Supreme Court Upholds Auction, Settles Contempt in SARFAESI Act Case: Celir LLP vs. Sumati Prasad Bafna & Ors. (2024) INSC 978 (13 December 2024)

Date of the Judgment: 13 December 2024
Citation: (2024) INSC 978
Judges: J.B. Pardiwala, J., Manoj Misra, J.
Can a borrower bypass the legal process and prevent a successful auction purchaser from taking possession of a property? The Supreme Court of India, in a recent judgment, addressed this critical question arising from a dispute under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). The Court clarified the obligations of borrowers and subsequent transferees in such cases, emphasizing the sanctity of court orders and the established legal procedures. This case highlights the importance of adhering to the rule of law and the consequences of attempting to circumvent legal processes.

Case Background

The case revolves around a loan default by Mr. Sumati Prasad Bafna (Original Borrower) who had availed credit facilities from Union Bank of India (Bank). The Bank sanctioned a Lease Rental Discounting (LRD) credit facility of ₹100 crore on July 3, 2017, and an additional ₹6.77 crore on January 2, 2020. A simple mortgage was created on a property in Thane, Maharashtra (Secured Asset) as security.

When the Original Borrower defaulted, the Bank declared the account as a Non-Performing Asset (NPA) on March 31, 2021, and issued a demand notice under Section 13(2) of the SARFAESI Act on June 7, 2021. Subsequently, the Bank took symbolic possession of the Secured Asset on February 4, 2022, under Section 13(4) of the SARFAESI Act.

The Bank then initiated auction proceedings, but the first eight attempts failed. Finally, a ninth auction was conducted on June 30, 2023, where Celir LLP (Successful Auction Purchaser) emerged as the highest bidder with a bid of ₹105.05 crore.

However, before the sale could be completed, the Original Borrower sought to redeem the mortgage by offering to pay the outstanding dues. The High Court of Judicature at Bombay allowed the redemption, leading to the present dispute.

Timeline

Course of Proceedings

The Original Borrower, aggrieved by the Bank’s actions, filed a Securitization Application (S.A. No. 46 of 2022) before the Debt Recovery Tribunal (DRT). While this application was pending, the Bank proceeded with the auction. The Borrower also filed applications before the DRT seeking to amend its pleadings to challenge the 9th auction and for a stay of the auction.

After the auction, the Borrower filed an application before the DRT seeking to redeem the mortgage. While the DRT reserved its orders on this application, the Borrower filed a writ petition before the High Court of Judicature at Bombay challenging the Bank’s actions and seeking permission to redeem the mortgage. The High Court allowed the Borrower to redeem the mortgage, which was challenged by the Successful Auction Purchaser before the Supreme Court.

Legal Framework

The judgment primarily deals with the interpretation and application of the following legal provisions:

• Section 13(2) of the SARFAESI Act: This section allows secured creditors to issue a demand notice to the borrower, requiring repayment of the secured debt.
  “Where any borrower makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of the notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).”
• Section 13(4) of the SARFAESI Act: This section empowers secured creditors to take possession of the secured assets if the borrower fails to comply with the demand notice.
  “In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;”
• Section 13(8) of the SARFAESI Act: This section, as amended in 2016, specifies the borrower’s right to redeem the secured asset.
  “Where the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.”
• Rule 8 of the Security Interest (Enforcement) Rules, 2002: This rule outlines the procedure for the sale of immovable secured assets.
• Rule 9 of the Security Interest (Enforcement) Rules, 2002: This rule specifies the procedure for the sale of immovable secured assets.
• Section 52 of the Transfer of Property Act, 1882: This section deals with the doctrine of lis pendens, which prevents the transfer of property during the pendency of a suit.
  “During the pendency in any Court having authority within the limits of India excluding the State of Jammu and Kashmir or established beyond such limits by the Central Government of any suit or proceeding which is not collusive and in which any right to immovable property is directly and specifically in question, the property cannot be transferred or otherwise dealt with by any party to the suit or proceeding so as to affect the rights of any other party thereto under any decree or order which may be made therein, except under the authority of the Court and on such terms as it may impose.”

The Court also considered the Bombay Amendment to Section 52 of the Transfer of Property Act, which requires registration of a notice of lis pendens for the doctrine to apply in Maharashtra.

Arguments

Submissions of the Successful Auction Purchaser (Celir LLP):

• The auction was valid, and the petitioner had paid the full amount, entitling them to possession of the Secured Asset.
• The Borrower and Subsequent Transferee had acted in bad faith to undermine the Supreme Court’s decision.
• The Borrower’s challenge to the auction was an abuse of process, as it was not raised in earlier proceedings.
• The 30-day notice period was not required for subsequent auctions.

Submissions of the Borrower (Mr. Sumati Prasad Bafna):

• The Supreme Court did not decide the validity of the 9th auction, leaving it to the DRT.
• The auction was subject to the outcome of the DRT proceedings as per the auction terms.
• The auction was based on symbolic possession, and the physical possession was never the subject matter of the appeals.
• The transfer to the Subsequent Transferee was done in compliance with the High Court’s order.
• The 30-day notice period was mandatory for the auction, and the sale was illegal due to non-compliance.
• The Borrower’s right of redemption survives due to the illegality of the auction.

