Validity of auction sale under SARFAESI Act: DRAT KOLKATA

Jaganath Mahaprabhu LLP

…Appellant

…Respondent

Case No: Appl No. 44 of 2021

Date of Judgement: 30 March, 2023

Judges:

For Appellant: Mr. A.K.Dhandhania, Ms. Sudarshana Dutta, Mr. Jiban Ballav Panda, Advocates.

For Respondent: Mr. Nimes Mishra, Learned Counsel with Mr. D. Mukherjee, Ms. Poetry Dutta, Advocates.

Facts:
Appellant Jaganath Mahaprabhu LLP participated in an e-auction conducted by respondent HUDCO (secured creditor) to recover loans given to respondent 1 Jain Steel and Power Ltd. (borrower). Appellant emerged as highest bidder in the auction held on 27.04.2021 and deposited 25% of the bid amount on 28.04.2021 as per terms. Meanwhile, the borrower (respondent 1) had filed an application before the Debts Recovery Tribunal (DRT) to stay the auction scheduled on 27.04.2021. The DRT heard the matter on 27.04.2021 and passed an interim order staying the auction sale. This stay order was communicated to the parties after conclusion of the e-auction. The DRT later set aside the auction by holding that relevant rules for sale notice were not followed. Appellant filed the present appeal challenging this.

Arguments by Appellant:
Arguments by Borrower (Respondent 1):

Order:
Appeal dismissed as not maintainable.
Appellant entitled to refund of deposit amount with interest till date of payment.

Sections Cited:
Section 13, SARFAESI Act (Pg 1)
Section 38 SARFAESI Act (Pg 12)
Rule 9 of Security Interest (Enforcement) Rules, 2002 (Pg 6, 12, 31)

Cases Referred:
Valji Khimji And Co. vs Official Liquidator (Pg 6, 14, 15)
Kotak Mahindra Bank Ltd. vs Girnar Corrugators Pvt Ltd (Pg 13)  
My Palace Mutually Aided Society vs B Mahesh (Pg 18)

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Full Text of Judgment:

4. Objections were filed by the creditor HUDCO alleging that all the actions were taken in accordance with the provisions specified in the Act of 2002 and Rules framed thereunder. It is further stated that loan account was classified as NPA in accordance with law. Application is barred by time as loan was classified NPA in 2013 and applicant has approached Tribunal after lapse of eight years. Further it is stated that no representation u/s 13(3A) was made within stipulated time. There is no irregularity and illegality in SARFAESI proceeding initiated against the borrower. Possession was taken in accordance with law. Notices u/s 8(6) of the Rules of 2002 is dated 17.03.2021. Notice was published in two newspapers on 26.03.2021 and auction sale was conducted on 27.04.2021. Provisions of Rule 8(6) and 9(1) of the Rules of 2002 was duly complied with. Auction was held on 27.04.2021 wherein appellant herein was the highest bidder. Auction purchaser deposited 25% of the bid amount on 28.04.2021.

5. Appellant (who is respondent no.3 in S.A.) filed objection and stated that he participated in e-auction. He was declared the highest bidder on 27.04.2021. Thereafter, he deposited 25% of the bid amount on 28.04.2021. Appellant herein has gained interest over the property. Sale was confirmed by the bank on 27.04.2021, but learned DRT has wrongly allowed the S.A. and set aside the auction sale.

6. On the basis of pleadings of the parties learned DRT framed following issues :
(i) Whether the declaration of NPA is illegal or not?
(ii) Whether the provision of Section 13(3A) was complied or not?
(iii) Whether Rule 8(6) and rule 9(1) was followed or not?
(iv) Whether the purported e-auction sale conducted by
theh defendents No. 1 and 2 on 27.04.2021 is unlawful
and to be set aside?

7. Learned DRT recorded finding on the issue no.1 to the effect that the loan account was legally classified as NPA. Accordingly, this issue was answered. On issue No. 2 learned DRT held that there is no violation of Section 13(3A) of the Act of 2002 by the financial creditor. On issue no.3 learned DRT has recorded finding that provisions of Rule 8(6) and 9(1) of the Rules of 2002 have not been followed. E-auction notice published on 26.03.2021 under Rule 8(6) fixing the date of sale on 27.04.2021 without issuing notice under Rule 9(1) which is against the law. Accordingly, auction sale held on 27.04.2021 in pursuance of notice under Rule 8(6) of the Rules of 2002 was set aside.

8. It would be pertinent to mention that the secured creditor i.e. HUDCO has not preferred any appeal against the impugned judgement and order. Hence as far as finding recorded by learned DRT are concerned they have been accepted by the HUDCO.

