Even otherwise, it is not case of the Bank that it has suffered damages on account of the non-deposit of the balance of the bid amount by the petitioner. As stated above, it had not taken vacant possession of the property from the borrower. On the other hand, it has settled the matter with the borrower and the borrower has continued with possession of the property. The Bank has not established that it has suffered any loss. In UNION OF INDIA VS. R.D. &. CO. - AIR 1973 SC 1098, the Supreme Court has held that a party to a contract taking security deposit from the other party to ensure due performance of the contract is not entitled to forfeit the deposit on the ground of default when no loss is caused to him in consequence of such default. When no loss is caused in consequence of the breach of contract, the other party is not entitled to forfeit the deposit for the breach.
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Karnataka High Court
E Ali S/O Soopy, vs The Syndicate Bank, on 1 June, 2015
Citation; AIR 2015 Karnataka122
The petitioner has called in question the validity of the proceedings at Annexure 'C' dated 6.2.2008 and the interim certificates issued by the authorized officer at Annexures 'D' and 'E' both dated 9.2.2008. The petitioner has also sought for quashing of the order of the authorized Officer at Annexure 'N' forfeiting the amount deposited by him towards purchase of the properties morefully described in the interim certificates at Annexures 'D' and 'E'.
2. The authorized officer of the Syndicate Bank, Sadashivanagar Branch issued an advertisement inviting tenders at Annexure 'A' for sale of the movable and immovable properties belonging to M/s Ultradew. The petitioner submitted his offer along with certain other persons. The authorized officer conducted the auction on 5.2.2008. The petitioner was the highest bidder. The sale proceedings were drawn as per Annexure 'B' and the sale was confirmed in favour of the petitioner. The petitioner deposited Rs.45.25 lakhs with the authorized officer, which is 25% of the bid amount. The balance of Rs.1,35,75,000/- was required to be deposited at a later date. An interim sale certificate pertaining to movable property as per Annexure 'E' and immovable assets as per Annexure 'D' was issued in favour of the petitioner.
3. The contention of the petitioner is that he visited the premises and found that the property was occupied by some persons. The factory was run by third parties. Thus, the property in question was not vacant.
4. The petitioner addressed a letter to the authorized officer on 14.3.2008 at Annexure 'F' and expressed his anguish and sought clarification regarding delivery of possession of immovable assets and availability of movable assets listed in the proceedings. He also indicated his willingness to pay the balance amount provided the Bank assures handing over vacant possession of the premises and movable assets mentioned in the notification. The Bank sent a reply dated 17.3.2008 at Annexure 'G' stating that the sale is on 'as is where is' basis. It is further stated that on receipt of balance sale consideration of 75% towards the movable and immovable assets, the sale certificate would be registered with the jurisdictional Sub-Registrar. It was clarified that physical possession will have to be taken by the petitioner.
5. The petitioner sent a protest letter as per Annexure 'H' to the authorized officer stating that 'as is where is' condition referred in the auction notice is with respect to the physical condition of the properties and not with regard to physical possession. Under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest At, 2002 (for short 'SARFAESI Act'), possession has to be taken by the secured creditor and on auction, it has to be handed over to the purchaser. If possession is not going to be given, the said fact was required to be mentioned in clear terms in the tender itself. If the petitioner was to take possession for himself, he would not have ventured to participate in the auction. He insisted for an assurance of handing over of vacant possession of the premises at the time of execution of the sale deed on payment of balance of sale consideration. He also insisted that the Bank should ensure handing over of all the items mentioned in the notice. Unless the Bank ensures the above, he would not be in a position to pay the balance of sale consideration.
6. On 1.4.2008 vide Annexure 'J', the Bank informed that the amount deposited by the petitioner stood forfeited and no further communication will be entertained in this regard. The petitioner got issued a notice through his lawyer at Annexure 'K' dated 11.4.2008 for refund of the amount deposited by him. The Bank sent a notice at Annexure 'L' dated 23.4.2008 extending the time to deposit the balance of the amount for a further period of 7 days from the date of the receipt of the letter. The petitioner got issued yet another notice through his lawyer at Annexure 'M' dated 30.4.2008 calling upon the authorized officer to confirm that the physical possession will be handed over to the petitioner along with the items listed in the auction notice immediately on payment of balance of the amount. The Bank sent a reply stating that the amount deposited by the petitioner stands forfeited and all the claims of the property both immovable and immovable also stands forfeited. The petitioner again sent a letter dated 3.8.2010 to the authorised officer seeking refund of the money. The authorized officer by his letter at Annexure 'Q' dated 20.10.2010 informed the General Manager, Recovery Cell of the Bank that the Bank has received full payment from the borrower and the securities are released in favour of the defaulter. In view of the same, he sought permission of the General Manager to refund the bid amount of Rs.45.25 lakhs to the petitioner as a special case and to score off the long outstanding amount. The authorized officer once again sent a letter to the General Manager at Annexure 'S' dated 4.3.2011 seeking permission to refund the amount to the petitioner.
