Supreme Court Upholds Auction Sale Over Prior Agreement: Vikram Kumar vs. State Bank of Hyderabad (2023)

Date of the Judgment: May 2, 2023
Citation: Civil Appeal Nos. 3152-3153 of 2023 (@ SLP (Civil) Nos. 5973-5974 of 2018)
Judges: M.R. Shah, J. and C.T. Ravikumar, J.
Can a prior agreement to sell a property override a subsequent auction conducted by a bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)? The Supreme Court of India recently addressed this question, ruling in favor of the auction purchaser. The core issue revolved around conflicting claims over a property, where one party held an agreement to sell, and another had successfully bid for the property in a bank auction. This judgment clarifies the rights of auction purchasers and the limitations of prior agreements in such cases. The bench comprised Justices M.R. Shah and C.T. Ravikumar, with the majority opinion authored by Justice M.R. Shah.

Case Background

The case originated from a loan taken by a builder (Respondent No. 3) from State Bank of Hyderabad (Respondent No. 2) for a housing project. When the builder defaulted on loan repayments, the bank initiated proceedings under Section 13 of the SARFAESI Act, 2002, attaching the builder’s properties. The builder challenged these measures at the Debt Recovery Tribunal (DRT), Hyderabad. During the DRT proceedings, the builder was given a chance to find buyers for the properties to repay the bank. The DRT allowed the bank to proceed with the sale, excluding flats identified by the builder, provided the remaining flats were sufficient to cover the dues. The builder, however, entered into a Memorandum of Understanding (MoU) on April 10, 2016, with Respondent No. 1 for the sale of Flat No. 6401 for ₹45 lakhs, which was followed by an agreement to sell on June 16, 2016, without informing the DRT or the bank. Subsequently, the bank issued a public notice on July 28, 2016, to auction the properties, including Flat No. 6401. The appellant, G. Vikram Kumar, participated in the e-auction on August 31, 2016, and was declared the successful bidder for Flat No. 6401, paying 25% of the bid amount. Respondent No. 1 then filed a writ petition in the High Court challenging the e-auction of Flat No. 6401, which was allowed, leading to the current appeal by the auction purchaser.

Timeline

Course of Proceedings

The borrower initially filed S.A. No. 253 of 2012 before the DRT, Hyderabad, challenging the bank’s actions under Section 13(4) of the SARFAESI Act. The DRT initially allowed the borrower to find buyers, but later permitted the bank to proceed with the sale, excluding specific flats. The borrower then entered into an agreement to sell Flat No. 6401 to Respondent No. 1 without informing the DRT or the bank. Subsequently, when the bank issued an auction notice, the borrower applied for a stay, which was rejected by the DRT on August 24, 2016. The DRT also declared the sale agreement with Respondent No. 1 void. After the auction, where the appellant was declared the successful bidder, Respondent No. 1 filed a writ petition in the High Court challenging the e-auction of Flat No. 6401. The High Court stayed the auction, subject to Respondent No. 1 paying the bank. The appellant was later impleaded and filed a counter-affidavit, arguing that the writ petition was not maintainable due to the availability of an alternative remedy under Section 17 of the SARFAESI Act. The High Court, however, allowed the writ petition, leading to the present appeal by the auction purchaser. The High Court also dismissed the review petition filed by the appellant.

Legal Framework

The core legal framework for this case is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Specifically, Section 13 of the SARFAESI Act deals with the enforcement of security interest by secured creditors. Section 13(4) allows the secured creditor to take possession of the secured assets if the borrower defaults. The relevant provisions are:

• Section 13(4) of the SARFAESI Act, 2002: This section empowers banks to take possession of secured assets when a borrower defaults on their loan. The bank in this case invoked this section to attach the properties of the borrower.
• Section 13(8) of the SARFAESI Act, 2002: This provision was argued by the respondent no. 1 to be applicable in his case. It states that if the dues are paid before the sale, the property should not be sold.
• Section 17 of the SARFAESI Act, 2002: This section provides an avenue for any person aggrieved by the measures taken under Section 13(4) to approach the Debt Recovery Tribunal (DRT).

The High Court’s decision was also influenced by its interpretation of Section 13(8) of the SARFAESI Act, which allows the borrower to redeem the secured asset by paying the dues before the sale. The Supreme Court, however, clarified the applicability of this provision in the context of the case.

