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TMI Blog2017 (2) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the details of the encumbrances known to the secured creditor. In Jai Logistics's case (2010 (7) TMI 1118 - MADRAS HIGH COURT ), defence of the Bank that the encumbrance was not known to them, and hence, could not be published on the sale notice, to sustain the order of forfeiture, was not accepted by this Court. On the facts and circumstances of the case, the Bank may be right in contending that physical possession need not be taken before bringing the mortgaged property for auction, but they cannot shirk their duty to hand over possession to the auction purchaser. If the bank was not in a position to take physical possession, before sale, then recourse ought to have been taken under Section 14 of the Act and under the scheme of the Act, the Bank cannot be permitted to contend that there is no statutory obligation, on its part, to put the auction purchaser in possession. Ordinarily, a sale is completed, on receipt of the entire sale consideration and handing over possession. But if encumbrance is specifically mentioned in the sale notice and if the auction purchaser with eyes open, had purchased the property, then there could be a cause to contend that it is the purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 3,30,000/- by way of three demand drafts to the Authorised Officer and Chief Manager, Punjab National Bank, Chennai/respondent No.2. 3. The appellant issued a legal notice dated 28.07.2009 stating that he had bonafidely participated in the auction sale to purchase the property without any hesitation and in good faith, but the bank did not furnish the original title deeds and copies of other documents including the judgment and decree from the competent court and therefore apprehended that title may not be proper. He therefore decided not to proceed with the transaction. According to him, it was also doubtful as to whether the Authorised Officer and Chief Manager, Punjab National Bank/2nd respondent would deliver possession of the auctioned property, without encumbrance and free from any future litigation. 4. According to him, the property was not kept under the custody of the second respondent-Bank, in terms of Rules 8 and 9 of the SARFAESI Rules, 2002. Therefore, by the aforesaid notice dated 28.07.2009, the appellant demanded return of the deposited amount of ₹ 3,30,000/-, within a week's time, from the date of receipt thereof, failing which, he would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering a sale by the Official Liquidator, the properties of a wound up company dealt with a similar claim and rejected it vide its decision in United Bank of India v. Official Liquidator and others reported in 1994(1) SCC 575. The following passages found in paragraphs 13 and 14 will make the position clear and they are usefully reproduced below:- 13. In our view, the complete answer to Triputi's allegation in regard to the failure of the Official Liquidator to hand over to it possession of certain properties which were sold to it, which, according to it, the company in liquidation did not even own, is contained in clause 2 of the Terms and Conditions of Sale upon the basis of which the property and assets of the company in liquidation were sold by the Official Liquidator to Triputi under the orders of this Court. Clause 2 reads thus: 2. The sale will be as per inventory list on 'as is where is basis' and subject to the confirmation of the Hon'ble Supreme Court of India. The Official Liquidator shall not provide any guarantee and/or warranty in respect of the immovable properties and as to the quality, quantity or specification of the movable assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 2002, Mr.P.T.Perumal, learned counsel for the appellant submitted that the abovesaid Rules deal with two types of sale, viz., Rules 9(1) to 9(6) deal with sale of unencumbered properties by the Bank, and Rules 9(7) to 9(10) deal with sale of encumbered properties. 9. Referring to Appendix IV in the said Rules, learned counsel for the appellant further submitted that the said Appendix unambiguously states that possession of properties sold, must be delivered and that sale must be free from all encumbrances. He therefore submitted that SARFAESI Act, 2002 and the Rules made thereunder, do not provide for sale, in as is where is and as is what is condition. 10. Learned counsel for the appellant further contended that the Doctrine of Caveat Emptor and Doctrine of as is where is condition, sale are general provisions, concerning sale of goods and such doctrines do not find a place, where specific provisions are made in SARFAESI Act, 2002 and the Rules made thereunder, for sale of assets, secured by the Bank. 11. On the reliance made to Bank of India v. Official Liquidator and others reported in 1994 (1) SCC 575, learned counsel for the appellant submitted that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made on a decision of this Court in Pandit Vetrivel v. Authorised Officer, Canara bank reported in 2009 (7) MLJ 370. 17. According to the learned counsel for the appellant, statute do not contemplate sale in as is where is condition or as is where is basis . He further submitted that the title deeds were not shown to the auction purchaser. 