Supreme Court Upholds Auction Sale: Deenadayal Nagari Sahakari Bank Ltd. vs. Munjaji (2022)

Date of the Judgment: 16 February 2022

Citation: 2022 INSC 144

Judges: M.R. Shah, J., B.V. Nagarathna, J.

Can a borrower challenge an auction sale of mortgaged property after failing to adhere to statutory procedures? The Supreme Court of India addressed this question in a recent judgment, overturning a High Court decision that had favored the borrower. The case revolves around a loan default, subsequent auction of mortgaged properties, and the borrower’s challenge to the sale based on alleged procedural lapses. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna, with Justice M.R. Shah authoring the opinion.

Case Background

Vaishnavi Hatcheries Company Limited, with respondent no. 1 as director, took loans from Deenadayal Nagari Sahakari Bank Ltd. and Vaidanath Nagari Sahakari Bank. Four properties (survey nos. 102, 440, 437 & 439) were mortgaged as security. Survey No. 439 was mortgaged with Vaidanath Bank, 437 with the appellant bank, and 440 & 102 jointly with both banks. In 2010, the borrower defaulted, leading to separate recovery proceedings by both banks. The appellant bank obtained a Recovery Certificate on 6.2.2010 under Section 101 of the Maharashtra Co-operative Societies Act, 1960 (MCS Act, 1960). The bank published auction proclamations in the ‘Sakal’ newspaper on 22.02.2010, 23.02.2010, and 24.02.2010. A further proclamation under Rule 107(11) of the Maharashtra Co-operative Societies Rules, 1961 (MCS Rules, 1961) was issued on 26.05.2010, giving 30 days for payment. The Deputy Joint Registrar fixed the upset price at Rs. 98,10,000 on 26.07.2010. The borrower challenged this upset price in a revision petition, which was later dismissed.

Timeline

Course of Proceedings

The borrower initially challenged the upset price fixed by the Deputy Joint Registrar but was unsuccessful. After the auction, the borrower filed a revision application before the Divisional Joint Registrar, which was also dismissed. The borrower then filed a writ petition before the High Court challenging the Divisional Joint Registrar’s order. The High Court initially dismissed the writ petitions challenging the Recovery Certificate. However, in the impugned judgment, the High Court allowed the writ petition challenging the auction proceedings, setting aside the auction sale and the Sale Certificate, directing the bank to refund the sale price to the auction purchaser with 10% interest.

Legal Framework

The judgment primarily revolves around the interpretation and application of the following provisions:

• Section 101 of the Maharashtra Co-operative Societies Act, 1960 (MCS Act, 1960): This section allows for the recovery of debts owed to cooperative societies. The bank initiated recovery proceedings under this section.
• Rule 107 of the Maharashtra Co-operative Societies Rules, 1961 (MCS Rules, 1961): This rule provides the procedure for the sale of immovable property in the recovery of debts. Key sub-rules are:
  • Rule 107(11)(e): Requires a proclamation of sale to be published thirty days before the sale date.
  • Rule 107(11)(f): Governs the process of sale by public auction, including the requirement for a fresh proclamation if the sale is adjourned for more than seven days, unless the defaulter waives it. It also specifies that the sale shall be held after the expiry of not less than thirty days calculated from the date on which notice of the proclamation was affixed in the office of the Recovery Officer.
  • Rule 107(11)(g) & (h): Mandates the auction purchaser to deposit 15% of the price immediately and the remainder 85% within fifteen days from the date of sale.
  • Rule 107(13): Allows the borrower to seek setting aside of the sale by depositing 5% of the purchase money within 30 days from the date of sale.
  • Rule 107(14): Allows for challenging the sale on the grounds of material irregularity, mistake, or fraud within 30 days of the sale, provided substantial injury is demonstrated. It also states that on the expiration of thirty days from the date of sale, if no application to have the sale set aside is made or if such application has been made and rejected, the [District Deputy Registrar] shall make an order confirming the sale.

Arguments

Appellant (Bank and Auction Purchaser) Arguments:

• The borrower did not deposit any amount towards the loan since 2010, nor did he deposit the 5% amount to set aside the sale as per Rule 107(13) of the MCS Rules, 1961.
• The High Court failed to appreciate that the borrower had lost in two earlier rounds of litigation challenging the recovery proceedings and the base price.
• The properties were jointly mortgaged and inseparable, and one of the banks (Vaidanath Bank) was not made a party before the High Court.
• The borrower, as a director, cannot challenge the auction when the company (borrower) has not done so.
• The borrower did not raise objections before the Recovery Officer as per Rule 107(14) of the MCS Rules, 1961, and no substantial injury was demonstrated.
• The High Court incorrectly held that there was no 30-day gap between the proclamation and sale, and that a fresh proclamation was required as the auction was adjourned due to a stay order obtained by the borrower.
• The auction purchaser deposited 85% within the stipulated time after receiving approval from the District Deputy Registrar as per the circular dated 23.07.2004.