9. As far as finding on the issue no. 1 and 2 are concerned they were decided against the S.A. applicant. Against these findings no challenge was made by the S.A. applicant. No cross appeal is preferred. Accordingly, these two findings are accepted by the S.A. applicant and are final.

10. Appeal is preferred by the highest bidder i.e. the appellant herein, who challenged the findings on issue no.3 and 4 on the ground that he is the highest bidder for auction sale held on 27.04.2021. He had acquired right over the property by depositing 25% of the bid amount.

11. I have heard the learned counsel for the parties and perused the records.

12. At the very outset as far as contentions of HUDCO are concerned it is submitted by the learned counsel that no challenge is made by the secured creditor to the impugned judgement and order passed by learned DRT. Hence, whatever finding will be recorded by DRAT that would be complied by them.

13. Now dispute remains between the highest bidder i.e. appellant and respondent no.1 and 2 i.e. corporate debtor.

14. It is also evident from the record that SA. No. 56 of 2021 was filed by respondent no. 1 and 2, S.A. applicants before the DRT, which was listed for hearing on 26.04.2021. An interim prayer was made to stay the auction sale scheduled to be held on 27.04.2021 between 10-30 AM to 01.30 PM. Objections are invited by learned DRT and matter was listed for hearing on 27.04.2021. It is also not in dispute that the matter was heard by learned DRT on 27.04.2021. An interim order was passed by learned DRT to the effect that “this petition is allowed and stay is granted directing respondent not to proceed further in pursuance
to the auction sale notice dated 26.03.2021 and not to conduct the auction sale on 27.04.2021”. It is further ordered that “not to take any coercive steps till next date of hearing.” It is also not in dispute that e-mail message was sent by learned counsel for the S.A. applicant to debendramisra@yahoo.com on 27.04.2021 at 05-24 PM communicating the order passed by learned DRT in I.A. 440 of 2021 to communicate the parties about the order.

15. Communication vide letter No. HUDCO/BBRO/ 18895/368 dated 27.04.2021 was made by the HUDCO to Shri A.K.Kedia, partner Janannath Maharabhu LLP, appellant to the effect that : “We are thankful to you for your participation in the E-auction vide auction id#225111 conducted on the auctionger.com. As you have emerged as the successful bidder with highest bid amount of Rs.27,96,000/- you are requested to deposit the 25% of the offered bid price in terms of the tender document at the earliest, but not later than 28.04.2021 by 05.00 PM. The amount may bbe transferred through RTGS to the following bank account.
Current a/c no. 6341941152.
Bank – Indian Bank, main branch, Bhubaneswar.
IFSC Code : IDBI 000B024”

16. Another letter was sent by the HUDCO to Mr. A.K.Kedia on 01.05.2021 at 02-34 PM to the effect that : “This is in continuation to our letter dated 27.04.2021 conveying you the outcome of the e-auction process. However, the Hon’ble PO DRT Cuttack vide his interim order dated 27.04.2021 directed not to proceed further in pursuant to the sale notice dared 26.03.2021 and not to conduct the sale on 27.04.2021 till further orders. This order was pronounced much after the conclusion of the e-auction process and communication of confirmation of sale. WE are taking necessary steps to file an appeal before the Appellate Tribunal / Court challenging the aforesaid order and seeking necessary relief. In view of the above development you are requested to please wait for further direction from our end.”

17. Another mail was sent by Mr. A.K.Kedia by on 01.05.2021 at 04.00 PM to the effect that :
“Kindly mentioned when to do balance payment of the auction land as you have mentioned about the stay on the auction proceeding of this land, but you have not mentioned about the payments made by us
and also what to do for the balance payment to be made to HUDCO for this land.So kindly clarify.”

18. On 4th May 2021 at 11-18 AM Mr. A.K.Kedia sent an e-mail message to HUDCO asking for payment of the balance amount of auction sale, which is as under :
“Kindly mention when to do balance payment of the auctioned land as you have mentioned about the stay on the auction proceeding of this land, but you have not mentioned about the payments made by us and also what to do for the balance payment to be made to HUDCO for this land.
So kindly clarify.”

19. Learned counsel for the appellant submits that auction sale in question was materialised on the 10th occasion whereas on earlier nine occasions date of auction sale was fixed but could not be materialised for want of bid. On 27.04.2021 appellant participated in the bid and was declared as the highest bidder. Thereafter, 25% of the offered sale price was required to be deposited by 28.04.2021 and the same was deposited. Hence, a right accrued in their favour.

21. It is further submitted by learned counsel that since no right accrued in favour of the appellant hence he has no right to file this appeal and the appeal as such is not maintainable and liable to be dismissed.

respondents.

