2017 (5) TMI 1275 - HC - Companies Law

Refund of sale consideration deposited with the Bank with interest - auction purchaser in vacant possession of the property - sale of secured asset under the SARFAESI Act - Held that - The representation that the property is free from encumbrance and that he would get vacant possession soon made the petitioner to take part in the auction and to submit his bid. Even according to the Bank, details of litigations were not disclosed in the auction notification in spite of clear knowledge. The petitioner with a fond hope that he would be in a position to enjoy the property made his offer which was accepted by the bank. The petitioner deposited the amount way back on 24.07.2008. The bank was expected to put the petitioner in vacant possession of the property within a reasonable time. Even after a period of nine years, the bank is not in a position to deliver vacant possession. The secured asset is now in the midst of civil litigations. There is also a criminal case in respect of the mortgage relating to the secured asset. The petitioner waited all these years. It was only when he was convinced that the chances of culmination of litigation is very remote, the petitioner made a request to the bank to refund the amount. The bank instead of admitting its mistake in not disclosing the encumbrances, and litigations, dragged the petitioner from pillar to post and finally prompted him to approach this court. In view of the background facts, the bank is liable to refund the sale consideration to the petitioner. The petitioner is entitled to interest which we fix at 12% per annum. We direct the bank to refund the sale consideration viz. ₹ 62,00,000/- (Rupees Sixty Two Lakhs only) to the petitioner with interest at the rate of 12 % per annum, calculated from 24.7.2008 within a period of four weeks from the date of receipt or production of a copy of this order. The bank is given liberty to cancel the sale certificate.

Summary

Issues Involved:
1. Validity and maintainability of the writ petition.
2. Bank's failure to disclose encumbrances and pending litigations.
3. Petitioner's entitlement to refund of sale consideration with interest.
4. Applicability of alternative remedies.
5. Bank's statutory obligations under SARFAESI Act and Rules.

Issue-Wise Detailed Analysis:

1. Validity and Maintainability of the Writ Petition:
The bank contended that the writ petition was not maintainable in law, arguing that the petitioner should have exhausted alternative remedies. However, the court found this argument unsubstantiated. The petitioner, being a third party to the loan transactions and not a borrower or someone claiming interest under the borrower, was justified in approaching the court due to the bank's failure to deliver possession of the secured asset despite full payment. The court emphasized that the bank's violation of mandatory provisions of SARFAESI Rules justified the petitioner's direct approach to the court.

2. Bank's Failure to Disclose Encumbrances and Pending Litigations:
The court highlighted the statutory obligation of the bank under Rule 8(6)(a) and 8(6)(f) of the Security Interest (Enforcement) Rules, 2002, to disclose details of encumbrances and other material information in the auction notice. The bank failed to disclose pending litigations and encumbrances, which misled the petitioner into believing that the property was free from such issues. The court noted that this failure constituted a violation of statutory duties, enabling the petitioner to avoid the contract under Section 18(2) of the Contract Act.

3. Petitioner's Entitlement to Refund of Sale Consideration with Interest:
The court found that the petitioner's request for a refund was justified due to the bank's failure to deliver vacant possession of the property despite full payment. The petitioner had waited for several years and made repeated requests for either possession or a refund. The court directed the bank to refund the sale consideration of ?62,00,000 with interest at 12% per annum from the date of deposit (24.07.2008) within four weeks. The bank was also given liberty to cancel the sale certificate.

4. Applicability of Alternative Remedies:
The bank argued that the petitioner should have sought remedies under Rule 62 of the Second Schedule of Income Tax Rules or approached the DRT. The court dismissed this argument, stating that the petitioner was not a borrower but an auction purchaser aggrieved by the bank's failure to fulfill its obligations. The court emphasized that the bank's statutory violations warranted judicial intervention without requiring the petitioner to exhaust alternative remedies.

5. Bank's Statutory Obligations under SARFAESI Act and Rules:
The court underscored the bank's statutory duty to notify encumbrances and deliver the property free from encumbrances as per Rule 9(9) of the Security Interest (Enforcement) Rules, 2002. The bank's failure to comply with these obligations and its misleading representations to the petitioner constituted a breach of statutory duties. The court cited relevant case law to emphasize the need for transparency and fairness in public auctions conducted by banks.

Conclusion:
The court allowed the writ petition, directing the bank to refund the sale consideration with interest and highlighting the bank's statutory obligations and the petitioner's justified reliance on the bank's representations. The judgment reinforced the importance of transparency and adherence to statutory requirements in public auctions conducted by financial institutions.