7. The respondents have filed their objections contending that the auction has been made on 'as is where is' basis. Therefore, the Bank is not required to hand over possession of the premises in question to the petitioner. The Bank has sought to justify its action in forfeiting the amount.
8. Sri M.Narayana Bhat, learned Counsel appearing for the petitioner would contend that under the provisions of the SARFAESI Act, the property cannot be sold in auction without taking physical possession of the property from the borrower or other occupants in the said property. He has taken me through various provisions of the said Act in support of his contentions. He further submits that the borrower has settled the matter with the Bank. The amount due to the Bank from the borrower has been realised in terms of the settlement and the borrower continued with his possession of both the movable and immovable properties put to auction. The Bank has not incurred any financial liability. The Bank cannot be permitted to retain the money deposited under the guise of forfeiture. It is submitted that Bank has to refund the amount with reasonable rate of interest.
9. On the other hand, learned Counsel appearing for the respondents submits that the property has been sold in auction on 'as is where is' basis. The petitioner was aware that the property in question was in possession of the borrower. It is his responsibility to get the persons in occupation vacated and also to take possession of the movable properties. Having failed to do so, he cannot seek refund of 25% of the amount deposited by him in pursuance of the auction. He prays for dismissal of the writ petition.
10. I have carefully considered the arguments of the learned Counsel made at the Bar and perused the materials placed on record.
11. Chapter III of the Act provides for enforcement of security interest. Sub-section (1) of Section 13 states that notwithstanding anything contained in Sections 69 or 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal by such creditor in accordance with the provisions of the said Act.
Sub-section (2) of Section 13 provides for issuance of notice to the borrower to discharge his full liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
The expression 'borrower' has been defined in sub- section (1)(f) of Section 2, which means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any Bank or financial institution and includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any Bank or financial institution in relation to such financial assistance. Thus, the person, who has given guarantee or created any mortgage or pledge as security for the financial assistance granted by the Bank is also a borrower.
Sub-section (3) of Section 13 provides for the particulars to be given in the notice to the borrower and sub- section (3A) provides for the consideration of objections, if any, filed by the borrower.
Sub-section (4) of Section 13 lays down the consequences in case the borrower fails to discharge his liability in full within the period specified in sub-section (2). It states that in case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the measures mentioned in clauses (a) to (d) of the said provision to recover his secured debt. Under sub-section (4)(a) of Section 13, the secured creditor is authorized to take possession of the secured assets of the borrower includingthe right to transfer by way of lease, assignment or sale for realising the secured asset and sub-section (4)(b) provides for taking over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.
Sub-section (6) of Section 13 states that any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the transferee all rights in or in relation to the secured asset transferred as if the transfer had been made by the owner of such secured asset.
The other two relevant provisions are sub-sections (8) and (13) in Section 13. Sub-section(8) states that if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.
Sub-section (13) states that no borrower shall, after receipt of notice referred to in sub-section (2), transfer by way or sale, lease or otherwise, other than in the ordinary course of his business, any of his secured assets referred to in the notice, without prior written consent of the secured creditor.
12. Section 14 authorises the Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset. It states that where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of the said Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may 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 take possession of such asset and documents relating thereto and forward such assets and documents to the secured creditor.
13. Rule 8 of the Security Interest (Enforcement) Rules, 2002 ('Rules' for short) provides for sale of immovable secured assets and Rule 9 provides for time of sale, issue of sale certificate and delivery of possession. Sub-rule (9) of Rule 9 states that the authorized 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).
14. From sub-section (4)(a) of Section 13, it is clear that if the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset. If the dues of the secured creditor are paid under sub-section (8) of Rule 13 before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor. Therefore, if the secured assets are in lawful possession of the third party, for example, a tenant or a mortgagee, etc., the secured creditor can only take symbolic possession of the property under the SARFAESI Act. Sale of immovable property with vacant possession will always fetch better price. The object of sale by holding public auction or by inviting tenders from the public under sub-rule (5) of Rule 8 is to fetch the best price. The secured asset has to be sold in public auction after taking physical possession as far as possible and transfer the same to the purchaser is spelt out in sub- section (6) of Section 13 and sub-rule (9) of Rule 9. It is also clear that before the date fixed for sale or actual transfer of the property, if the borrower pays the dues to the secured creditor, the secured asset shall not be sold or transferred by the secured creditor. In my view, if the property is in possession of the borrower or if it has been transferred to third parties contrary to sub- section (13) of Section 13, the secured creditor has to first take vacant possession under Section 14 from the borrower or the third party as the case may be and thereafter it has to be sold by holding public auction or by inviting tenders.