23. Now it is to be looked into as to :
(i) Whether any right accrues in favour of the successful bidder who has deposited the amount equal to 25% of the bid amount on 28.04.2021?
(ii) What is the effect of the interim order of stay of auction sale passed by learned DRT on 27.04.2021?
(iii) Whether any right accrues in favour of the appellant to prefer this appeal and its effect?

24. Learned counsel for the appellant would submit that as soon as bid is complete right accrues in favour of the highest bidder. Learned counsel has placed reliance upon the Order XXI Rule 84 of the CPC which reads as under :
“(1) On every sale of immovable property the to be the purchaser shall pay immediately after such declaration a deposit of twenty-five per cent on the amount of his purchase-money to the officer or other person conducting the sale, and in default of such deposit, the property shall forthwith be re-sold.
(2) Where the decree-holder is the purchaser and is entitled to set-off the purchase-money under rule 72, the Court may dispense with the requirements of this rule.”

25. Learned counsel for the appellant has further placed reliance upon following judgements :
(1) Hari Shankar Vs. Amina BIbi [(1921) 5 RD 125
(3) Surendramohan Sarkar Vs. Manmathanath Banerji [ILR Vol.LVIII 788]
(4) Jaibhddar Jha Vs. Matakduri Jha [AIR 1923 Patna 525]

Ors. [2022 SCC Online SC 1063]
26. On the strength of the above case laws learned counsel for the appellant submits that a right accrues in favour of the appellant as soon as amount of 25% of the bid amount is deposited by him.

27. Per contra, learned counsel for the respondents submits that Act of 2002 and Rules framed thereunder are complete code and a special Act which will prevail over the general Act. Accordingly, provisions of Rule 9(2) of the Rules of 2002 would apply for confirmation of sale. Rule 9(2) of the Rules of 2002 reads as under :
“9(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, he may, with the consent of the borrower and the secured creditor effect the sale at such price.”

28. Rules of 2002 were made in exercise of the power conferred by sub-section (1) and clause (b) of sub-section(2) of section 38 read with sub-sections (4), (10) and (12) of section 13 of the Act
of 2002.

29. It is clear that the Rules are framed under the power conferred by the Act of 2002. It was held by the Hon’ble Apex Court in a recent judgement of Kotak Mahindra Bank Limited vs Girnar Corrugators Pvt. Ltd. decided on 5 January, 2023 [2023 Vol.3 SCC 210] :
32. At this stage, the object and purpose of the enactment of the SARFAESI Act is required to be considered. The SARFAESI Act has been enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, the SARFAESI Act has been enacted providing specific mechanism/provision for the financial assets and security interest. It is a special legislation for enforcement of security interest which is created in favour of the secured creditor — financial institution. Therefore, in absence of any specific provision for priority of the dues under the MSMED Act, if the submission on behalf of Respondent 1 for the dues under the MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment/the SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26-E of the SARFAESI Act would be frustrated. If the submission on behalf of Respondent 1 is accepted, then in that case, Section 26-E of the SARFAESI Act would become nugatory and would become otiose and/or redundant. Any other contrary view would be defeating the provision of Section 26-E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.

30. It is clear that Code of Civil Procedure, 1908 is a general procedural law to be followed by Civil Courts while the Act of 2002 is a special enactment enacted for specific purposes as held by Hon’ble Apex Court in Kotak Mahindra Bank case (supra). Hence, provision of the Act of 2002 and the Rules framed thereunder would have primacy over the general law provided under CPC. Accordingly, I am of the view that provision of Rule 9(2) of the Rules of 2002 would apply for confirmation of sale. Appellant cannot take advantage of the provision of Order XXI Rule 84 of CPC. Accordingly, case laws on Order XXI Rule 84 of CPC as referred by the learned counsel for the appellant would have no application in the present case.

11. “It may be noted that the auction sale was done after adequate publicity in well-known newspapers. Hence, if any one wanted to make a bid in the auction he should have participated in the said auction and made his bid. Moreover even after the auction the sale was confirmed by the High Court only on 30.7.2003, and any objection to the sale could have been filed prior to that date. However, in our opinion,entertaining objections after the sale is confirmed should not ordinarily be allowed, except on very limited grounds like fraud, otherwise no auction sale will ever be complete.”
In the said case sale was confirmed on 30.07.2003. Hon’ble Apex
Court held in Para 29 and 30 as under :
“29. In the present case we are satisfied that there is no fraud in the auction-sale. It may be mentioned that auctions are of two types —
(1) where the auction is not subject to subsequent confirmation, and
(2) where the auction is subject to subsequent confirmation by someauthority after the auction is held.

