Supreme Court Upholds Auction Sale: IDBI Bank vs. Ramswaroop Daliya (2024) INSC 780

Introduction

Date of the Judgment: 16 October 2024

Citation: 2024 INSC 780

Judges: Justice Pankaj Mithal and Justice R. Mahadevan

Can a bank cancel an auction sale if the highest bidder fails to deposit the balance amount within the stipulated time, even if the delay is due to the bank’s own actions? The Supreme Court of India recently addressed this question in a case where the bank refused to accept the balance payment from the auction purchaser, leading to a cancellation of the sale. The court had to determine whether the bank’s actions were justified under the Security Interest (Enforcement) Rules, 2002.

This judgment was delivered by a two-judge bench comprising Justice Pankaj Mithal and Justice R. Mahadevan. Justice Pankaj Mithal authored the judgment.

Case Background

The case revolves around the e-auction of a property located in Telangana. The respondents, Ramswaroop Daliya and others, were the highest bidders for the property, offering ₹1,42,50,000. They deposited 25% of the bid amount (₹36,00,000) on the day of the auction, April 10, 2018. The auction was confirmed, but the sale certificate was not issued, and the sale deed was not executed because the respondents could not deposit the balance amount within 15 days. The IDBI Bank refused to accept the balance amount for various reasons, and ultimately, on December 24, 2019, the bank cancelled the auction and refunded the deposited amount. The respondents then filed a writ petition challenging the cancellation and seeking the issuance of the sale certificate.

Timeline:

Course of Proceedings

The respondents challenged the bank’s cancellation of the auction in the High Court. The High Court allowed the writ petition, holding that the bank was not justified in withholding the sale certificate. The court noted that the respondents were always ready and willing to pay the sale consideration and that the bank’s refusal to issue the sale certificate was not due to the respondents’ failure to deposit the balance amount within 90 days as stipulated under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002. The High Court also dismissed the review petition filed by the bank. The bank then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of Rule 9(4) and Rule 9(5) of the Security Interest (Enforcement) Rules, 2002. These rules govern the payment of the balance amount by the auction purchaser and the consequences of default.

• Rule 9(4) of the Security Interest (Enforcement) Rules, 2002: “The balance amount of purchase price payable shall be paid by the purchaser to the authorized officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period [as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months].” This rule specifies the time limit for the purchaser to pay the balance amount and allows for an extension of this period if agreed upon in writing.
• Rule 9(5) of the Security Interest (Enforcement) Rules, 2002: “In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited [to the secured creditor] and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.” This rule outlines the consequences of failing to pay the balance amount within the stipulated time, including forfeiture of the deposit and resale of the property.

Arguments

Arguments of the Appellant (IDBI Bank):

• The bank argued that the respondents failed to deposit the balance sale consideration within the mandatory period of 90 days as per Rule 9(4) of the Security Interest (Enforcement) Rules, 2002.
• The bank contended that the respondents repeatedly sought extensions without depositing the amount.
• The bank also cited the complaint to the CBI and the advisory from the Enforcement Directorate (ED) as reasons for not releasing the title deeds.
• The bank argued that the statutory period prescribed under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 cannot be extended, even under Article 142 of the Constitution of India, relying on the case of Union Bank of India v. Rajat Infrastructure Private Limited and Others [ (2023) 10 SCC 232].

Arguments of the Respondents (Auction Purchasers):

• The respondents argued that they were always ready and willing to pay the balance amount.
• They contended that the delay in payment was due to the bank’s refusal to accept the balance amount, citing the stay order obtained by the guarantor and the CBI complaint.
• The respondents submitted that they never insisted on the release of the property documents and were willing to collect them after clearance from the CBI and ED.
• The respondents highlighted that the bank had issued the e-auction notice after making the complaint to the CBI, without disclosing this fact in the advertisement.
• The respondents pointed out that the advisory from the ED was issued after the 15-day period for payment had expired.

The respondents argued that the time for deposit of the balance amount is not sacrosanct and may be extended if there is a written agreement between the parties, relying on the cases of Varimadugu Obi Reddy v. Sreenivasulu and Ors. [(2023) 2 SCC 168] and General Manager, Sri Siddeshwara Cooperative Bank Ltd. and Anr. v. Ikbal and Ors. [(2013) 10 SCC 83].

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether there was any default on the part of the respondents in depositing the balance amount within the time prescribed pursuant to the auction sale dated 10.04.2018, so as to attract Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 and allow the appellant-Bank to cancel the auction which had already been confirmed.

