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TMI Blog2024 (8) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, inexora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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. - B. P. COLABAWALLA And SOMASEKHAR SUNDARESAN , JJ. Ms.Vinodini Srinivasan, a/w Ujawala V. Karpe, i/b M/s. Consulta Juris, Advocates for the Petitioner Mr.Murtaza Kachwala, a/w Aashdin Chivalwala, Shreyas Lavekar Vyoma Joshi, i/b Argus Partners, Advocates for Respondent No.6. Mr.Cherag Balsara, a/w Yogesh Patil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not repaid by the Karias at the expiry or termination of the LLA, then SCB would have an irrevocable license to remain in occupation of the Secured Asset until the deposit is repaid with interest at the rate of 3% per month (36% per annum); f) SCB was unable to occupy the Secured Asset immediately since the housing society in which the Secured Asset is situated, refused SCB entry on the premise that approval of IOB (as the mortgagee) would be necessary (although the society had approved the execution of the LLA on 22nd August, 2000). The housing society wrote to SCB on 8th September, 2000, explicitly putting SCB to notice that the Secured Asset stood mortgaged; g) Owing to the housing society s stance, the Karias moved the First Co-operative Court at Mumbai constituted under the Maharashtra Co-operative Societies Act, 1960, with Case No. CCI/315/2000, behind the back of IOB, complaining about the society obstructing SCB from entering the property, and obtained an interim order dated 19th September, 2000, pursuant to which, SCB was allowed to occupy the Secured Asset; h) The LLA was subsequently registered by the Karias and SCB on 12th December, 2000; i) On 29th May, 2002, in procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively for an amount of Rs. 1.70 crores (Rs. 33 lakhs being the bid amount; Rs.90 lakhs being the amount of security deposit payable to SCB; Rs. 45 lakhs being the accumulated interest payable to SCB; and a sum of Rs.2.93 lakhs being arrears payable to the society); s) Surprisingly, and even though the price offered by the Purported Acquirers was way below the reserved price of Rs.1.17 crores, the DRT, vide an order dated 19th March, 2004 ( DRT Order ), overruled the failure report filed by the DRT Receiver and declared the auction a success in favour of the Purported Acquirers. The DRT approved the sale of the Secured Asset to the Purported Acquirers, by ruling that SCB had a charge for Rs. 90 lakhs. The DRT ruled that the bid amount of Rs. 33 lakhs was proper, taking into account the attendant liability and the outgoings payable to the society, and asked the Purported Acquirers to settle the dues of SCB independently. The DRT did not rule what the amount payable to SCB was, and did not seek a deposit of any amount that, in its view, was payable to SCB; t) On appeal, the DRAT, vide an order dated 5th November, 2004 ( DRAT Order ), approved the DRT s order in near-identical terms, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proceeds of the sale, in full, and in priority over the other creditors. Effectively, Ms. Srinivasan would argue, the DRT and the DRAT have decreed the SCB Recovery Suit filed by SCB for recovery of the security deposit that is pending in this High Court, assuming SCB had been able to successfully conduct trial and prove that the amount was payable to it in full. Worse, the said suit has effectively been executed against the mortgagees by the outcome in the DRT Order and the DRAT Order. 8. Mr. Cherag Balsara, learned counsel on behalf of the Purported Acquirers, essentially argued that the Petitioner (the successor in interest to IOB) can be said to have acquiesced to the rights enjoyed by SCB. He would argue that the LLA was a registered document and the consequences of non- refund of the security deposit viz. the entitlement of SCB to remain in possession until it receives a full refund with interest, indeed constituted a charge or encumbrance in favour of SCB. According to Mr. Balsara, despite being aware of the existence of the LLA, IOB did not initiate any steps to evict SCB. Instead, IOB agreed to the option of a sale of the Secured Asset, leaving it to the purchaser to dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be considered to be a trespasser to the Secured Asset. Upon becoming aware of the proceedings pursuant to the Original Application to enforce the mortgage, SCB would argue, it chose to intervene in those proceedings. 11. SCB also argued that it had a right to remain in occupation of the Secured Asset until the security deposit with interest thereon as contracted with the Karias is refunded, on the premise that the license in SCB s favour is irrecoverable and such license could not be extinguished by reason of a transfer of the Secured Asset. The transferee would merely step into the shoes of the Karias and would need to adopt eviction proceedings to remove SCB from the premises. Curiously, SCB would also argue that the LLA cannot be equated with a lease in order to attract Section 65-A of the ToP Act particularly since the memorandum of deposit of title deeds did not contain an explicit restriction on execution of such a license agreement. To summarize, SCB would argue that it is a bonafide licensee for value, without notice of the mortgage, and its right to use and occupy the Secured Asset would override any other interest in the Secured Asset unless and until the security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal possession of the Secured Asset would not vest in SCB; (ii) the license was a bare license to use the Secured Asset as a residence; and (iii) no other right, title or interest would vest in SCB by reason of the LLA. Yet, the Impugned Orders have treated SCB as a beneficiary of a charge and that too as a secured creditor with the highest priority, ahead of the consortium of banks led by IOB, which had the highest security interest in the Secured Asset; c) Therefore, not only was the unsecured creditor i.e. SCB treated as a secured creditor, the amount of unsecured debt claimed by SCB has effectively been treated as being payable to SCB, from the proceeds of sale of the Secured Asset, in priority to the mortgagees of the Secured Asset. Effectively, the DRT and DRAT have accepted the Purported Acquirers depiction of their bid amount of Rs. 33 lakh as being far higher than that amount (the Purported Acquirers had claimed that the effective bid was