30. In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction-purchaser. However, where the auction is subject to subsequent confirmation by some authority (under a statute or terms of the auction) the auction is not complete and no rights accrue until the sale is confirmed by the said authority. Once, however, the sale is confirmed by that authority, certain rights accrue in favour of the auction-purchaser, and these rights cannot be extinguished except in
exceptional cases such as fraud.”
33. Sub-rule (2) of Rule 9 of the Rules of 2002 specifically provides that sale would be confirmed subject to confirmation of the secured creditor. As has been held by the Apex Court in Valji case (supra), no rights would accrue till the sale is confirmed by the secured creditor.

34. Now it is to be seen as to whether the sale was confirmed in favour of appellant by the secured creditor i.e. HUDCO? In the letter No. HUDCO/BBRO/18895/368 dated 27.04.2021 appellants were informed that appellant emerged as a successful bidder and they are required to deposit of 25% of the bid price in terms of tender documents at the earliest but not later than 28.04.2021 by 05.00 PM. There is no mention of confirmation of sale in the letter. Another letter addressed to Mr. A.K.Kedia, partner Jagannath Mahaprabu LLP on 01.05.2021 at 02.34 PM was sent by some Bhubaneshar Ro, authorized officer of HUDCO wherein it is mentioned that :
“in continuation to our letter dated 27.04.2021 conveying you the outcome of the e-auction process. However, the Hon’ble PO, DRT, Cutack vide his interim order dated 27.04.2021 directed not to proceed further in pursuant to the sale notice dated 26.03.2021 and not to conduct the sale on 27.04.2021 till further orders. This order was pronounced much after the conclusion of the e-auction process and communication of confirmation of sale. We are taking necessary steps to file an appeal before the Appellate Tribunal/Court challenging the aforesaid order and seeking necessary relief. In view of the above development, you are requested to please wait for further directions from our end.”

35. As far as confirmation of sale is concerned nothing is on record either before the learned DRT or in this appeal as to when the sale was confirmed by the secured creditor as provided under
36. Hence, it is clear that the appellant as well as HUDCO grossly acted in violation of the order dated 27.04.2021 passed by learned DRT whereby stay was granted on concluding the auction sale.

37. Accordingly I am of the view that no right accrued in favour of the appellant by depositing 25% of the bid amount.

39. I am unable to accept the submission made by the learned counsel for the appellant. As far as appellants are concerned no right accrued in their favour by depositing 25% of the bid amount in spite of the stay order passed by the learned DRT to stay the auction sale. Further no right accrued in favour of the appellant as auction sale was not confirmed as provided under Rule 9(2) of
Rules of 2002.

40. Law laid down by the Hon’ble Apex Court in My Palace Mutually Aided Cooperative Society case (supra) would not be applicable. It is held in Para 31 of the judgement that any aggrieved party can prefer an appeal with the leave of the Court. In the present case, appellant has not sought any leave of this Appellate Tribunal to file the appeal.

41. On the basis of the discussion made above, I am of the considered opinion that no right accrued in favour of the appellant on the basis of auction sale held on 27.04.2021. Accordingly, they have no right to file appeal and appeal filed by the appellant is not maintainable.

42. Regarding notices issued under Rule 8(6) and 9(1) of the Rules of 2002 learned DRT has recorded its findings which have not been challenged by the HUDCO. Learned DRT has set aside the auction sale by observing that notice issued under Rule 8(6) was not in accordance with Rule. Finding is recorded against HUDCO, but no appeal is preferred by them. Since no appeal is preferred by HUDCO and no right accrued in favour of the appellant, auction purchaser, I am of the view that appeal is liable to be dismissed being not maintainable. However, the appellant would be entitled to refund of the 25% of the bid amount deposited by them along with interest at the rate of Fixed Deposit prevalent at the relevant time from the date HUDCO received the deposit till the date on which offer is given by
HUDCO to the appellant to take refund of the amount deposited by them.

43. Appeal is dismissed. However, appellant would be entitled to refund of the 25% of the bid amount deposited by them along with interest at the rate of Fixed Deposit prevalent at the relevant time from the date HUDCO received the deposit till the date on which offer is given by HUDCO to the appellant to take refund of the amount deposited by them or if no such offer is made by HUDCO, till the date of actual payment. No order as to costs. File be consigned to record room.
Copy of the order be supplied to the appellant and the respondents and a copy be also forwarded to the concerned DRT.
Copy of the judgement/Final Order be uploaded in the Tribunal’s website.
Order dictated, signed and pronounced by me in the open Court on this the 30th day of March, 2023.