Supreme Court clarifies auction sale obligations in Rajasthan Financial Corporation vs. Jain Bandhu Sneh Resorts (27 April 2022)

Introduction

Date of the Judgment: 27 April 2022
Citation: 2022 INSC 434
Judges: L. Nageswara Rao, J. and B.R. Gavai, J.

Can a sale be cancelled simply because the value of the property increased between the auction date and the final sale? The Supreme Court of India recently addressed this question in a case involving the Rajasthan Financial Corporation and a defaulting borrower. The core issue revolved around whether the High Court was correct in setting aside an auction sale solely on the ground that the financial corporation did not consider the price escalation during the intervening period. The Supreme Court bench, comprising Justices L. Nageswara Rao and B.R. Gavai, delivered the judgment.

Case Background

M/s. Jain Bandhu Sneh Resorts Private Limited (Borrower) took a term loan of Rs. 2.14 Crores from the Rajasthan Financial Corporation (Corporation) on 29 December 1999. They took another loan of Rs. 41.24 Lakhs on 20 April 2001. The Borrower defaulted on repayments, leading the Corporation to issue a notice for repayment. The Borrower filed a Writ Petition, which was disposed of on 15 September 2006, with the High Court directing the Corporation to consider any settlement proposal.

The Borrower then filed a Writ Appeal, seeking more time and waiver of penal interest. The High Court granted time until 31 March 2009, with a condition to deposit 10 lakhs per month or clear the account, whichever is earlier. The Corporation waived 50% of the penal interest, but the Borrower did not repay the loan by the deadline.

The Corporation took possession of the Borrower’s resort on 19 October 2012. Later, the Corporation agreed to give the Borrower another opportunity to deposit 20% of the outstanding balance and provide a repayment schedule. However, the Borrower did not respond, and the Corporation invited bids for the sale of the resort on 16 March 2013. The Borrower challenged this notice in a Writ Petition, seeking a waiver of penal interest and reduction in the rate of interest.

The Auction Purchaser, M/s. Sun On Mount Hotels Pvt. Ltd., emerged as the sole bidder on 23 May 2013. The High Court stayed the finalization of the auction on 28 May 2013, but allowed negotiations with the Auction Purchaser. The interim order was extended multiple times. On 11 January 2018, the High Court vacated the interim order, stating the Borrower was not serious about settling the dispute. The Borrower’s appeal was dismissed on 19 January 2018. The Writ Petition challenging the auction notice was dismissed on 8 March 2018.

The Borrower filed a Writ Appeal which was disposed of by the judgment dated 19 August 2019. The Division Bench of the High Court did not find any irregularity in the judgement of the learned Single Judge. However, the Division Bench set aside the sale confirmed in favor of the Auction Purchaser and directed the Corporation to conduct the auction proceedings for the resort afresh.

Timeline

Course of Proceedings

The Borrower initially filed a Writ Petition against the Corporation’s notice for loan repayment. The learned Single Judge dismissed this petition, but directed the Corporation to consider any settlement proposals. The Borrower then filed a Writ Appeal seeking more time for repayment and waiver of penal interest. The Division Bench granted time till 31 March 2009, subject to certain conditions.

After the Corporation took possession of the resort, the Borrower filed another Writ Petition challenging the auction notice. The learned Single Judge dismissed this petition, stating that the scope of judicial review on contractual matters was limited. The Borrower then filed a Writ Appeal which was disposed of by the judgment dated 19 August 2019. The Division Bench of the High Court did not find any irregularity in the judgement of the learned Single Judge. However, the Division Bench set aside the sale confirmed in favor of the Auction Purchaser.

The Corporation, the Auction Purchaser, and the Borrower each filed Civil Appeals challenging the High Court’s judgment. The Auction Purchaser also challenged the order dismissing the review petition.

Legal Framework

The judgment primarily deals with the contractual obligations and the process of auction sales by financial corporations. There are no specific sections of any statute mentioned in the judgment. The case revolves around the interpretation of the contractual terms between the Corporation and the Borrower, as well as the fairness and legality of the auction process.

Arguments

Arguments on behalf of the Corporation:

• The Corporation contended that the Auction Purchaser was the sole bidder, offering Rs. 8.21 crores initially, which was increased to Rs. 11.11 crores after negotiations.
• They argued that the High Court erred in setting aside the sale certificate and directing a fresh auction, given that the Borrower was a defaulter and had been given sufficient opportunities to clear the loan.
• The Corporation submitted that the High Court should have upheld the sale in favor of the Auction Purchaser, with a direction to pay interest at 12% on the bid amount for the period between 14 June 2013 and 15 January 2018.

Arguments on behalf of the Auction Purchaser:

• The Auction Purchaser argued that the bid amount was enhanced through negotiations and that it had to wait for nearly five years to get possession of the resort.
• They contended that they were not liable to pay any interest for price escalations, as they could not enjoy the property during the period when the interim order was in operation.
• The Auction Purchaser stated that they had spent a substantial amount in renovating the resort after taking possession.

