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2024 (8) TMI 388 - HC - Indian LawsChallenge to order passed by the Debt Recovery Tribunal (DRT), allowing the sale of a mortgaged apartment at below the approved reserve price in an auction - unsecured creditor treated as a secured creditor and that too with priority over the secured creditors (beneficiaries of a mortgage over the secured asset) - HELD THAT - SCB is a creditor of the Karias and may have a cause of action to recover its dues from the Karias, for which it has instituted the SCB Recovery Suit, which would be eventually adjudicated. Should SCB succeed, the decree therein would have to be executed against the Karias. The issue at hand is not whether SCB may have a legitimate right to recovery of the security deposit under its LLA which was admittedly entered into not only after the creation of the mortgage in favour of the Petitioner, but also after the Original Application was filed. Instead, the issue at hand is whether SCB has any right over the Secured Asset to recover its dues from the Karias. The Petitioner being a prior mortgagee in whose favour the Karias created the mortgage over the Secured Asset, it is the Petitioner who has the foremost and highest priority over recovery of proceeds of sale of the Secured Asset. SCB does not have a charge over the Secured Asset, and even if one were to treat its rights under the LLA as a fetter of some kind over the Secured Asset (and thereby an encumbrance ), such fetter cannot in any manner rank superior to the rights of the mortgagee over the Secured Asset. SCB, the unsecured creditor was now, by virtue of the Impugned Orders converted into a secured creditor, and worse, in preference to the consortium of banks led by IOB, the secured creditors, whose interest is now owned by the Petitioner. The LLA having been executed after initiation of the proceedings for enforcement of the mortgage, and the entry of SCB into the premises of the Secured Asset behind the back of the mortgagee, inexorably lead to even equities not being in favour of SCB, on whose strength, the Purported Acquirers seek to justify that their bid was made at a deep discount to the reserve price. SCB having been treated as a holder of a charge and such charge being effectively treated as superior to even a mortgagee, no option left, but to set aside the Impugned Orders and direct the DRT to conduct the auction afresh. Sumikin Bussan 2006 (5) TMI 567 - BOMBAY HIGH COURT and its implications - HELD THAT - It is evident that SCB may be a protectee against the Karias on terms reduced to writing in the LLA. SCB would have recourse to the Karias to enforce its protection. However, SCB would simply be unable to claim any protection against IOB and the Petitioner, and those claiming through such mortgagee. SCB cannot claim to have any recourse to the proceeds of the sale of the Secured Asset, and towards this end, the DRT and the DRAT failed to apply their mind to this vital facet of the matter, and instead, perhaps thinking of their decision as a practical matter, permitted the sale in the auction at a price below the reserve price, justifying such sale by alluding to SCB having a charge and taking into account the amount they believed would need to be paid to SCB for SCB to give up possession. Equitable Considerations do not arise - HELD THAT - The DRT and the DRAT ought to have been mindful of the fact that the reserve price was one of the core features of the auction. Just as the Purported Acquirers submit that IOB had agreed to the approach of the DRT to auctioning the Secured Asset (for the element of leaving it to the buyer to evict SCB after the acquisition), it must also be remembered that an integral feature of the terms of the auction was that the sale would not be at below the reserve price - the DRT Receiver, upon receiving the bids and comparing them with the DRTapproved reserve price, rightly concluded that the auction deserved to be declared as a failure. The only means for the DRT over-ruling this obvious position was the treatment of SCB as a beneficiary of a charge and that too superior to the mortgagee, which aspect has been dealt with extensively earlier. The Impugned Orders have not only granted relief on issues that form the subject matter of the SCB Recovery Suit, but also execute the same against the Secured Asset (the execution would have had to be against the Karias). We say nothing more, particularly since the matter is relegated to the DRT to conduct the proceedings afresh and to auction the Secured Asset in accordance with law and to rule on the same in accordance with the law declared by us in this judgement. The DRT Order upholding the sale of the Secured Asset to the Purported Acquirers, and all consequential actions such as issuance of the sale certificate and other formalities flowing from the DRT order are hereby quashed and set aside - The DRT is directed to conduct and oversee an auction afresh in accordance with law, treating the mortgagee as the only secured creditor with a charge in the form of the mortgage over the Secured Asset - SCB is free to pursue recovery proceedings against the Karias to recover the amount so deposited, which is in fact, the subject matter of the SCB Recovery Suit. Petition allowed.
Issues Involved:
1. Legality of treating an unsecured creditor as a secured creditor. 2. Validity of the auction sale conducted below the reserve price. 3. Rights of the mortgagee versus the rights of the licensee. 4. Compliance with the Transfer of Property Act, 1882. 5. Equitable considerations in the context of the auction and mortgage enforcement. Detailed Analysis: 1. Legality of Treating an Unsecured Creditor as a Secured Creditor: The core issue was whether the Debt Recovery Tribunal (DRT) and the Debt Recovery Appellate Tribunal (DRAT) erred in treating Standard Chartered Bank (SCB), an unsecured creditor, as having a "charge" over the mortgaged property, thus elevating SCB's status to that of a secured creditor. The court found this treatment fundamentally flawed. The Impugned Orders by the DRT and DRAT were deemed perverse and manifestly contrary to law, as they prioritized SCB's unsecured claim over the secured creditors' mortgage interests. 2. Validity of the Auction Sale Conducted Below the Reserve Price: The auction of the mortgaged property was conducted at a price significantly below the reserve price of Rs. 1.17 crores, with the highest bid being only Rs. 33 lakhs. The court found this discrepancy sufficient to set aside the auction. The DRT Receiver had rightly declared the auction a failure due to the vast difference between the reserve price and the bid amount. The court emphasized that the reserve price is a core feature of the auction process, and any sale below this price is inherently flawed. 3. Rights of the Mortgagee Versus the Rights of the Licensee: The court examined the competing rights of the mortgagee (Petitioner) and the licensee (SCB). It was determined that SCB, as a mere licensee, did not have any superior rights over the mortgagee. The Leave and License Agreement (LLA) between SCB and the Karias did not grant SCB any legal possession or interest in the property that could override the mortgage. The court held that SCB's rights under the LLA were subservient to the mortgagee's rights, and SCB should stand in queue as an unsecured creditor in the bankruptcy of the Karias. 4. Compliance with the Transfer of Property Act, 1882: The court highlighted that under Section 65-A of the Transfer of Property Act, no lease of a mortgaged property may exceed three years, and no clause for renewal may be contracted. The LLA with SCB was a mere leave and license agreement, not a lease, and its provisions for an irrevocable license pending repayment of the security deposit were invalid against the mortgagee's rights. The court found that the DRT and DRAT had erred in treating SCB's license as creating a "charge" or "encumbrance" superior to the mortgage. 5. Equitable Considerations in the Context of the Auction and Mortgage Enforcement: The court rejected the argument that equitable considerations justified the auction outcome. It emphasized that equity cannot undermine explicit legal provisions, and SCB, being aware of the mortgage, could not claim equitable relief to override the mortgagee's rights. The court noted that SCB's conduct, including obtaining access to the property behind the mortgagee's back, did not give rise to any equitable considerations in its favor. Conclusion: The court quashed the DRT and DRAT orders, directing a fresh auction of the mortgaged property in accordance with the law. The mortgagee was recognized as the only secured creditor with a charge over the property, and SCB was advised to pursue its recovery suit against the Karias separately. The court also ordered the refund of any amounts deposited by the purported acquirers with interest. The judgment emphasized adherence to legal principles governing priority of security interests and the importance of the reserve price in auction processes.
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