15. In the instant case, the secured creditor has not taken physical possession of the property though it was in possession of the borrower. Before actual transfer of the possession of the property could be made, the borrower has paid the entire dues to the secured creditor in terms of the settlement arrived at between them. In the circumstances, question of the bank transferring the property to the petitioner does not arise. This is in conformity with sub-section (8) of Section 13. In view of the same, the bank cannot retain 25% of the amount deposited by the petitioner in pursuance of the auction made in terms of the sale notice at Annexure 'A'.
16. It is contended on behalf of the petitioner that the advertisement did not contain the status in relation to the physical possession of the property. Therefore, the sale is bad.
Sub-rule (6) of Rule 8 provides for issue of public notice in relation to sale of secured asset. When a secured asset of an immovable property is brought for sale, the intending purchaser should know the nature of the property, the extent of liability pertaining to the said property, any other encumbrances pertaining to the said property, the minimum price below which one cannot make a bid and the total liability of the borrower to the secured creditor. The proviso of Sub-rule (6) of Rule 8 indicates that any other material aspect should also be made known when effecting the publication, it would only mean that the intending purchaser should have entire details about the property brought for sale in order to rule out any possibility of the bidders later on to express ignorance about the factors connected with the asset in question. Therefore, it is just and proper for the Bank to incorporate the status in relation to physical possession of the property in the notification.
17. The sale notice at Annexure 'A' is defective. It did not disclose the status relating to physical possession of the properties. The advertisement states that the immovable property charged by the Bank for recovery of secured debt is on 'as is where is' condition. The Hon'ble Supreme Court in HARYANA FINANCIAL CORPORATION AND ANOTHER VS. RAJESH GUPTA - (2010) 1 SCC 655 was considering an identical case. In the said case, the advertisement for sale of the property issued by the Corporation contained the expression 'as is where is basis'. Therefore, a contention was raised on behalf of the appellant- Corporation that the Corporation cannot permit the respondent to wriggle out of a confirmed bid, on the ground that there was no independent approach road to the unit. The Supreme Court after considering the rival contentions of the parties, has held as under:
"22. We are also of the opinion that the Division Bench was justified in further concluding that in law the appellant Corporation undoubtedly has the power to forfeit the earnest money provided there was a failure on the part of the respondent to make the deposit. The Division Bench, however, observed that the respondent was dealing with an instrumentality of the State. He was entitled to legitimately proceed on the assumption that the appellant, a statutory corporation, an instrumentality of the State, shall act fairly. The respondent could not have suspected that he would be called upon to pay the amount of Rs.50 lakhs without being given even a proper passage to the unit that he was buying. We are of the considered opinion that the respondent had deposited the sum of Rs.2.5 lakhs on the clear understanding that there would be an independent approach road to the unit. This is understandable. Without any independent passage the plot of land would be not more than an agricultural plot, not suitable for development as a manufacturing unit. We therefore do not find any substance in the submission made by the learned Counsel for the appellant-Corporation.
23. In our opinion, the appellants cannot be given the benefit of Clause 5 of the advertisement. The appellant Corporation cannot be permitted to take advantage of its own wrong. Clause 5 undoubtedly permits the forfeiture of the earnest money deposited. But this can only be if the auction-purchaser fails to comply with the conditions of sale. In our opinion, the respondent has not failed to comply with the conditions of sale. Rather, it is the appellant Corporation which has acted unfairly, and is trying to take advantage of its own wrong."
18. It is clear from the aforesaid passages that the Corporation being an instrumentality of the State shall act fairly. It cannot take advantage of its own wrong. It has been further held that the Corporation has acted unfairly, and is trying to take advantage of its own wrong
19. In the instant case, it is not in dispute that the Bank has received full amount under OTS Scheme from the borrower. Thus, the matter has been settled by the Bank with the borrower. This is permissible under Section 13(8) because settlement has been entered into between the Bank and the borrower before transfer of the property to the petitioner. Therefore, the authorized officer has rightly sought permission of the General Manager to refund the money to the petitioner. This is clear from his letter at Annexure 'Q' dated 20.10.2010, which is as under:
"Ref:No:1416/REC/0434 20.10.2010
The General Manager,
Recovery Cell,
R.O. Bangalore.
