2025 (4) TMI 746 - HC - Indian Laws

Validity of sale of the property to the petitioner - subsequent discovery of a prior sale and possession by another party - refund of the amounts paid along with interest due to the failure of respondent No. 1 to deliver clear title and possession of the property - whether in view of the pendency of the proceedings before the learned DRT this writ petition is maintainable or not? - HELD THAT - This Court has no hesitation in answering that the present writ petition is certainly maintainable because the dispute as between the petitioner and the respondent No.1 cannot be encompassed within the scope and ambit of the SARFAESI Act. The respondent No.1 claimed the schedule property as a security interest for the realization of its debts from the primary borrowers viz. due in account of M/s. Dass Brothers and M/s. Simran Traders whose accounts had become non-performing assets. Consequently respondent No. 1 proposed to sell the property by inviting tenders and conducting an auction. The home loan agreement executed by the petitioner on 24.12.2013 is not the subject matter of the proceedings before the learned DRT. Instead the proceedings concern the competing rights and claims of two different financial institutions/banks over the scheduled property with each asserting it as its security interest. - the proceedings against the present petitioner are not in the nature of Section 13 of the SARFAESI Act i.e. they do not pertain to the enforcement of a security interest per se and therefore this Court finds no hesitation in holding that pendency of proceedings before the learned DRT does not render the present petition non maintainable before this Court. In terms of Rule 8(7)(f) it is manifest that the respondent No.1 failed to supply all the relevant details regarding the encumbrances in respect of the schedule property by or in favour of other financial institutions. There was a patent failure on the part of respondent no. 1 to conduct due diligence before auctioning the scheduled property. Regardless of whether respondent No. 1 was aware of the encumbrances on the property in question this is immaterial as the petitioner acted in good faith based on the declarations made by respondent No. 1. As a result respondent No. 1 has not only unjustly enriched itself but has also caused irreparable harm to the petitioner - In the instant case respondent No.1 has not only failed to act in accordance with the provisions of the Act but has also acted in blatant disregard of the fundamental principles of judicial procedure. The petitioner lodged a complaint with the Ombudsman/respondent No.2 within the period of limitation prescribed under the Limitation Act 1963. It cannot be concluded that the complaint was abusive frivolous or vexatious. The petitioner undeniably had a legitimate grievance against respondent No.1 as he fell victim to a misleading declaration in the Auction Notice. Respondent No. 1 without conducting proper due diligence managed to sell the subject property to the petitioner for valuable consideration. This led to the petitioner being trapped into entering a home loan agreement leaving him a victim of the high- handed actions of Respondent No. 1. Repeatedly and at the cost of redundancy despite giving repeated assurances the officials of Respondent No. 1 failed to address the petitioner s genuine and legitimate grievance. Conclusion - i) The sale certificate dated 24.12.2013 was quashed and declared null and void. ii) The petitioner was entitled to a refund of Rs. 9, 93, 752.94 with 12% interest per annum from 2013. iii) The loan account was to be foreclosed and any installments paid were to be refunded with interest. iv) Respondent No. 1 was ordered to remove the freeze on the petitioner s savings account. v) The Reserve Bank of India was directed to inquire into the arbitrary actions of respondent No. 1 and issue corrective guidelines. vi) Respondent No. 1 was ordered to pay Rs. 5, 00, 000 as compensation for the petitioner s prolonged litigation and distress. vi) The Court emphasized the importance of due diligence and disclosure in auction sales under the SARFAESI Act. Petition disposed off.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

1. Whether the sale of the property to the petitioner was valid given the subsequent discovery of a prior sale and possession by another party.

2. Whether the petitioner is entitled to a refund of the amounts paid, along with interest, due to the failure of respondent No. 1 to deliver clear title and possession of the property.

3. Whether the writ petition is maintainable under Article 226 of the Constitution of India despite ongoing proceedings before the Debts Recovery Tribunal (DRT).

4. Whether respondent No. 1's actions constituted a breach of statutory duties under the SARFAESI Act and related rules.

5. Whether the petitioner is entitled to compensation for the prolonged litigation and distress caused by respondent No. 1's conduct.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Property Sale

- Relevant Legal Framework and Precedents: The sale was conducted under the SARFAESI Act, which mandates that properties sold must be free from encumbrances known to the secured creditor.

- Court's Interpretation and Reasoning: The Court found that the sale certificate and auction notice failed to disclose existing encumbrances, violating the statutory requirement to inform potential buyers of any material defects or claims.

