Supreme Court Orders Return of Original Documents to Auction Purchaser, Except for Disputed Land: Tripower Enterprises vs. State Bank of India (2020)

Introduction

Date of the Judgment: 24 April 2020

Citation: (2020) INSC 285

Judges: A.M. Khanwilkar, J., Ajay Rastogi, J.

When a property is sold in a public auction by a bank to recover dues, who has the right to possess the original title documents? The Supreme Court of India addressed this question in a case where the auction purchaser sought the original documents from the Debts Recovery Tribunal (DRT), while the previous owner contested the validity of the mortgage. This case highlights the complexities that arise when a property sale is challenged and third-party rights are involved. The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Ajay Rastogi.

Case Background

M/s. Rukmini Mills Ltd. (the borrower) took a loan from State Bank of India (the Bank). Associated Trading Corporation Pvt. Ltd. (the guarantor) mortgaged its immovable property as security. The borrower defaulted, leading the Bank to declare the account a Non-Performing Asset (NPA). The Bank initiated proceedings before the DRT at Madurai in 2008 (O.A. No. 11/2008). The Bank also took symbolic possession of the secured assets on 15 October 2008, after issuing a notice on 13 May 2008. The guarantor challenged this notice in S.A. No. 225/2008, which was rejected by the DRT on 10 February 2011. The guarantor’s appeal was dismissed on 8 February 2013 for non-payment of the pre-deposit amount.

The Bank put the secured assets up for public auction to recover dues of ₹350.12 lakhs. M/s. Tripower Enterprises (Private) Limited (the appellant) was the highest bidder in the e-auction held on 28 February 2017 and received the sale certificate on 29 April 2017. Before the auction was finalized, the Bank applied to the DRT (I.A. No. 995/2017) for the return of original documents deposited with the DRT, as these documents needed to be handed over to the auction purchaser. The DRT rejected this application on 9 November 2018, stating that the validity of the mortgage was still under examination.

Timeline

Course of Proceedings

The DRT rejected the Bank’s application (I.A. No. 995/2017) for the return of original documents, stating that the validity of the mortgage was yet to be examined in the main proceedings (O.A. No. 11/2008). The DRT noted that the guarantor claimed the mortgage was created by incompetent persons and that the issue needed to be decided in the main case.

The Debts Recovery Appellate Tribunal (DRAT) at Chennai reversed the DRT’s decision, allowing the Bank’s application and directing the return of the original documents. The DRAT observed that the loan was availed long ago, and the bank had a right to recover the money. It also noted that the auction purchaser had spent a significant amount on the property. The DRAT clarified that it was not expressing any opinion on the legality of the mortgage, which was to be decided by the DRT.

The High Court of Judicature at Madras reversed the DRAT’s order and restored the DRT’s order, rejecting the Bank’s application. The High Court stated that since the core issue was the validity of the mortgage, it should be decided in the original application, and the documents should be retained by the DRT until then. The High Court directed the DRT to dispose of the main matter within four months.

Legal Framework

The case primarily involves the interpretation and application of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Specifically, Section 13(4) of the SARFAESI Act, which deals with the enforcement of security interest, is relevant. The Court also considered the Transfer of Property Act, 1882, in relation to the creation of mortgages.

The SARFAESI Act allows banks to recover their dues by enforcing security interests without intervention of the court. The DRT is a tribunal constituted under the Recovery of Debts and Bankruptcy Act, 1993, which has the power to oversee actions taken by banks under the SARFAESI Act.

The court also considered the principles of res judicata, which prevents the same issue from being litigated again, and the doctrine of caveat emptor, which implies that a buyer should be aware of the risks involved in a transaction.

Arguments

Appellant’s (Auction Purchaser) Submissions:

• The appellant, having purchased the property in a public auction and received the sale certificate, is legally entitled to the original title documents.
• The guarantor had unsuccessfully challenged the possession notice and the auction, and the contention about the invalidity of the mortgage had been consistently rejected.
• The guarantor had admitted the mortgage and offered to pay the dues, thus it should not be allowed to raise the same issue again.

Bank’s Submissions:

• The Bank supported the appellant’s stand, stating that it is obligated to hand over the original documents to the auction purchaser.
• The Bank had already initiated the process of auction before filing the application for the return of documents, and it was done in anticipation of the sale being concluded.

Guarantor’s Submissions:

• The guarantor argued that it had not taken any loan from the Bank and was not a party to the extensions of the mortgage.
• The equitable mortgage was not created by an authorized person of the guarantor.
• The DRT’s jurisdiction under the SARFAESI Act is limited to procedural irregularities and cannot decide the validity of the mortgage itself.
• The principle of res judicata does not apply to the DRT’s opinions, and the guarantor should not be prevented from raising objections about the validity of the mortgage in the ongoing proceedings.
• The guarantor relied on the principle of caveat emptor, stating that there is no warranty of title in a public auction.

