Supreme Court Orders 6% Interest on Auction Amount Refund: Salil R. Uchil vs. Vishu Kumar & Ors. (2024)

Date of the Judgment: 18 October 2024
Citation: 2024 INSC 793
Judges: Justice Abhay S. Oka and Justice Ujjal Bhuyan
Can an auction purchaser be compensated for the delay in refund of their deposit when an auction is set aside due to equitable considerations? The Supreme Court of India addressed this question in a recent case, ordering a 6% interest payment on the refunded amount. This judgment clarifies the rights of auction purchasers when sales are reversed not due to illegality but on equitable grounds. The bench comprised of Justice Abhay S. Oka and Justice Ujjal Bhuyan, with the judgment authored by Justice Abhay S. Oka.

Case Background

The case involves a loan default by Respondents 1, 2, 5, and 6, who had taken a business loan of Rs. 25,00,000 from the 4th respondent, a Co-operative Bank. Respondents 7 to 9 acted as guarantors for this loan. When the borrowers defaulted, the bank initiated recovery proceedings before the 3rd respondent, the Assistant Registrar of Co-operative Societies and Recovery Officer. The dispute was decided in favor of the bank, which was entitled to recover Rs. 21,92,942 with interest and costs. In the recovery process, the 3rd respondent issued a sale proclamation on 10th June 2019 for the sale of the property of Respondents 1 and 2, fixing the property value at Rs. 80,67,500. The auction was set for 22nd July 2019, with the notice published in local newspapers on 4th July 2019. The appellant, Salil R. Uchil, made the highest bid of Rs. 81,20,000, which was accepted. He deposited the amount on 21st July 2019, and a sale confirmation certificate was issued on 5th September 2019. The excess amount was sought to be refunded to the borrowers, but the cheque was returned due to disputes among them. Subsequently, the High Court of Karnataka set aside the auction sale, leading to the present appeal.

Timeline

Course of Proceedings

The 1st and 2nd respondents challenged the auction in the High Court of Karnataka, which set aside the sale on 17th March 2022. The High Court directed the 4th respondent bank to refund the auction amount to the appellant along with an additional 5% as per Rule 38(4)(b) of the Karnataka Co-operative Societies Rules, 1960. The High Court noted that the 1st and 2nd respondents had deposited Rs. 25,61,400 within three months of filing the writ petition, covering the awarded amount with interest. The appellant then appealed to the Division Bench, which upheld the Single Judge’s decision on 5th September 2022. The Supreme Court initially issued notice only on the issue of adequate compensation to the appellant, noting that the bank had retained the amount since 21st July 2019 and received the amount on 13th October 2022.

Legal Framework

The High Court relied on Rule 38 of the Karnataka Co-operative Societies Rules, 1960, specifically sub-rules 4(a) and 4(b). Sub-rule 4(b) states that if the owner of a property sold in auction applies within 30 days of the sale and deposits the arrears, the sale can be set aside, and the auction purchaser will receive a refund plus 5% of the deposited amount. However, the High Court acknowledged that this rule did not directly apply as the 1st and 2nd respondents did not apply within 30 days. The High Court used its discretionary powers under Article 226 of the Constitution of India to provide compensation.

The relevant provision of the Karnataka Co-operative Societies Rules, 1960, Rule 38(4)(b) states:

“when an owner of a property sold in auction makes an application within 30 days from the date of sale and deposits the arrears specified in the sale proclamation within the said period of 30 days, the Recovery Officer shall pass an order setting aside the sale. While doing so, the Recovery Officer shall refund the purchase money to the auction purchaser together with 5 per cent of the amount deposited by the person applying for setting aside the auction.”

Arguments

Appellant’s Submissions:

• The appellant argued that the 5% solatium was inadequate compensation.
• The appellant was deprived of the use of Rs. 81,20,000 from 21st July 2019.
• The appellant should receive interest on the deposited amount from the date of deposit until the date of refund.

