian Laws

Recovery of bank dues - Liability of guarantor - Held that - In view of the provisions of Section 128 of the Indian Contract Act 1872 the liability of the guarantor/surety is co-extensive with that of the debtor. Therefore the creditor has a right to obtain a decree against the surety and the principal debtor. The surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor for the reason that it is the business of the surety/guarantor to see whether the principal debtor has paid or not. The surety does not have a right to dictate terms to the creditor as how he should make the recovery and pursue his remedies against the principal debtor at his instance. - In case the property is disposed of by private treaty without adopting any other mode provided under the statutory rules etc. there may be a possibility of collusion/fraud and even when public auction is held the possibility of collusion among the bidders cannot be ruled out. In The State of Orissa Ors. v. Harinarayan Jaiswal Ors. AIR 1972 SC 1816 this Court held that a highest bidder in public auction cannot have a right to get the property or any privilege unless the authority confirms the auction sale being fully satisfied that the property has fetched the appropriate price and there has been no collusion between the bidders. Therefore it becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price. Thus essential ingredients of such sale remain a correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report the intending buyers may not come forward treating the property as not worth purchase by them as a moneyed person or a big businessman may not like to involve himself in smallsales/deals. - there must be an application of mind by the authority concerned while approving/accepting the report of the approved valuer and fixing the reserve price as the failure to do so may cause substantial injury to the borrower/guarantor and that would amount to material irregularity and ultimately vitiate the subsequent proceedings. - law requires a proper valuation report its acceptance by the authority concerned by application of mind and then fixing the reserve price accordingly and acceptance of the auction bid taking into consideration that there was no possibility of collusion of the bidders. The authority is duty bound to decide as to whether sale of part of the property would meet the outstanding demand. Valuation is a question of fact and valuation of the property is required to be determined fairly and reasonably. Recovery of the public dues must be made strictly in accordance with the procedure prescribed by law. The liability of a surety is co-extensive with that of principal debtor. In case there are more than one surety the liability is to be divided equally among the sureties for unpaid amount of loan. Once the sale has been confirmed it cannot be set aside unless a fundamental procedural error has occurred or sale certificate had been obtained by mis-representation or fraud. - No fundamental procedural error had been pointed out which would vitiate the order of confirmation of sale and issuance of sale certificate. Auction sale stood vitiated and all the consequential proceedings are liable to be quashed. However for the reasons best known to the appellants they have neither impleaded the Bank (creditor) nor any of the legal heirs of Ganga Prasad (principal debtor). In such a fact-situation it becomes difficult to proceed with the case any further. - The courts below have rejected the case of the appellants only on the ground of delay. Nothing had been pointed out before us as to on what basis the aforesaid judgment and orders warrant any interference. In view of the above the appeal lacks merit and is accordingly dismissed. However the appellants may move an application before the Collector Banda/concerned authority in case the excess amount had not been paid to them for recovery of the same. If such an application is filed and the authority comes to the conclusion that excess amount had not been paid to them it shall be refunded within a period of 3 months from the date of making the application with 9% interest. - Decided against assessee.

Summary

Issues Involved:
1. Liability of guarantor and co-sureties under the Indian Contract Act, 1872.
2. Recovery of public dues and the conduct of auction sales.
3. Valuation and reserve price in the auction process.
4. Decision to sell whole or part of the secured assets.
5. Setting aside auction sale after confirmation.

Issue-wise Detailed Analysis:

1. Liability of Guarantor and Co-sureties under the Indian Contract Act, 1872:
The court emphasized the settled legal proposition that under Section 128 of the Indian Contract Act, 1872, the liability of the guarantor is co-extensive with that of the debtor. This means the creditor has the right to obtain a decree against both the surety and the principal debtor. The surety cannot dictate terms to the creditor regarding how to recover the debt. The court cited several precedents, including *Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr.*, *AIR 1969 SC 297*, and *State Bank of India v. Messrs. Indexport Registered & Ors.*, *AIR 1992 SC 1740*, to support this principle. Additionally, Section 146 of the Contract Act provides that co-sureties are liable to contribute equally unless the contract states otherwise.

2. Recovery of Public Dues and the Conduct of Auction Sales:
The court highlighted that public money should be recovered expeditiously, but financial institutions must not behave like property dealers and must comply with statutory provisions. The right to hold property is both a constitutional and human right, and deprivation of property must follow statutory provisions, as established in *Lachhman Dass v. Jagat Ram & Ors.*, *(2007) 10 SCC 448*, and *Narmada Bachao Andolan v. State of Madhya Pradesh & Anr.*, *AIR 2011 SC 1589*. The court also noted the potential for collusion in public auctions, referencing *The State of Orissa & Ors. v. Harinarayan Jaiswal & Ors.*, *AIR 1972 SC 1816*.

3. Valuation and Reserve Price in the Auction Process:
The court discussed the importance of proper valuation and reserve price in auction sales. The valuation must be based on relevant material, and the reserve price should reflect the property's intrinsic worth. The court cited *State of U.P. v. Shiv Charan Sharma & Ors.*, *AIR 1981 SC 1722*, and *Anil Kumar Srivastava v. State of U.P. & Anr.*, *AIR 2004 SC 4299*, to explain these concepts. The court emphasized that failure to conduct proper valuation and fix an appropriate reserve price could result in substantial injury to the borrower/guarantor and vitiate subsequent proceedings.

4. Decision to Sell Whole or Part of the Secured Assets:
The court stressed that only the necessary portion of the property should be sold to satisfy the decree, as established in *Ambati Narasayya v. M. Subba Rao & Anr.*, *AIR 1990 SC 119*. The court observed that in the present case, the appellants' land was sold for Rs. 25,000/-, which was three times the amount to be recovered. Therefore, selling the entire property was a material irregularity.

5. Setting Aside Auction Sale After Confirmation:
The court noted that a confirmed sale can be set aside on grounds of material irregularity or fraud, as established in *Navalkha & Sons v. Sri Ramanya Das & Ors.*, *AIR 1970 SC 2037*, and *Divya Manufacturing Co. (P) Ltd. & Anr. v. Union Bank of India & Ors.*, *AIR 2000 SC 2346*. The court found no fundamental procedural error in the auction process in the present case. However, the appellants' failure to implead the bank or legal heirs of the principal debtor complicated further proceedings.

Conclusion:
The court dismissed the appeal, noting that the appellants' objections were rejected on the ground of delay and no fundamental procedural error was identified. The court allowed the appellants to apply for recovery of any excess amount not paid to them, with interest, within three months from the date of application.