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2024 (8) TMI 388 - HC - Indian Laws


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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