for Rs. 1.70 crores). By taking the unsecured debt owed to SCB as being payable in full and with first priority, the secured creditors with a mortgage over the Secured Asset, have been made to take a hair-cut in what they can get from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age, which had been initiated even before the LLA was executed. Strangely, the DRT has indeed ruled that SCB s rights are inferior to the rights of the mortgagees, and yet, on the premise that due process for eviction would have to be taken, SCB s dues have been treated as having priority over the dues payable to the mortgagee. This is the only means to justify the bid of the Purported Acquirers in the sum of Rs. 33 lakhs, which is way below the reserve price of Rs. 1.17 crores; j) On the face of it, the bid having been way below the reserve price, the auction ought to have been declared a failure a position that the DRT Receiver rightly set out for acceptance by the DRT, which, inexplicably, and in gross error, overruled and confirmed the sale to the Purported Acquirers; and k) Under Section 52 of the ToP Act, where any right to immovable property is directly and specifically in question in a suit, the property cannot be dealt with by any party to the suit so as to affect the rights of any other party to the suit, except under the authority of the court. This position would obtain from the date of instituting the proceedings and remain until disposal by a final decree. The LLA was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a license would become irrevocable, would have conferred on the licensee the right to use the premises until the security deposits were refunded. Sumikin Bussan is of no assistance to them to argue that such right of a licensee would rank superior to the rights of a mortgagee and thereby give an unsecured creditor priority over secured creditors. 19. To begin with, the mortgage over the Secured Asset was created as security from the Karias in favour of the consortium of banks led by IOB for loans advanced to EOL, well prior to the execution of the LLA. The LLA was executed by the Karias in favour of SCB subsequently. In other words, the Karias gave SCB a license to use the mortgaged property. We are not concerned with the interpretation of the contractual terms of the LLA and we are not resolving a dispute between the parties to the LLA that would be the subject matter of the SCB Recovery Suit. In Sumikin Bussan, the Division Bench was essentially dealing with a dispute between a licensor and a licensee in that case. Sumikin Bussan has nothing to do with giving an unsecured licensee priority over a secured mortgagee. 20. As stated earlier, at the heart of this writ petition is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Transfer of Property Act? It is brought to the notice of this Court that the said issue is considered by the Division Bench of Madras High Court in the case of Sree Lakshmi Products Rep. by its partner vs. State Bank of India, AIR 2007 Madras 148 in the backdrop of provisions of section 65-A of the Transfer of Property Act. Relevant observations made in paragraph 8 of the said decision, reads thus: 8. In Sanjeev Bansal v. Oman International Bank SAOG, 2006 (4) BC 299 (DB) Delhi High Court, a similar contention was raised by the petitioner therein that he being a tenant and in physical possession of the mortgaged property is protected under the provisions of the Delhi Rent Control Act and cannot be dispossessed without taking recourse to the provisions of the Delhi Rent Control Act. Repelling this contention the Court held that the protection afforded by the Rent Control Act to a tenant is from the landlord of the premises and the landlord of the premises cannot recover possession from the tenant unless he takes recourse to any of the grounds as available to him under Rent Control Act and the right of the tenant is fully protected notwithstanding anything contrary contained in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocument of lease or tenancy created in its favour. Therefore, in view of requirement laid down in section 65-A of the Transfer of Property Act, the petitioner cannot claim any protection only on the basis of promissory lien. We answer the question in negative. [ Emphasis Supplied ] 24. Applying the aforesaid articulation to the case at hand, 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: 25. The submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a property that had been mortgaged and which mortgage was in the process of being enforced even before the LLA had been executed, to somehow justify the deep discount to the reserve price and justify the Impugned Orders as being a product of equitable and fair exercise of judicial discretion. While SCB s conduct does not give rise to equities, even if it did, in our opinion, equity considerations cannot undermine the explicit position in law, to give an unsecured creditor a march over a mortgage in access to the proceeds of sale of a mortgaged asset. Equity supplements the law and it cannot supplant the law. 29. As a matter of fact, considering that proceedings before the DRT and DRAT were proceedings dealing with enforcement of a mortgage, both these forums have erred in not appreciating the evident position discernible from a bare perusal of the material on record and the applicable law. The LLA, pointing towards being a contrivance devised to undermine the enforcement of the mortgage over the Secured Asset, the DRT and DRAT ought to have applied their minds to the core issue of whether a bid below the reserve price could be justified by resort to treating SCB as enjoying a char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 by us earlier. 32. We are surprised that SCB, itself a commercial bank that must have multiple enforcement proceedings against those who borrow from it, and therefore conversant with the law on asset recovery and priority of charges, has conducted itself in the aforesaid manner. SCB has indeed instituted the SCB Recovery Suit against the Karias for refund of the security deposit. Effectively, 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 we are relegating the matter 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. 33. We must record that we enabled the parties to engage with one another in a commercial and practical manner to see if they could work out a resolution with a formula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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