- Key Evidence and Findings: The petitioner discovered another party in possession of the property, claiming a prior purchase from another bank, indicating a failure of due diligence by respondent No. 1.

- Application of Law to Facts: The Court held that the sale was invalid due to the non-disclosure of encumbrances, and respondent No. 1's failure to conduct proper due diligence.

- Treatment of Competing Arguments: Respondent No. 1's reliance on "as is, where is" disclaimers was rejected as insufficient to absolve responsibility for non-disclosure of encumbrances.

- Conclusions: The sale was declared null and void, and the petitioner was entitled to a refund.

2. Entitlement to Refund and Interest

- Relevant Legal Framework and Precedents: The SARFAESI Act and related rules require the disclosure of encumbrances and the provision of clear title to auction purchasers.

- Court's Interpretation and Reasoning: The Court emphasized that the petitioner acted in good faith based on respondent No. 1's declarations and was entitled to a refund with interest for the amounts paid.

- Key Evidence and Findings: The petitioner's payments and loan were documented, and respondent No. 1's failure to deliver possession or clear title was established.

- Application of Law to Facts: The Court ordered a refund of Rs. 9,93,752.94 with 12% interest per annum from 2013.

- Treatment of Competing Arguments: Respondent No. 1's failure to address the petitioner's grievances and refund requests was noted.

- Conclusions: The petitioner was entitled to a refund with interest, and the loan account was to be foreclosed.

3. Maintainability of the Writ Petition

- Relevant Legal Framework and Precedents: Article 226 of the Constitution allows for writ petitions in cases of violation of fundamental rights or statutory duties.

- Court's Interpretation and Reasoning: The Court found that the writ petition was maintainable despite ongoing DRT proceedings, as the issues extended beyond the scope of the SARFAESI Act.

- Key Evidence and Findings: The DRT proceedings were focused on competing claims by financial institutions, not the petitioner's grievance regarding the auction sale.

- Application of Law to Facts: The Court exercised its jurisdiction under Article 226 due to the failure of respondent No. 1 to comply with statutory obligations.

- Treatment of Competing Arguments: The Court acknowledged the Supreme Court's guidance on exercising writ jurisdiction but found exceptions applicable in this case.

- Conclusions: The writ petition was deemed maintainable, and relief was granted to the petitioner.

4. Breach of Statutory Duties

- Relevant Legal Framework and Precedents: The SARFAESI Act and Security Interest (Enforcement) Rules mandate disclosure of encumbrances and due diligence by the authorized officer.

- Court's Interpretation and Reasoning: The Court found respondent No. 1 in breach of these duties, having failed to disclose encumbrances or conduct due diligence.

- Key Evidence and Findings: The auction notice and sale certificate lacked information on encumbrances, and respondent No. 1's conduct was deemed negligent.

- Application of Law to Facts: The Court found respondent No. 1's actions unjust and ordered corrective measures.

- Treatment of Competing Arguments: The Court rejected respondent No. 1's defenses based on disclaimers and ongoing proceedings.

- Conclusions: Respondent No. 1 was found to have breached statutory duties, warranting the Court's intervention.

5. Compensation for Prolonged Litigation and Distress

- Relevant Legal Framework and Precedents: The Court considered the petitioner's prolonged ordeal and the failure of respondent No. 1 to resolve the issue.

- Court's Interpretation and Reasoning: The Court found it appropriate to award compensation for the petitioner's distress and litigation costs.

- Key Evidence and Findings: The petitioner's health issues and psychological trauma were documented in correspondence with respondent No. 1.

- Application of Law to Facts: The Court ordered respondent No. 1 to pay Rs. 5,00,000 as compensation for the petitioner's suffering and litigation expenses.

- Treatment of Competing Arguments: The Court noted the lack of response from respondent No. 1 and the absence of any remedial actions.

- Conclusions: Compensation was awarded to the petitioner for the distress and costs incurred.

SIGNIFICANT HOLDINGS

- The sale certificate dated 24.12.2013 was quashed and declared null and void.

- The petitioner was entitled to a refund of Rs. 9,93,752.94 with 12% interest per annum from 2013.

- The loan account was to be foreclosed, and any installments paid were to be refunded with interest.

- Respondent No. 1 was ordered to remove the freeze on the petitioner's savings account.

- The Reserve Bank of India was directed to inquire into the arbitrary actions of respondent No. 1 and issue corrective guidelines.

- Respondent No. 1 was ordered to pay Rs. 5,00,000 as compensation for the petitioner's prolonged litigation and distress.

- The Court emphasized the importance of due diligence and disclosure in auction sales under the SARFAESI Act.