18. He further submitted that for the shortcomings of the Bank, in not clearing the encumbrance and handing over vacant possession, auction purchaser should not suffer an order of forfeiture. For the abovesaid reasons, he prayed that the order made in W.P.No.19557 of 2009, dated 28.10.2009, be set aside and refund a sum of ₹ 3,30,000/-, being 25% of the deposit, be ordered. 19. The Chairman cum Managing Director, Punjab National Bank, New Delhi and Authorised Officer and Chief Manager, Punjab National Bank, Chennai, respondents 1 and 2, in their counter affidavit, have stated as follows: (a) M/s.Weather Maker, represented by its proprietor Mr.R.S.Sankar, availed of Term Loan Facility and Overdraft facility from the Respondents herein. (b) The prompt and due repayment of the aforesaid financial facilities along with i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance sale consideration. (j) Hence, vide letter dated 14.09.2009, the respondent called upon the appellant to remit the balance sale consideration of ₹ 9,90,0001/- within a period of 7 days and also put the appellant on specific notice that upon his failure to pay the balance sale consideration on or before 22.09.2009, that the deposit amount of ₹ 3,30,000/- paid by the appellant under Section 9(3) of the SARFAESI Rules would stand forfeited in terms of Section 9(4) of the SARFAESI Rules. (k) Owing to the default of the appellant to pay the balance sale consideration within the time schedule as stated in the auction sale notice dated 07.06.2009 and within the time schedule as extended by the authorized officer, the security deposit of ₹ 3,30,000/- paid by the appellant as part payment of the sale consideration stood forfeited. (i) In as much as the appellant herein participated in the tender cum auction sale held by the respondent bank on 17.07.2009 out of his free will and volition, after having realized and understood the inherent risk that are associated with a on sale, the Learned Single Judge dismissed the above Writ Petition No.19557 of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to the terms of the auction notice. According to him, there is no valid grounds to interfere with the well considered order of the writ Court. For the abovesaid reasons, he prayed for dismissal of the writ petition. Heard the learned counsel for the parties and perused the materials available on record. 23. Rule 8 of the Security Interest (Enforcement) Rules, 2002, deals with sale of immovable secured assets and that the same reads as follows: (1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property. (2) The possession notice as referred to in sub-rule (1) shall also be published, as soon as possible but in any case not later than seven days from the date of taking possession, in two leading newspaper one in vernacular language having sufficient circulation in that locality, by the authorised officer. (3) In the event of possession of immovable property is actually taken by the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernet. (8) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing. 24. Rule 9 of the abovesaid Rules, 2002, deals with time of sale, issue of sale certificate and delivery of possession, etc., and the said Rule is extracted hereunder: 9. Time of sale, Issue of sale certificate and delivery of possession, etc.- (1) No sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower. (2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor: Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of rule 9 : Provided further that if the authorised officer fails to obtain a price higher than the reserve price, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not. 25. Appendix-IV, in terms of Rule 8(1) of the abovesaid Rules, for immovable property, is extracted hereunder: APPENDIX-IV [See rule-8(1)] POSSESSION NOTICE (for Immovable property) Whereas The undersigned being the authorised officer of the _______________ (name of the Institution) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and in exercise of powers conferred under Section 13(12) read with rule 9 of the Security Interest (Enforcement) Rules, 2002 issued a demand notice dated _______________calling upon the borrower Shri _______________/M/s_______________to repay the amount mentioned in the notice being Rs. _______________(in words_______________) with in 60 days from the date of receipt of the said notice. The borrower having failed to repay the amount, notice is hereby given to the borrower and the public in general that the undersigned has taken possession of the property described herein below in exercise of powers conferred on him/ her und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purchaser such surplus shall be paid to the purchaser within fifteen day, from date of finalisation of the sale. 28. As per Rule 9(8) of the abovesaid Rules, on such deposit of money for discharge of the encumbrances, the authorised officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly. Rule 9(9) states that the authorised officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7) above. As per Rule 9(10), certificate of sale issued under sub-rule (6) shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not. 29. In Transcore v. Union of India reported in 2008 (1) SCC 125, while considering several issues, at Paragraph 26, the Hon'ble Apex Court held as follows: Section 13(6) inter alia provides that any transfer of secured asset after taking possession or after taking over of management of the business, under Section 13(4), by the bank/FI shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the stage is anterior to issuance of sale certificate and delivery of possession under Rule 9. Section 13(4) empowers the bank to take possession symbolic or actual. As per Rule 8(3), in the event of possession of immovable property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar circumstances, take of such property. 