Supreme Court Upholds Auction Sale, Rejects Agreement Holder’s Claim in SARFAESI Case: G. Vikram Kumar vs. State Bank of Hyderabad (2 May 2023)

Introduction

Date of the Judgment: 2 May 2023

Citation: 2023 INSC 475

Judges: M.R. Shah, J., C.T. Ravikumar, J.

Can a person holding a mere agreement to sell, prevent a bank from auctioning a property under the SARFAESI Act? The Supreme Court of India recently addressed this question, clarifying the rights of an auction purchaser versus an agreement holder. This case revolves around a dispute over a flat that was subject to auction by a bank after the borrower defaulted on loan payments. The court had to determine if the High Court was right in allowing the agreement holder to claim the property over the successful auction purchaser. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice C.T. Ravikumar.

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 failed to repay the loan, the bank initiated proceedings under Section 13 of the SARFAESI Act, 2002, and attached the properties of the borrower. The borrower then filed a case before the Debt Recovery Tribunal (DRT), Hyderabad. The DRT initially allowed the borrower to find buyers for the properties to repay the bank. However, the borrower entered into an agreement to sell Flat No. 6401 with Respondent No. 1 (G. Vikram Kumar) without informing either the DRT or the bank. Subsequently, the bank issued a public notice for auctioning the properties, including Flat No. 6401. The appellant participated in the auction and was declared the successful bidder. The respondent no.1 filed a writ petition before the High Court challenging the auction notice, which was allowed by the High Court.

Timeline:

Course of Proceedings

The borrower initially approached the DRT against the bank’s actions under the SARFAESI Act. The DRT allowed the bank to proceed with the sale of the properties, excluding some flats to be identified by the borrower. However, the borrower entered into an agreement to sell Flat No. 6401 to Respondent No. 1 without the DRT’s or the bank’s consent. The DRT declared this agreement void. Subsequently, the High Court stayed the auction of Flat No. 6401 based on a writ petition filed by Respondent No. 1, who claimed rights based on the agreement to sell. The High Court allowed the writ petition and dismissed the review petition filed by the auction purchaser. The auction purchaser then appealed to the Supreme Court.

Legal Framework

The case primarily involves the interpretation of the following legal provisions:

• Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): This section deals with the enforcement of security interest by secured creditors, such as banks, when borrowers default on their loans. Specifically, Section 13(4) allows the bank to take possession of secured assets, and Section 13(8) provides that if the borrower tenders the dues before the sale, the sale should not take place.
• Section 17 of the SARFAESI Act: This section provides a remedy to any person aggrieved by the measures taken by the bank under Section 13(4) by way of appeal to the DRT.
• Section 54 of the Transfer of Property Act, 1882: This section defines “sale” as a transfer of ownership in exchange for a price, and states that a contract for sale does not, of itself, create any interest in or charge on such property.
• Section 91 of the Transfer of Property Act, 1882: This section lists the persons who may seek redemption of a mortgaged property.

The interplay of these provisions determines the rights of the parties involved, particularly the auction purchaser and the agreement to sell holder.

Arguments

Appellant’s Arguments (Auction Purchaser):

• The High Court should not have entertained the writ petition against the e-auction notice, as there is an alternative remedy under Section 17 of the SARFAESI Act.
• Respondent No. 1, being an agreement to sell holder, had no right or title in the property and could not challenge the e-auction.
• The DRT had already declared the sale agreement between the borrower and Respondent No. 1 as void.
• Respondent No. 1 suppressed material facts by not disclosing that the auction had already taken place when the writ petition was filed.
• Section 13(8) of the SARFAESI Act does not apply to an agreement to sell holder.
• A sale agreement does not create any interest or charge on a property under Section 54 of the Transfer of Property Act, 1882.
• The High Court effectively granted a decree for specific performance of the agreement to sell, which is not permissible under Article 226 of the Constitution of India.