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:

• Mohinder Singh Gill & Anr. v. Chief Election Commissioner and Ors. [(1978) 1 SCC 405]: The Supreme Court relied on this case to emphasize that the validity of an order must be judged based on the reasoning contained in the order itself and cannot be supplemented by a counter affidavit.
• Varimadugu Obi Reddy v. Sreenivasulu and Ors. [(2023) 2 SCC 168]: This case was cited to support the view that the time stipulated in Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 is not sacrosanct and can be extended by agreement of the parties.
• General Manager, Sri Siddeshwara Cooperative Bank Ltd. and Anr. v. Ikbal and Ors. [(2013) 10 SCC 83]: This case was cited to further support that the time for deposit stipulated in Rule 9(4) is not absolute and may be extended by written agreement.
• Union Bank of India v. Rajat Infrastructure Private Limited and Others [(2023) 10 SCC 232]: The Court distinguished this case, stating that it does not apply as the court is not extending the time period but interpreting the existing rule to mean that there must be a default by the purchaser for Rule 9(4) to apply.
• Rule 9(4) of the Security Interest (Enforcement) Rules, 2002: The court interpreted this rule to mean that the time for deposit is not absolute and may be extended with written agreement.
• Rule 9(5) of the Security Interest (Enforcement) Rules, 2002: The court interpreted this rule to mean that it applies only when there is a default by the purchaser.

Judgment

The Supreme Court held that the High Court was correct in directing the bank to issue the sale certificate. The court found that the respondents were not at fault for the delay in depositing the balance amount. The bank’s refusal to accept the payment was due to its own actions, including the CBI complaint and the ED advisory. The court also noted that the bank had not disclosed the CBI complaint when issuing the e-auction notice.

How each authority was viewed by the Court?

• Mohinder Singh Gill & Anr. v. Chief Election Commissioner and Ors. [(1978) 1 SCC 405]: The Court used this case to emphasize that the validity of an order must be judged based on the reasoning contained in the order itself and cannot be supplemented by a counter affidavit.
• Varimadugu Obi Reddy v. Sreenivasulu and Ors. [(2023) 2 SCC 168] and General Manager, Sri Siddeshwara Cooperative Bank Ltd. and Anr. v. Ikbal and Ors. [(2013) 10 SCC 83]: The Court followed these cases to support the view that the time stipulated in Rule 9(4) is not sacrosanct and can be extended by agreement of the parties.
• Union Bank of India v. Rajat Infrastructure Private Limited and Others [(2023) 10 SCC 232]: The Court distinguished this case, stating that it does not apply as the court is not extending the time period but interpreting the existing rule to mean that there must be a default by the purchaser for Rule 9(4) to apply.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the delay in depositing the balance amount was not attributable to the auction purchasers but to the actions of the IDBI Bank itself. The Court emphasized that the respondents were always ready and willing to pay the balance amount and that the bank’s refusal to accept the payment was unjustified. The Court also noted that the bank had not disclosed the CBI complaint when issuing the e-auction notice, which was a significant factor in the Court’s decision. The Court also considered that the time for deposit of the balance amount was not sacrosanct and could be extended with the agreement of the parties.

Fact:Law Ratio

Logical Reasoning:

The Court considered the literal interpretation of Rule 9(4) and Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, and held that the time stipulated therein is not sacrosanct and can be extended. The Court noted that the bank had not acted fairly and had unilaterally cancelled the auction without giving any notice or opportunity of hearing to the respondents. The Court also considered the fact that the bank had not disclosed the CBI complaint when issuing the e-auction notice.

The Supreme Court quoted from the judgment: “The respondents, on the other hand, never insisted for the release or the handing over of the property documents rather submitted that they would not create any third-party interest in the property auctioned and that the original documents of the property would be collected by them, subsequently on the consent and clearance from the CBI and ED.”

The Supreme Court also stated: “The communication dated 24.12.2019, by which the appellant-Bank took a decision to cancel the auction sale and to return the amount deposited by the respondents, is completely silent as regards the default, if any, committed by the respondents in depositing the balance auction amount as per the mandate of Rule 9(4) of the Rules.”

The Supreme Court further stated: “The silence on part of the appellant -Bank in either immediately revoking the sale confirmation or refusing to extend the time, impliedly amounted to extension of time in writing with consent.”

Key Takeaways

• The time limit for depositing the balance amount in an auction sale under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 is not absolute and can be extended by written agreement between the parties.
• An auction sale cannot be cancelled if the delay in payment is attributable to the actions of the secured creditor (bank) and not the auction purchaser.
• Secured creditors must act fairly and transparently in auction proceedings and cannot withhold information that may affect the auction process.
• Unilateral cancellation of an auction sale without notice or opportunity of hearing to the auction purchaser is a violation of the principles of natural justice and is illegal.
• This judgment reinforces the principle that the rules of natural justice must be followed even in commercial transactions.

Directions

The Supreme Court directed the IDBI Bank to issue the sale certificate and register the sale deed in favor of the respondents after getting the balance auction amount deposited within a period of four weeks.

Development of Law

The ratio decidendi of this case is that the time limit for depositing the balance amount in an auction sale under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 is not absolute and can be extended by written agreement between the parties. The judgment clarifies that the provisions of Rule 9(4) and Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 will only come into play when there is a default on the part of the auction purchaser and will not apply where the default lies with the auctioneer. This decision reinforces the principle that the rules of natural justice must be followed even in commercial transactions.

Conclusion

The Supreme Court dismissed the appeals filed by IDBI Bank, upholding the High Court’s decision to direct the bank to issue the sale certificate to the auction purchasers. The Court emphasized that the delay in payment was not attributable to the purchasers but to the bank’s own actions. This judgment reinforces the principle that the rules of natural justice must be followed even in commercial transactions and that the time limit for payment can be extended by written agreement.