Respondent No. 11’s (A.R. Sridharan) Submissions:

• Respondent No. 11 claimed ownership of land (1.80 acres) bearing Paimash No. 722/4, based on a decree in O.S. No. 186/1976.
• The sale certificate issued by the Bank included this land, which could not have been mortgaged by the guarantor.
• The mortgage and sale certificate should not include the property bearing Paimash No. 722/4.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the guarantor can be allowed to approbate and reprobate from its earlier stand of admitting the mortgage and offering to pay the dues.
2. Whether the auction purchaser is entitled to get the original title documents in respect of the properties purchased in public auction.
3. Whether the documents pertaining to land bearing Paimash No. 722/4 admeasuring 1.80 acres, which is subject to a decree in favour of respondent No. 11, can be handed over to the auction purchaser.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

The Court did not delve into the details of the authorities cited by the parties on the jurisdiction of the DRT and res judicata, as the facts of the case made it unnecessary. The Court focused on the specific circumstances of the case, particularly the guarantor’s admission of the mortgage and the prior decree in favour of Respondent No. 11.

What weighed in the mind of the Court?

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

• The guarantor’s admission of the mortgage and offer to pay the dues in previous proceedings, which estopped them from denying the validity of the mortgage.
• The fact that the auction sale had been concluded, and the Bank was obligated to hand over the documents to the auction purchaser.
• The need to protect the rights of the auction purchaser, who had legitimately acquired the property in a public auction.
• The existence of a prior decree in favour of Respondent No. 11, which could not be disregarded.

Logical Reasoning:

The Court did not consider any alternative interpretations, as the facts of the case were clear. The Court rejected the guarantor’s arguments based on the principle of res judicata and caveat emptor because of the specific facts of the case and the guarantor’s prior admissions.

The Supreme Court held that the High Court should not have entertained the writ petition filed by the guarantor, as the guarantor was trying to delay the auction sale by raising the same plea repeatedly. The Court directed that the original documents be returned to the auction purchaser, except for the documents related to the land subject to the prior decree.

The Court emphasized that the DRT would be free to pass appropriate directions regarding the documents, including those handed over to the appellant, in the pending O.A. No. 11/2008.

“The guarantor cannot be permitted to resile from the admission of its liability.”

“The inevitable effect of entertaining the stated plea of guarantor will entail encouraging vexatious plea and procrastination of the concluded auction sale by delaying handing over of title documents to the highest bidder.”

“The fact that other proceedings, including about the title in respect of land admeasuring 1.80 acres bearing Paimash No. 722/4 are pending between the parties, cannot be the basis to overlook the claim of the respondent No. 11 (A.R. Sridharan) until a Court of competent jurisdiction declares that the respondent No. 11 (A.R. Sridharan) had no subsisting right, title or interest in that property.”

Key Takeaways

• An auction purchaser in a public auction is generally entitled to receive the original title documents for the purchased property.
• A party cannot approbate and reprobate, meaning they cannot take contradictory positions in legal proceedings, especially after admitting liability.
• The principle of caveat emptor does not apply when the validity of the mortgage itself is in question and there is a prior decree affecting the property.
• Courts should be cautious in entertaining pleas that aim to delay or frustrate concluded auction sales.
• The rights of third parties, such as those with prior decrees, need to be protected in auction sales.

Directions

The Supreme Court partly allowed the appeal and modified the order of the DRAT. The Court directed that:

• The application filed by the Bank (I.A. No. 995/2017) is partly allowed.
• The original documents should be returned to the Bank, except those related to the land bearing Paimash No. 722/4 admeasuring 1.80 acres, which is subject to a prior decree in O.S. No. 186/1976.
• The DRT is free to pass appropriate directions regarding all the documents, including those handed over to the appellant, in the pending O.A. No. 11/2008.

Specific Amendments Analysis

There was no discussion about any specific amendment in the judgment.

Development of Law

The ratio decidendi of the case is that an auction purchaser is generally entitled to the original title documents, but this right is subject to the rights of third parties with prior decrees and the principle that a party cannot approbate and reprobate. The judgment clarifies that while the DRT has a supervisory role under the SARFAESI Act, it must also consider the rights of all parties involved, including auction purchasers and those with prior claims on the property.

Conclusion

The Supreme Court’s judgment in M/s. Tripower Enterprises (Private) Limited vs. State Bank of India & Ors. balances the rights of the auction purchaser with the need to protect prior claims on the property. The Court emphasized that while auction purchasers are generally entitled to the original documents, this right is not absolute and is subject to the rights of third parties with prior decrees. The judgment also underscores the importance of consistency in legal proceedings and prevents parties from taking contradictory positions. The Court’s decision ensures that the auction process is not unduly delayed while also protecting the legitimate rights of all parties involved.