33. Branch Manager, M/s.Nedungadi Bank Ltd., Purasawalkam Branch, Chennai, has filed O.S.No.328 of 1999, on the file of Subordinate Judge, Poonamallee, for recovery of ₹ 3,94,804/-, for the money borrowed by M/s.Weather Maker, 1st defendant therein. Mr.N.E.Subramanian and P.S.Sarala Devi, the defendants 2 and 3 therein have deposited the title deeds of the suit property, with M/s.Nedungadi Bank Ltd., on 10.10.1996. On 10.07.2000, the learned Subordinate Judge, Poonamallee, has decreed the suit, as hereunder: (1) That the defendant to pay into court on or before the 10th day of September 2000 or any later date upto which time for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. And it is hereby further ordered and decreed and that if the money realised by such sale shall not be sufficient for payment in full of the amount payable to the Plaintiff as aforesaid, the plaintiff shall be at liberty (where such remedy is open to him under the term of his mortgage and is not barred by any law for the time being in force) to apply for a personal decree against the defendant for the amount of the balance; and that the parties are at liberty to apply to the Court from time to time, as they may have occasion, and on such application nor otherwise the Court may give such directions as it thinks fit. 34. Mr.R.S.Sankar, the Sole Proprietor of M/s.Weather Maker and the 3rd defendant in O.S.No.328 of 1999, has availed a term loan of ₹ 2,10,000/- along with a overdraft facility of ₹ 7,899/-. For non-payment of loan amount, Punjab National Bank, respondent No.1 herein, has issued a notice, under Section 13(2) of the SARFAESI Act, 2002, demanding a sum of ₹ 11,71,699.50, with further interest, from 01.09.2007, until payment in full is made, within 60 days, failing which, action would be taken under Section 13(4) of the SARFAESI Act, 2002. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t property sought to be sold, but it only states that sale of the property would be in, as is where is/as is what is condition. Section 13(4) of the SARFAESI Act, 2002, enables the secured creditor to take actual possession of the secured assets of the borrower. 39. Certificate of encumbrance, dated 20.07.2009, issued by the Joint Registrar, Kundrathur, enclosed in the typed set of papers, filed along with the writ appeal, shows that in respect of the property in S.F.No.375/3, Kalaimagal Nagar, names of the executants/claimants, have been mentioned as, Sarala Devi (Principal), Sankar (Agent) and Shanmugam. 40. Legal notice, dated 28.07.2009, has been sent by the auction purchaser to the Authorized Officer and Chief Manager, Punjab National Bank, Chennai, stating that though sale was confirmed in his favour, the Bank has failed to furnish the original title deeds, as well as copies of all the documents, including the judgment and decree from the competent Court, pertaining to the auctioned property. Auction purchaser in the said notice, has further stated that after verification of the encumbrance certificate and inspection of the property, he came to know that some third p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance amount of ₹ 9,90,000/-, from 01.08.2009, till remittance and the same should not be later than 22.09.2009. The Bank has further stated that if the auction purchaser/appellant defaults in payment on or before 22.09.2009, then, in terms of Rule 9(5) of the Rules, 2002, read with the terms and conditions of the auction, dated 17.07.2009, a sum of ₹ 3,30,000/- would be forfeited. 45. The auction purchaser/appellant has sent a legal notice, dated 15.09.2009, to the bank. Thereafter, the Authorized Officer and General Manager, Punjab National Bank, has addressed a letter, dated 17.09.2009, to the auction purchaser, stating that 25% of the bid amount, including EMD, ie., a sum of ₹ 3,30,000/- has been deposited, at the time of auction and that the balance amount of ₹ 9,90,000/- has to be paid, on or before 01.08.2009. A reply, dated 19.09.2009, has been given by the Bank. 46. Nowhere in the auction notice, dated 03.06.2009, Punjab National Bank - respondent/secured creditor has stated that the mortgaged property was under a decree in O.S.No.328/1999 dated 10.07.2000 on the file of the Subordinate Judge, Poonamallee. Even in the reply notice dated 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him- a. take possession of such asset and documents relating thereto; and b. forward such asset and documents to the secured creditor. Provided that any application by the secured creditor shall be accompanied by an affidavit duly affirmed