4th Respondent’s Submissions:

• The 4th respondent contended that the 5% compensation was adequate as per the Rules.
• The 4th respondent argued that their liability to pay interest should only begin from 13th October 2022, when they received the funds from the 3rd respondent.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a dedicated section. However, the core issue before the court was:

• Whether the appellant was adequately compensated for the delay in refund of the auction amount, and whether the appellant is entitled to interest on the said amount.

Treatment of the Issue by the Court

Authorities

The Court did not explicitly rely on any specific case laws or books in its reasoning. However, it did consider the following legal provisions:

• Rule 38 of the Karnataka Co-operative Societies Rules, 1960: Specifically sub-rules 4(a) and 4(b), which deal with setting aside auction sales and refunding the purchase money.
• Article 226 of the Constitution of India: The High Court’s discretionary power to issue writs for equitable considerations.

Judgment

How each authority was viewed by the Court?

• Rule 38 of the Karnataka Co-operative Societies Rules, 1960: The Court acknowledged that the High Court had relied on this rule, but clarified that it did not directly apply to the case. The rule provided a basis for setting aside the auction and paying 5% compensation but was not the legal basis for the High Court’s decision.
• Article 226 of the Constitution of India: The Court recognized the High Court’s discretionary power under Article 226 to set aside the auction on equitable grounds. However, the Supreme Court modified the High Court’s order to ensure that the appellant was adequately compensated.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of fairness and equity. The Court recognized that the appellant was not at fault and had been deprived of the use of his money for an extended period. The Court emphasized that the auction was set aside not because of any illegality, but because the original borrowers had paid the dues. The Court aimed to provide just compensation, which included interest on the deposited amount.

The Court’s reasoning was based on the following points:

• The appellant was not at fault in the auction process.
• The appellant was deprived of the use of a substantial sum of money from 21st July 2019 until the refund.
• The High Court’s decision to set aside the auction was based on equitable considerations, not on any illegality in the auction process.
• The 5% compensation was not sufficient to cover the loss of interest on the deposited amount.

The Court stated:

“Therefore, there is no doubt that the appellant must be compensated as he was deprived of using the amount of Rs.81,20,000/ – from 21st July 2019 till the date of actual refund due to no fault on his part.”

“In our view, the appellant was entitled to receive interest on the said amount of Rs.81,20,000/ – at the rate of 6 per cent per annum from the date of deposit of the said amount till the date of refund.”

“Though there was nothing illegal about the auction, 4th respondent did not challenge the impugned orders. Therefore, the impugned judgments need modification in the peculiar facts and circumstances of the case for adequately compensating the appellant.”

Key Takeaways

• Auction purchasers are entitled to adequate compensation when an auction is set aside, especially when it is not due to their fault.
• A 5% compensation may not be considered adequate, especially if there is a significant delay in the refund of the deposited amount.
• Interest on the deposited amount may be awarded to the auction purchaser from the date of deposit until the date of refund.
• The liability to pay interest lies with the party at whose instance the auction was conducted.

Directions

The Supreme Court issued the following directions:

1. The High Court’s direction to pay 5% of Rs. 81,20,000 to the appellant was set aside.
2. The 4th respondent was directed to pay simple interest at 6% per annum on Rs. 81,20,000 to the appellant from 21st July 2019 until the actual refund date.
3. The entire interest amount must be paid within six weeks from the date of the judgment.

Development of Law

The ratio decidendi of this case is that an auction purchaser is entitled to interest on the deposited amount when the auction is set aside on equitable grounds, and the 5% compensation provided under the rules is inadequate. This case establishes that auction purchasers should be adequately compensated for the loss of use of their funds when an auction is set aside due to no fault of their own. This clarifies the position of law that the auction purchaser should be compensated from the date of deposit till the date of refund of the amount.

Conclusion

The Supreme Court’s judgment in Salil R. Uchil vs. Vishu Kumar & Ors. emphasizes the need for fair compensation to auction purchasers when sales are set aside due to equitable considerations. The Court held that a 5% compensation was inadequate and directed the 4th respondent to pay 6% simple interest from the date of deposit until the date of refund. This ruling ensures that auction purchasers are not unduly penalized when auctions are reversed due to reasons beyond their control.