Respondent (Borrower) Arguments:

• The auction sale was in contravention of Rules 107(11)(e), (f), (g) & (h) of the MCS Rules, 1961.
• No proclamation was made 30 days before the sale on 29.11.2010 as required by Rule 107(11)(e) of the MCS Rules, 1961.
• A fresh proclamation was required as the sale was postponed for more than seven days due to a stay order, as mandated by the second proviso to Rule 107(11)(f) of the MCS Rules, 1961.
• The property was sold at a very low price due to the absence of a fresh proclamation, and only related parties participated in the auction.
• The auction purchaser did not deposit the remaining 85% within 15 days from the date of sale as per Rules 107(11) (g) & (h) of the MCS Rules, 1961.
• Reliance was placed on Shilpa Shares and Securities vs. National Cooperative Bank Limited [(2007) 12 SCC 165] and Balram vs. Ilam Singh [(1996) 5 SCC 705] to argue that failure to deposit the amount within the stipulated time renders the auction sale a nullity.
• The bank did not act fairly and ensure the best price for the mortgaged property, as observed in Ram Kishun vs. State of Uttar Pradesh [(2012) 11 SCC 511] and J. Rajiv Subramaniyan vs. Pandiyas [(2014) 5 SCC 651].

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the Court were:

1. Whether the High Court was correct in setting aside the auction sale based on alleged non-compliance of Rule 107(11) of the MCS Rules, 1961.
2. Whether the borrower could challenge the auction sale without adhering to the procedure prescribed under Rule 107(13) and (14) of the MCS Rules, 1961.
3. Whether the auction sale was conducted in violation of the provisions of the MCS Rules, 1961, specifically Rules 107(11)(e), (f), (g), and (h).

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

What weighed in the mind of the Court?

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

• Procedural Compliance: The Court emphasized the importance of adhering to the statutory procedures outlined in the MCS Rules, 1961. It noted that the borrower failed to follow the prescribed procedures for challenging the sale, particularly under Rule 107(13) and (14).
• Borrower’s Conduct: The Court took a dim view of the borrower’s conduct, highlighting the repeated attempts to stall the recovery process without making any payments towards the outstanding loan. The Court noted that the borrower had initiated multiple legal proceedings without paying a single rupee.
• No Substantial Injury: The Court observed that the borrower failed to demonstrate any substantial injury due to the alleged irregularities in the auction process, as required by Rule 107(14) of the MCS Rules, 1961.
• Factual Accuracy: The Court corrected the factual inaccuracies in the High Court’s judgment, particularly regarding the dates of proclamation and the deposit of the remaining 85% of the sale amount.
• Interpretation of Rules: The Court clarified the interpretation of Rule 107(11)(f), holding that the requirement for a fresh proclamation does not apply when the sale is adjourned due to a stay order obtained by the borrower.
• Public Interest: The Court emphasized the need to protect public money and ensure the smooth recovery of debts owed to cooperative societies.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Supreme Court’s reasoning was influenced more by the factual aspects of the case (60%) than by legal considerations (40%). The borrower’s conduct, the procedural lapses on his part, and the factual inaccuracies in the High Court’s judgment played a significant role in the Court’s decision. While the Court did interpret and apply the relevant legal provisions, the factual context weighed more heavily in its reasoning.

Logical Reasoning

Key Takeaways

• Borrowers must strictly adhere to the procedures prescribed under the Maharashtra Co-operative Societies Rules, 1961, when challenging auction sales of mortgaged properties.
• Failure to apply to the Recovery Officer within the stipulated time and demonstrate substantial injury can be fatal to a challenge against an auction sale.
• A fresh proclamation is not required when the auction is adjourned due to a stay order obtained by the borrower.
• The Court will not entertain challenges that are merely attempts to stall recovery proceedings without any genuine legal basis.
• The courts prioritize the protection of public money and the smooth recovery of debts owed to cooperative societies.

Directions

The Supreme Court did not issue any specific directions other than quashing the High Court’s judgment and dismissing the borrower’s writ petition.

Development of Law

The ratio decidendi of this case is that a borrower cannot challenge an auction sale of mortgaged property if they have not followed the procedure laid down in Rule 107 of the MCS Rules, 1961, specifically Rules 107(13) and 107(14), and if they have failed to demonstrate substantial injury due to any alleged irregularity. The judgment clarifies that the requirement for a fresh proclamation under Rule 107(11)(f) does not apply when the sale is adjourned due to a stay order obtained by the borrower. This judgment reinforces the importance of procedural compliance and the need to protect public money in recovery proceedings. There is no change in the previous position of law, but rather a clarification and reaffirmation of existing legal principles.

Conclusion

The Supreme Court’s judgment in Deenadayal Nagari Sahakari Bank Ltd. vs. Munjaji sets aside the High Court’s order and upholds the auction sale, emphasizing the need for strict adherence to statutory procedures and discouraging frivolous attempts to stall recovery proceedings. The Court’s decision underscores the importance of procedural compliance and the protection of public money, providing a clear message to borrowers seeking to evade their financial obligations.