Submissions of the Subsequent Transferee (Greenscape IT Park LLP):

• It was a bona fide third-party purchaser without notice of any defects in the title.
• The doctrine of lis pendens did not apply due to the absence of registration as required by the Maharashtra amendment to Section 52 of the Transfer of Property Act.
• The Bank had relinquished its charge over the property, and therefore, the Bank had no authority to transfer any interest in the Secured Asset to the petitioner.
• The Subsequent Transferee had to institute a suit to protect its right and prevent its dispossession without due process.
• The auction was bad in law as the Bank has violated mandatory statutory requirements for the auction process, more particularly the mandatory 30-days period.

Submissions of the Bank (Union Bank of India):

• The Supreme Court had upheld the auction and directed the issuance of the sale certificate.
• The Bank took steps to comply with the Supreme Court’s decision.
• The Borrower and Subsequent Transferee have prevented the implementation of the Supreme Court’s directions.

Submissions by Parties

Issues Framed by the Supreme Court

1. Whether any act of contempt could be said to have been committed by the respondents, and whether they were duty-bound to cancel the Release Deed and hand over the physical possession and original title deeds of the Secured Asset to the petitioner?
2. Whether the proceedings arising out of S.A. No. 46 of 2022 could have continued after the Supreme Court’s judgment, and whether the petitioner acquired clear title to the property by virtue of the Sale Certificate?
3. Whether the transfer of the Secured Asset in favor of the Subsequent Transferee was hit by lis pendens, and whether the absence of registration under the Maharashtra amendment to Section 52 of the TPA renders lis pendens inapplicable?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court held that the Borrower and the Subsequent Transferee had committed contempt of court by attempting to circumvent the Supreme Court’s decision in the Main Appeals. The Court noted that their actions were a deliberate attempt to frustrate the implementation of the judgment.

However, considering their belated willingness to comply, the Court provided one last opportunity to the Borrower and the Subsequent Transferee to abide by the judgment and comply with the directions issued in the present contempt petition.

The Supreme Court also clarified that the doctrine of lis pendens applied to the transfer of the Secured Asset, despite the lack of registration of notice of pendency.

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

How each authority was viewed by the Court?

The Supreme Court relied on the authorities to come to its conclusion.