Arguments

The appellant, represented by Shri A. Sirajudeen, argued that:

• The High Court erred in entertaining the writ petition against actions taken under Section 13(4) of the SARFAESI Act.
• Respondent No. 1, being an agreement to sell holder, had no right to challenge the e-auction.
• Respondent No. 1 had an alternative remedy under Section 17 of the SARFAESI Act.
• Respondent No. 1 suppressed the fact that the auction had already taken place when the interim relief was obtained.
• The DRT had already declared the sale agreement with Respondent No. 1 as void.
• The High Court erred in relying upon Section 13(8) of the SARFAESI Act.
• A sale agreement holder cannot seek redemption of a property under Section 91 of the Transfer of Property Act, 1882.
• The High Court has granted the decree for specific performance of the agreement to sale which is not permissible while exercising the powers under Article 226 of the Constitution of India.
• The High Court has materially erred in observing that the equity would be in favour of respondent no. 1.

Respondent No. 1, represented by Shri Buddy A. Ranganadhan, contended that:

• Section 13(8) of the SARFAESI Act applies to the case as he was willing to pay the entire sale consideration.
• The object of Section 13(8) is to save the property from auction if the dues are cleared.
• There was no concluded sale in favor of the appellant as only 25% of the auction amount was paid.
• He relied on decisions including Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610, Narandas Karsondas vs. S.A. Kamtam, (1977) 3 SCC 247, and B. Arvind Kumar vs. Govt. of India & Ors., (2007) 5 SCC 745 to support his argument that a sale is not concluded until full payment and sale deed execution.
• He also relied on Pal Alloys & Metal India Pvt. Ltd. & Ors. vs. Allahabad Bank & Ors., 2021 SCC OnLine P&H 2733 and M/s India Finlease Securities Ltd. vs. Prasad Indian Overseas Bank, 2012 SCC OnLine AP 205.
• Respondent No. 1 has subsequently died and his heirs are residing in the flat in question and have paid the entire sale consideration.

Submissions Table

Issues Framed by the Supreme Court

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

• Whether a writ petition under Article 226 of the Constitution of India is maintainable against the e-auction notice issued by the bank under Section 13(4) of the SARFAESI Act, given the availability of an alternative remedy under Section 17 of the SARFAESI Act.
• Whether an agreement to sell holder has the right to challenge an e-auction notice issued by the bank under Section 13(4) of the SARFAESI Act.
• Whether Section 13(8) of the SARFAESI Act is applicable in favor of a person who is only an agreement to sell holder.
• Whether the High Court was right in allowing the writ petition in favor of the agreement to sell holder.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeals, setting aside the High Court’s judgment. The Court held that the High Court should not have entertained the writ petition due to the availability of an alternative remedy under Section 17 of the SARFAESI Act. The Court also found that the agreement to sell between the borrower and Respondent No. 1 was void, as it was entered into without the permission of the DRT and the bank.

Treatment of Submissions

Treatment of Authorities

What weighed in the mind of the Court?

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

• The availability of an alternative remedy under Section 17 of the SARFAESI Act, which the High Court overlooked.
• The fact that the agreement to sell was entered into without the permission of the DRT or the bank, making it void.
• The principle that a party cannot benefit from its own wrong.
• The need to uphold the sanctity of the auction process under the SARFAESI Act.
• The fact that the writ petition was filed after the auction was completed.
• The Court was not inclined to grant any relief to the respondent no. 1 as he had entered into the agreement to sale with the borrower during the pendency of the proceedings before the DRT and without the permission of the DRT and the Bank.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

Conclusion

The Supreme Court’s judgment in Vikram Kumar vs. State Bank of Hyderabad (2023) provides clarity on the rights of auction purchasers under the SARFAESI Act. It establishes that:

• A writ petition under Article 226 of the Constitution of India is generally not maintainable against actions taken under Section 13(4) of the SARFAESI Act, as there is an alternative remedy available under Section 17.
• An agreement to sell holder does not have the right to challenge an e-auction notice issued by the bank under Section 13(4) of the SARFAESI Act, especially when the agreement was entered into without the permission of the DRT and the bank.
• Section 13(8) of the SARFAESI Act is primarily for the borrower who is willing to pay the entire debt, and it does not extend to an agreement to sell holder.

The judgment reinforces the legal framework of the SARFAESI Act and protects the interests of auction purchasers who acquire properties through a valid auction process. It also discourages parties from entering into agreements that circumvent the legal process. This case serves as a significant precedent in property disputes involving auction sales and prior agreements.