by the authorised officer of the secured creditor, declaring that, - (i) the aggregate amount of financial assistance granted and the total claim of the Bank as on the date of filing the application; (ii) the borrower has created security interest over various properties and that the Bank or Financial Institution is holding a valid and subsisting security interest over such properties and the claim of the Bank or Financial Institution is within the limitation period; (iii) the borrower has created security interest over various properties giving the details of properties referred to in sub-clause (ii) above; (iv) the borrower has committed default in repayment of the financial assistance granted aggregating the specified amount; (v) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the secured creditor to approach the Chief Metropolitan Magistrate or District Magistrate, as the case may be, to take possession or control of any such secured assets. 49. In Kathikkal Tea Plantations vs. State Bank of India reported in (2009) 7 MLJ 24, Kathikkal Tea Plantations, represented by its Managing Director, availed loan. There was default. Symbolic possession was taken under Section 13(4) on 11.12.2006. Bank sold the property by a private treaty on 09.04.2007 and issued a sale certificate. Property was not physically dispossessed and continued to hold on de facto possession, even after without issuance of sale certificate. Therefore, bank, filed an application under Sections 14(1)(2) of the SARFAESI Act, before the learned Chief Judicial Magistrate, Udhagamandalam, on 13.11.2008, seeking an order take possession of the petitioner's property with the help of police aid and hand over the same to the bank. Permission was granted. Writ petition was filed to challenging the order of the learned Chief Judicial Magistrate, Udhagamandalam contending inter alia that once sale certificate was issued in favour of the auction purchaser of the property, there is no secured deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y themselves in all respect as regards the movable and immovable assets, as to their title, encumbrances, area, boundary, description, quality, quantity, and volume etc. and the purchaser will be deemed to offer with full knowledge as to the description, area etc. of the properties and defects thereof, if any. The purchaser shall not be entitled to claim any compensation or deduction in price on any account whatsoever and shall be deemed to have purchased the property subject to all encumbrances, liens anti claims including those under the existing legislation affecting labour, staff etc. The Official Liquidator shall not entertain any complaint in this regard after the sale is over. Any mistake in the notice inviting tender shall not vitiate the sale. (emphasis supplied) 52. When the said clause contained that no compensation or deduction in price on any account whatsoever can be claimed, the auction purchaser therein sought for diminution of the price and in such circumstances, the Hon'ble Apex Court in United Bank of India's case, held that having purchased the property on such terms, then a claim for diminution in the price on the ground of defect in title or desc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been informed by the management of the defaulting unit at the time of availing of the loan facility that the Unit had the necessary independent approach road. The letter however does not indicate, that any independent inquiries were made by the appellants/ Corporation to verify the authenticity of the statements made by the management of the defaulting unit which had availed of the loan, by mortgaging the assets of the unit. 20. The entire issue seems to be concluded against the appellants/ Corporation by letter dated 30.4.1998, the relevant parts of which have already been reproduced in the earlier part of this judgment. A perusal of the extracts, reproduced earlier, would clearly show that the Branch Manager has informed the head office in unequivocal language that the independent passage shown in the sale deed is not connected directly with the defaulting unit. It also indicates that the defaulting unit had merely purchased some land to connect the rasta with the revenue record on which movement of the vehicle is not possible at all. This land was not even mortgaged with the appellants/Corporation. The letter also clearly states that by exclusion of the aforesaid land the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omply with the conditions of sale. Rather, it is the appellants/Corporation which has acted unfairly, and is trying to take advantage of its own wrong. 24. In view of the aforesaid, we are of the considered opinion that the appellants/Corporation cannot be permitted to rely upon Section 55 of The Transfer of Property Act, 1882. The appellants/Corporation failed to disclose to the respondent the material defect about the non-existence of the independent 3 'Karam' passage to the property. Therefore, the appellants/ Corporation clearly acted in breach of Section 55(1) (a) and (b) of the Transfer of Property Act, 1882. 