• Henderson v. Henderson [1843] 3 Hare 999*: The Court used this principle to highlight that parties should bring all their claims in one litigation, which the Borrower failed to do.
• Johnson v. Gore Wood & Co [2002] 2 AC 1*: The Court used this case to emphasize the need for finality in litigation and to prevent abuse of process.
• Virgin Atlantic Airways Ltd. v. Zodiac Seats UK Ltd. [2014] AC 160*: The Court relied on this case to reiterate the public interest in the finality of litigation.
• State of U.P. v. Nawab Hussain (1997) 2 SCC 806*: The Court used this case to apply the principle of res judicata and constructive res judicata.
• Devilal Modi v. Sales Tax Officer, Ratlam & Ors. AIR 1965 SC 1150*: The Court used this case to support the application of constructive res judicata in writ proceedings.
• Shankara Coop. Housing Society Ltd. v. M. Prabhakar (2011) 5 SCC 607*: The Court relied on this case to emphasize that grounds available but not raised in earlier proceedings cannot be raised later.
• Bellamy v. Sabine (157) 1 De G&J 566*: The Court used this case to explain the rationale of the principle underlying lis pendens.
• Jayaram Mudaliar v. Ayyaswami AIR 1973 SC 569*: The Court relied on this case to explain the doctrine of lis pendens and the court’s control over the subject matter.
• Sanjay Verma v. Manik Roy (2006) 13 SCC 608*: The Court used this case to highlight that lis pendens is based on public policy, and no claim of good faith can exempt a party from its application.
• Guruswamy Nadar v. P. Lakshmi Ammal (2008) 5 SCC 796*: The Court used this case to reiterate that lis pendens applies regardless of whether a subsequent purchaser acted in good faith.
• Chander Bhan (D) through Lr. Sher Singh v. Mukhtiar Singh & Ors. 2024 INSC 377*: The Court relied on this case to highlight that the defence of bona fide purchaser is not applicable when a transaction is hit by lis pendens.
• M/s Siddamsetty Infra Projects Pvt. Ltd. v. Katta Sujatha Reddy & Ors. 2024 INSC 861*: The Court used this case to emphasize that lis pendens applies from the date of institution of proceedings.
• B. Arvind Kumar v. Govt of India & Ors. (2007) 5 SCC 745*: The Court relied on this case to explain that a confirmed sale becomes absoluteand vests title in the purchaser.
• LICA (P) Ltd. v. Official Liquidator (1996) 85 Comp Cas 788 (SC)*: The Court used this case to state that courts should interfere in auctions only when there is fraud or inadequate pricing.
• Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. & Ors (2008) 9 SCC 299*: The Court relied on this case to hold that objections to a confirmed sale should not be allowed, except in cases of fraud.
• Ram Kishun & Ors. v. State of Uttar Pradesh & Ors. (2012) 11 SCC 511*: The Court used this case to hold that confirmed sales cannot be set aside unless there is a fundamental procedural error or fraud.
• PHR Invent Educational Society v. UCO Bank (2024) 6 SCC 579*: The Court relied on this case to reiterate that a confirmed auction sale can only be interfered with in cases of fraud or collusion.
• V.S. Palanivel v. P. Sriram 2024 INSC 659*: The Court used this case to emphasize that courts should refrain from setting aside confirmed auctions unless there are serious flaws like fraud or collusion.
• Janak Raj v. Gurdilal Singh & Ors. AIR 1967 SC 608*: The Court relied on this case to hold that even if a decree pursuant to which auction was previously conducted was later set-aside, the successful auction purchaser’s rights will remain unaffected.
• Ashok Paper Kamgar Union v. Dharam Godha and Ors. (2003) 11 SCC 1*: The Court used this case to define ‘wilful disobedience’ as a deliberate action done with evil intent.
• Murray & Co. v. Ashok Kr. Newatia & Anr. (2000) 2 SCC 367*: The Court relied on this case to emphasize the purpose of contempt jurisdiction to uphold the dignity of the courts.
• Pushpaben & Anr. v. Narandas Badiani & Anr. (1979) 2 SCC 394*: The Court used this case to hold that contempt jurisdiction is to be exercised sparingly to protect the administration of justice.
• Reliance Petrochemicals Ltd. v. Proprietors of Indian Express Newspapers, Bombay Pvt. Ltd. & Ors. (1988) 4 SCC 592*: The Court relied on this case to state that the judicial process must remain unimpaired and judicial decisions should not be circumvented.
• Rita Markandey v. Surjit Singh Arora (1996) 6 SCC 14*: The Court used this case to hold that a party can be held liable for contempt if the court is induced to pass an order based on false representation.
• Patel Rajnikant Dhulabhai & Anr. v. Patel Chandrakant Dhulabhai & Ors. (2008) 14 SCC 561*: The Court relied on this case to explain the conditions for civil contempt, including wilful disobedience.
• Jhareshwar Prasad Paul v. Tarak Nath Ganguly (2002) 5 SCC 352*: The Court used this case to hold that if an order is ambiguous, the court should direct parties to seek clarification.
• Vodafone Idea Cellular Ltd. v. Ajay Kumar Agarwal (2022) 6 SCC 496*: The Court relied on this case to explain the Doctrine of Election, stating that once a party has elected to choose remedy under one forum, again the same cause of action cannot be challenged before another forum.
• Joint Action Committee of Air Line Pilots’ Assn. of India (ALPAI) & Ors. v. DGCA (2011) 5 SCC 435*: The Court used this case to explain the doctrine of election and that one cannot approbate and reprobate at the same time.
• Baranagore Jute Factory Plc. Mazdoor v. Baranagore Jute Factory Plc. AIR ONLINE 2017 SC 410*: The Court relied on this case to hold that the court has the power to take restitutive measures to rectify things done in violation of its orders.
• State Bank of India & Ors. v. Dr. Vijay Mallya 2022 SCC Online SC 826*: The Court used this case to hold that the court may issue directions to nullify any advantage secured through contumacious conduct.

Directions Issued by the Supreme Court

The Supreme Court issued the following directions:

1. The Borrower and the Subsequent Transferee were directed to cancel the Release Deed and the Assignment Agreement executed between them.
2. The Borrower and the Subsequent Transferee were directed to hand over the physical possession of the Secured Asset to the Successful Auction Purchaser.
3. The Borrower and the Subsequent Transferee were directed to hand over the original title deeds of the Secured Asset to the Successful Auction Purchaser.
4. The Borrower and the Subsequent Transferee were directed to pay costs of ₹1,00,000/- to the Successful Auction Purchaser.
5. The Bank was directed to issue the sale certificate to the Successful Auction Purchaser.
6. The Supreme Court clarified that the DRT proceedings were rendered infructuous by the Supreme Court’s earlier judgment.

Flowchart of the Case

Conclusion

The Supreme Court’s judgment in the case of Celir LLP vs. Sumati Prasad Bafna & Ors. reinforces the sanctity of court orders and the established legal procedures under the SARFAESI Act. The Court emphasized that borrowers and subsequent transferees cannot circumvent legal processes to frustrate the rights of successful auction purchasers. The judgment also clarifies the application of the doctrine of lis pendens and its implications on property transfers during ongoing litigation. This case serves as a reminder that the rule of law must be upheld, and attempts to undermine judicial decisions will not be tolerated.

The Court’s decision underscores the importance of adhering to the established procedures under the SARFAESI Act and respecting the finality of court orders. It also highlights the consequences of attempting to bypass legal processes and the protection afforded to successful auction purchasers who follow due process.