Arguments on behalf of the Borrower:

• The Borrower argued that the Corporation colluded with the Auction Purchaser and finalized the sale for a paltry amount.
• They claimed that the value of the resort was Rs. 17 crores in 2012, and the sale was vitiated by fraud.
• The Borrower contended that the High Court did not consider the issue of fraud while dismissing the Writ Petition.

The innovativeness in the arguments is that the Auction Purchaser argued that they should not be liable for price escalation due to the interim order of the High Court, which prevented them from enjoying the property.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the Court addressed was:

• Whether the High Court was correct in setting aside the confirmed sale in favor of the Auction Purchaser solely on the ground that the Corporation had not factored in the price escalation of the property between 2013 and 2018.

Treatment of the Issue by the Court

Authorities

The judgment does not explicitly cite any specific cases or legal provisions. The Court’s reasoning is based on its understanding of the principles of contract law, auction sales, and the duties of financial corporations.

Judgment

The Court did not cite any authorities.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The fact that the Borrower was a chronic defaulter who had been given multiple opportunities to repay the loan.
• The fairness of the auction process, which was not found to be flawed, except for the non-consideration of price escalation.
• The need to balance the interests of the Corporation, the Auction Purchaser, and the Borrower.
• The principle that the value of property can change over time, and this should be taken into account in financial transactions.

The Court’s reasoning was based on the principle of fairness and equity. While the Court acknowledged that the High Court was correct in pointing out the non-consideration of price escalation, it held that this alone was not sufficient to set aside the sale. The Court stated, “The Division Bench of the High Court has set aside the confirmation of sale only on the ground that the Corporation has not taken into account the escalation of the prices in property between 14.06.2013 to 15.01.2018.” The Court also noted, “Except this ground, there is no fault found with the auction proceedings and finalization of the sale in favour of the Auction Purchaser.” The Court further observed, “Therefore, we are of the considered view that the sale in favour of the Auction Purchaser could not have been set aside by the Division Bench of the High Court on this ground alone.”

The Court considered the alternative argument that the sale should be set aside due to the price escalation and the alleged fraud, but rejected this argument because the Borrower had been given multiple opportunities to settle the loan. The Court’s final decision was to reverse the High Court’s order setting aside the sale, but to direct the Auction Purchaser to pay interest for the period during which the sale was pending.

Key Takeaways

• A sale in auction should not be set aside solely on the ground of price escalation between the auction date and the final sale.
• Financial corporations must consider price escalation when finalizing auction sales, especially when there is a significant time gap between the auction and the final sale.
• Auction Purchasers may be required to pay interest on the bid amount for the period during which the sale was pending, to account for price escalation.
• Borrowers who are chronic defaulters cannot expect further opportunities to settle their dues.

The judgment clarifies that while price escalation is a factor to consider, it is not sufficient ground to set aside an otherwise valid auction sale. This decision provides guidance to financial corporations on how to conduct auction sales and balance the interests of all parties involved.

Directions

The Supreme Court directed the Auction Purchaser to pay interest at the rate of 12% per annum on Rs. 11.11 crores for the period from 14 June 2013 to 15 January 2018.

Specific Amendments Analysis

There were no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of this case is that a sale in auction should not be set aside solely on the ground of price escalation, but the financial corporation should consider the price escalation while finalizing the sale. The Court held that while price escalation is a factor to consider, it is not sufficient ground to set aside an otherwise valid auction sale. This clarifies the position of law and provides guidance to financial corporations on how to conduct auction sales and balance the interests of all parties involved.

Conclusion

The Supreme Court reversed the High Court’s decision to set aside the auction sale, holding that price escalation alone is not a sufficient ground to invalidate a sale. However, the Court directed the Auction Purchaser to pay interest on the bid amount to account for the delay and the increase in property value. This judgment provides clarity on the obligations of financial corporations in auction sales and balances the interests of all parties involved.

Category

Parent Category: Contract Law
Child Categories:

• Auction Law
• Financial Corporation
• Default
• Price Escalation

Parent Category: Civil Law
Child Categories:

• Auction Law
• Financial Corporation
• Default
• Price Escalation

FAQ

Q: Can a property auction sale be canceled if the property value increases after the auction?
A: No, the Supreme Court has clarified that a property auction sale should not be canceled solely because the property’s value has increased since the auction date. However, the financial corporation should consider the price escalation.

Q: What are the obligations of financial corporations in auction sales?
A: Financial corporations must ensure that the auction process is fair and transparent. They should also consider the price escalation of the property when finalizing the sale, especially if there is a significant time gap between the auction and the final sale.

Q: What happens if there is a delay in finalizing the auction sale?
A: If there is a significant delay, the auction purchaser may be required to pay interest on the bid amount to account for the delay and the increase in property value.

Q: What does this mean for borrowers who default on their loans?
A: Borrowers who are chronic defaulters cannot expect further opportunities to settle their dues. Financial corporations are within their rights to proceed with the auction of the property to recover the outstanding loan.