Respondent’s Arguments (Agreement to Sell Holder):

• Section 13(8) of the SARFAESI Act is applicable, and the High Court did not err in entertaining the writ petition.
• Respondent No. 1 was ready to pay the entire sale consideration and thus should be allowed to redeem the property.
• At the time of the writ petition, the sale was not concluded in favor of the appellant as only 25% of the sale consideration was paid.
• The object of Section 13(8) is to save the property from auction if the dues are cleared.
• The respondent and his family are residing in the flat and would suffer if the appeal is allowed.

Innovation of Arguments: The appellant’s argument that an agreement to sell holder cannot seek redemption under Section 91 of the Transfer of Property Act, 1882, was a novel approach, highlighting the difference between a sale and an agreement to sell. The respondent’s reliance on Section 13(8) of the SARFAESI Act for an agreement holder was also a novel argument.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the High Court was right in entertaining the writ petition under Article 226 of the Constitution of India challenging the e-auction notice issued by the Bank under Section 13(4) of the SARFAESI Act.
2. Whether the High Court was right in holding that the respondent no.1, being an agreement to sale holder, could invoke Section 13(8) of the SARFAESI Act.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

On the point of the nature of sale under SARFAESI Act:

• Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610 – Supreme Court of India

The Court referred to this case to clarify that a sale is complete only when the full sale consideration is paid and the sale deed is executed.

On the point of rights of agreement to sell holder:

• Narandas Karsondas vs. S.A. Kamtam, (1977) 3 SCC 247 – Supreme Court of India

The Court cited this case to emphasize that an agreement to sell does not create any interest or charge on the property.

• B. Arvind Kumar vs. Govt. of India & Ors., (2007) 5 SCC 745 – Supreme Court of India

The Court referred to this case to reiterate that a sale agreement does not create any interest in the property.

On the point of applicability of Section 13(8) of the SARFAESI Act:

• Pal Alloys & Metal India Pvt. Ltd. & Ors. vs. Allahabad Bank & Ors., 2021 SCC OnLine P&H 2733 – Punjab and Haryana High Court
• M/s India Finlease Securities Ltd. vs. Prasad Indian Overseas Bank, 2012 SCC OnLine AP 205 – Andhra Pradesh High Court

The Court referred to these cases to discuss the applicability of Section 13(8) of the SARFAESI Act.

Legal Provisions Considered:

• Section 13 of the SARFAESI Act: The Court examined the provisions related to the enforcement of security interest by secured creditors.
• Section 17 of the SARFAESI Act: The Court considered the alternative remedy available to the aggrieved party.
• Section 54 of the Transfer of Property Act, 1882: The Court analyzed the definition of “sale” and the effect of an agreement to sell.
• Section 91 of the Transfer of Property Act, 1882: The Court discussed the persons who may seek redemption of a mortgaged property.

Judgment

How each authority was viewed by the Court?

• The Supreme Court relied on Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610* to emphasize that a sale is complete only when the full sale consideration is paid and the sale deed is executed.
• The Supreme Court cited Narandas Karsondas vs. S.A. Kamtam, (1977) 3 SCC 247* and B. Arvind Kumar vs. Govt. of India & Ors., (2007) 5 SCC 745* to reiterate that an agreement to sell does not create any interest or charge on the property.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced 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 respondent no.1 was merely an agreement to sell holder, and not the owner of the property.
• The DRT had already declared the sale agreement between the borrower and respondent no.1 as void.
• The respondent no.1 had entered into the agreement during the pendency of the DRT proceedings and without the consent of the DRT or the bank.
• The respondent no.1 suppressed the fact that the auction had already taken place when the writ petition was filed.
• The court’s view that Section 13(8) of the SARFAESI Act is primarily intended for the borrower, and not for a third party like the agreement holder.

Fact:Law Ratio:

The court’s reasoning was more focused on the legal aspects of the case, such as the interpretation of the SARFAESI Act and the Transfer of Property Act, rather than the specific factual circumstances.