Dear Sir,
Reg:M/s Aradhya/Ultra Dues.
We are enclosing herewith letter received from Mr.Ali, who was successful bidder for the unit auctioned by us during 2008 in respect of the above referred. He failed to pay balance of bid amount and subsequently our party brought in stay from DRT. Now the account stands closed under OTS. Now we have received full payment and the securities are released to our defaulter i.e. Mr.Aradhya.
In view of the above facts, we request you to permit us to pay the bid amount of Rs.45,25,000/- deposited by Mr.Ali as special case and to square off the long outstanding amount.
Yours faithfully, Sd/-
Chief Manager."
20. Yet another communication was sent by the authorized officer to the General Manager at Annexure 'S' dated 4.3.2011, which is as under:
"84/0434/RECC/RO 04.03.2011
The General Manager,
Recoveries,
R.O.Bangalore.
Dear Sir,
Reg: Bid amount outstanding suspense account. This has reference to your various letters regarding settlement of amount laying in suspense account paid by Mr.Ali on account of NPL account of ULTRA DUE and Mr.T.H.Aradhya.
Mr.Ali was an successful bidder for the property marked for auctioning in 2008 when earlier two auction failed to fetch the specified bid amount against which Mr.Ali deposited Rs.4525000/- but failed to pay the balance of bid amount before the stipulated period. In the meantime, Mr.Aradhya brought stay from DRT. With constant persual we negotiated with Mr.Aradhya when the stay was not vacated for 2 years who agreed for OTS without much sacrifice on our part. We could recover the book balance and interest of over Rs.3500000/-.
Mr.Ali has been representing since 2009 and we have not received any reply from you. He had even issued V N claiming the amount back which we have not acknowledge which was sent to you during 2009.
The amount lying in suspense has been commented in all our report but we are unable to settle it either way without your specific instructions. In view of this, we once again request you to permit us to refund the bid amount to Mr.Ali as a special case or to adjust the amount to P/L account which we feel is not justified.
We once again request you to permit us to refund so that we can square off the huge amount laying in suspense which will complete 3 years.
Yours faithfully, Sd/-
Chief Manager."
21. Even otherwise, it is not case of the Bank that it has suffered damages on account of the non-deposit of the balance of the bid amount by the petitioner. As stated above, it had not taken vacant possession of the property from the borrower. On the other hand, it has settled the matter with the borrower and the borrower has continued with possession of the property. The Bank has not established that it has suffered any loss. In UNION OF INDIA VS. R.D. &. CO. - AIR 1973 SC 1098, the Supreme Court has held that a party to a contract taking security deposit from the other party to ensure due performance of the contract is not entitled to forfeit the deposit on the ground of default when no loss is caused to him in consequence of such default. When no loss is caused in consequence of the breach of contract, the other party is not entitled to forfeit the deposit for the breach.
22. The decision relied on by the learned counsel for the respondent in NARENDRAKUMAR NAKHAT VS. M/S.NANDI HASBI TEXTILE MILLS LTD., AND OTHERS - ILR 1997 KAR 1 has no application to the facts of this case. In Narendrakumar's case, the Court was considering forfeiture of EMD and not bid money. In the instant case, the advertisement itself is defective. The advertisement should have indicated the status relating to possession of the property. Further, the statutory provisions do not authorize the Bank to sell the property without taking its possession from the borrower.
23. Having regard to the facts and circumstances of the case, I am of the view that the respondent - Bank has acted unfairly while forfeiting the bid amount.
24. The petitioner is also entitled for reasonable rate of interest on the amount deposited by him. I am of the view that it is just and proper to award interest at the rate of 9% per annum on the said amount from the date of the deposit till the date of refund.
25. In the result, I pass the following:
ORDER
(i) The writ petition succeeds and it is accordingly allowed.
(ii) The order passed by the authorized officer at Annexure 'N' dated 26.5.2008 and the interim sale certificates at Annexures 'D' and 'E' both dated 9.2.2008 are hereby quashed.
(iii) The second respondent is directed to refund a sum of Rs.45.25 lakhs to the petitioner with interest at the rate of 9% per annum from the date of its deposit till the date of refund.
(iv) The refund as above shall be made within a period of eight weeks from the date of receipt of a copy of this order.
(v) The petitioner is also entitled for costs from the respondents, which is assessed at Rs.25,000/-.
26. In view of the disposal of the writ petition as above, I.A.No.1/2015 does not survive for consideration. It is accordingly disposed of.
Sd/-
JUDGE.
BMM/-
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