25. The aforesaid Section provides as under: (1) The seller is bound- (a) to disclose to the buyer any material defect in the property [or in the seller's title thereto] of which the seller is, and the buyer is not, aware, and which the buyer could not with ordinary care discover; (b) to produce to the buyer on his request for examination all documents of title relating to the property which are in the seller's possession or power; A mere perusal of the aforesaid provision will show that it was incumbent upon the appellants/Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the duty of the intending purchaser to satisfy himself as to the encumbrance before participating in the bid. Having participated in the bid, the intending purchaser cannot later on turn around and question the Official Liquidator on the ground that the encumbrance was not notified. In that case, the provisions of the Rules as applicable in the present case are not applicable to the Official Liquidator. But in the case on hand, once possession is taken over under Section 13(4) or under Section 14 of the SARFAESI Act, whenever the secured creditor contemplates a sale of immovable property, they will have to follow Rule 8 of the Security Interest (Enforcement) Rules, 2002. Rule 8(6)(f) mandates the secured creditors to set out in the terms of sale notice any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. A reading of the said rule, in our opinion, would also include the encumbrance relating to the property. We are inclined to read the rule in that way keeping in mind the interest of the intending purchaser to be put on notice as to the encumbrance, as otherwise he/she will be purchasing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the amounts that are claimed by the secured creditor. 36.2 (ii) The second situation will arise where the secured creditor meets with resistance from the borrower after the notice under rule 8(1) is given. In that case he will take recourse to the mechanism provided under section 14 of the Act viz. making application to the Magistrate. The Magistrate will scrutinize the application as provided in section 14, and then if satisfied, appoint an officer subordinate to him as provided under section 14 (1)(A) to take possession of the assets and documents. For that purpose the Magistrate may authorise the officer concerned to use such force as may be necessary. After the possession is taken the assets and documents will be forwarded to the secured creditor. 36.3 (iii) The third situation will be one where the secured creditor approaches the Magistrate concerned directly under section 14 of the Act. The Magistrate will thereafter scrutinize the application as provided in section 14, and then if satisfied, authorise a subordinate officer to take possession of the assets and documents and forwards them to the secured creditor as under clause (ii) above. 36.4 In any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made or encumbrances created by the mortgagor after the creation of the security interest. 25. As a matter of fact, the statutory provisions make it clear that a sale could take place only after the expiry of 30 days from the date of the public notice. This 30 days time is intended to serve two purposes. One for the borrower to gather resources and repay the loan and another for all intending purchasers to make sufficient enquiries as a person of normal diligence and ordinary prudence would do while buying any immovable property. The purport of Rule 8(6) cannot be extended to such an extent that it obliterates the liability of the purchaser to undertake due diligence and to scrutinise the title to the property. Therefore, the obligation of the Authorised Officer is only to disclose the encumbrance that had come to the notice of the secured creditor. It is for the auction purchaser to apply for encumbrance certificates, in the time of 30 days made available to the intending buyers to see if there are any encumbrances. 58. When rules permit sale, with encumbrance and without, contention of the learned counsel for the appellant that the sale should be free from encumbranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tgaged to another bank, viz., Nedungadi Bank and that there was a decree in O.S.No.328 of 1999, dated 10.07.2000, on the file of Subordinate Judge, Poonamallee. 62. Though the appellant has taken a demand draft dated 02.09.2009 in favour of Punjab National Bank, the respondent herein and also sent a telegram that he was ready to hand over the draft, subject to the bank handing over vacant possession of the property and time for remittance was granted up to 22.02.2009, bank has stuck to its stand of 'as is where is' or 'as is what is' condition and not committed to hand over physical and vacant possession of the auctioned property, which in our view is contrary to the scheme of the Act. In the light of the above discussion and decisions, forfeiture of the amount is erroneous. Appellant has made out a case for interference. 63. In the result, order made in W.P.No.19557 of 2009, dated 28.10.2009, is set aside. The respondent bank is directed to refund, a sum of ₹ 3,30,000/- to the appellant, with interest at the rate of 9% per annum, within a period of four weeks, from the date of receipt of a copy of this order. 64. Hence, the Writ Appeal is allowed. No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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