Logical Reasoning:

The Supreme Court rejected the interpretation that Section 13(8) of the SARFAESI Act could be invoked by an agreement to sell holder, emphasizing that the provision is primarily intended for the borrower. The court also rejected the argument that the High Court could grant relief under Article 226 of the Constitution of India, when an alternative remedy was available under Section 17 of the SARFAESI Act.

The court’s decision was based on the interpretation of legal provisions, the facts of the case, and the conduct of the parties. The court noted that the respondent no.1 had entered into the agreement to sell during the pendency of proceedings before the DRT and without the consent of the DRT or the bank. The court also noted that the respondent no.1 had suppressed the fact that the auction had already taken place when the writ petition was filed.

The court emphasized that the High Court had not clearly stated what relief it had granted to the respondent no.1, except to allow the writ petition. The court also noted that the High Court had not considered the fact that the DRT had already declared the sale agreement between the borrower and respondent no.1 as void. The court held that the High Court’s decision was unsustainable and set it aside.

The court also emphasized that the respondent no.1 and his heirs cannot be permitted to get the benefit of their own wrong and cannot be permitted to get the benefit of a void transaction.

The Supreme Court quoted the following from the judgment:

• “…the High Court ought not to have entertained the writ petition under Article 226 of the Constitution of India in which the e-auction notice was under challenge.”
• “Even otherwise it is very debatable whether Section 13(8) of the SARFAESI Act shall be applicable in favour of a person who is only an agreement to sale holder…”
• “Therefore, respondent no.1 and/or his heirs cannot be permitted to get the benefit of his own wrong and cannot be permitted to get the benefit of a void transaction.”

There were no dissenting opinions in this case. The judgment was delivered by a two-judge bench.

Key Takeaways

• An agreement to sell does not create any interest or charge on a property.
• An agreement to sell holder cannot challenge an auction notice under the SARFAESI Act.
• Section 13(8) of the SARFAESI Act is primarily intended for the borrower, not for third parties like agreement holders.
• A writ petition under Article 226 of the Constitution of India should not be entertained if an alternative remedy is available under the SARFAESI Act.
• Suppression of material facts can be detrimental to a party’s case.
• The DRT’s orders have to be followed and cannot be circumvented by filing a writ petition.

Directions

The Supreme Court directed the following:

• The appellant (auction purchaser) shall pay the remaining amount of the auction sale consideration with 9% interest from the date of the auction within four weeks.
• The bank shall issue the sale certificate in favor of the appellant.
• The amount deposited by the respondent no.1/his heirs shall be returned with 9% interest from the date of deposit within four weeks.
• The heirs of the original respondent no.1 are granted three months to vacate the flat and hand over possession to the appellant.

Specific Amendments Analysis

There were no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of the case is that an agreement to sell holder does not have the right to challenge an auction notice under the SARFAESI Act, and cannot invoke Section 13(8) of the SARFAESI Act. The Supreme Court clarified that Section 13(8) is primarily intended for the borrower and not for third parties. This judgment reinforces the principle that an agreement to sell does not create any interest or charge on a property. The judgment also reiterated that the High Court should not entertain a writ petition under Article 226 of the Constitution of India when an alternative remedy is available under Section 17 of the SARFAESI Act. This case clarifies the position of law regarding the rights of an agreement to sell holder in the context of SARFAESI proceedings.

Conclusion

The Supreme Court allowed the appeals filed by the auction purchaser, setting aside the High Court’s judgment. The court held that an agreement to sell holder cannot challenge an auction under the SARFAESI Act and cannot invoke Section 13(8). The court emphasized the availability of alternative remedies under the SARFAESI Act and the principle that an agreement to sell does not create any interest in the property. The court directed the auction purchaser to pay the remaining amount and the bank to issue the sale certificate, while also directing the refund of the amount deposited by the agreement holder along with interest.