SUPREME COURT HOLDS THAT UNILATERAL CANCELLATION OF AN AUCTION SALE WITHOUT PROVIDING NOTICE TO THE AUCTION PURCHASER IS UNLAWFUL

A Double Bench of the Hon’ble Supreme Court comprising of Justice Pankaj Mithal and Justice R. Mahadevan passed a Judgment dated 16-08-2024 in the matter of IDBI Bank Ltd. vs. Ramswaroop Daliya and Ors., Special Leave Petition. (C) Nos. 8159-8160 of 2023 and observed that the period for depositing the remaining sale consideration, as stipulated under the Rules, is not absolute and can be extended with the Parties’ written consent. Further, Rule 9(4)[i] Security Interest (Enforcement) Rules, 2002 (hereinafter, referred to as ‘the Rules’) only applies in cases where the Auction purchaser defaults in depositing the amount. It does not apply when there is no default or if the default, in this case, is on the part of the Auctioneer, such as the Appellant Bank.

FACTS:

1)  That the Appeal above was filed before the Apex Court by one, IDBI Bank Ltd. (Appellant) against one Ramswaroop Daliya, one Savitri Devi Daliya, Rajesh Narayan Somani and one Ramesh Chandra Jain (Respondents), who filed these two Appeals to challenge the High Court’s Judgment and Order dated 19.09.2022 in Writ Petition No. 3820 of 2020, “Ramswaroop Daliya and 3 Others vs. IDBI Bank Ltd.,” as well as the Order dated 29.11.2022 in Review Petition No. 1 of 2022, arising from the same Writ Petition.

2) The case revolves around an Auction conducted by IDBI Bank on 10.04.2018, for a property consisting of 2 guntas of land in Bogaram village, Telangana. Further, one Ramswaroop Daliya and three others participated in the e-Auction and emerged as the highest bidders, offering a total amount of ₹1.42 crore. They immediately deposited 25% of the bid amount (₹36 lakh) as required.

3) The sale was confirmed, and the Auction Purchasers were required to deposit the remaining balance of ₹1.06 crore within 15 days. However, several issues arose that prevented them from completing the payment on time. IDBI Bank, stated that the guarantor of the Auction Purchaser filed Writ Petition No. 12390 of 2018 in the High Court of Telangana, to challenge the e-Auction Notice dated 17.03.2018 and obtained a Stay Order on 18.04.2018. Additionally, on 08.03.2018, the Appellant Bank lodged a Complaint with the CBI, which led the Enforcement Directorate (ED) to take suo moto cognizance of the matter. These factors as per IDBI Bank made it difficult for the Bank to complete the Sale.

4) Subsequently, the ED issued an advisory to the Appellant Bank, instructing them not to release the original property documents and to keep them securely in the bank’s custody until further directions were provided by the ED.

5) Despite these complications, the Auction Purchasers were ready and willing to deposit the remaining amount. Nevertheless, the Bank cancelled the Auction results on 24.12.2019, without giving prior notice to the Purchasers. The Bank refunded the deposit via demand drafts, which the Auction Purchasers did not encash.

6) Feeling aggrieved, Ramswaroop Daliya and the other Purchasers filed a Writ Petition in the High Court, challenging the Bank’s unilateral cancellation of the Auction and requesting the issuance of the sale certificate upon payment of the balance amount. The High Court, in its Judgment dated 19.02.2022, ruled in favour of the Auction Purchasers, holding that IDBI Bank’s refusal to issue the sale certificate was unjustified, as the purchasers were not at fault for the delay in payment. The Court found that the Bank could not rely on Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, which deals with the default in payment by an Auction purchaser, as the delay was primarily caused by the Bank’s own actions and external factors.

HIGH COURT:

The High Court ruled that IDBI Bank was unjustified in withholding the sale certificate from Auction Purchasers who had already paid 25% of the bid amount. The Bank’s refusal was not due to any failure on the purchasers’ part to deposit the remaining balance but rather stemmed from external issues, such as a complaint to the CBI and an advisory from the ED, which the Court deemed invalid grounds for withholding the certificate.

The Court found that the purchasers were not at fault for any delays, which were primarily caused by the Bank’s refusal to accept payment and a stay Order that was procured by the guarantor. It emphasized that the mandatory 90-day period for depositing the balance amount is not absolute and can be extended with mutual consent. Additionally, the Bank’s unilateral cancellation of the Auction without notice violated principles of natural justice, rendering the action illegal. The Court concluded that the Bank’s conduct implied an extension of time for payment, given the purchasers’ continued willingness to comply.

SUPREME COURT:

Aggrieved by the High Court Order dated 19.09.2022, the Appellant filed SLP (C) 8159-8160 of 2023 before the Supreme Court. The Apex Court vide Order dated 16.10.2024 held as follows:

ISSUE:

Whether IDBI Bank was justified in unilaterally cancelling the confirmed Auction sale due to the Auction Purchasers’ failure to deposit the balance sale consideration within the stipulated time, as required under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002

OBSERVATIONS:

The Supreme Court observed that the period for depositing the balance sale consideration under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, is not absolute or rigid. The Court clarified that this period can be extended with the written consent of the parties involved, as also recognized in earlier decisions. In this case, the Auction Purchasers were ready and willing to pay the balance amount, but the Bank’s actions, including its refusal to accept the payment due to external factors, resulted in the delay. Since the purchasers were not at fault, the mandatory period to deposit the amount did not apply strictly, and there was an implied extension.

The Court found that the Auction Purchasers did not default in their obligation to pay the balance amount. Instead, IDBI Bank refused to accept the balance payment for reasons such as a complaint to the Central Bureau of Investigation (CBI) and an advisory from the Enforcement Directorate (ED). The Court held that these reasons were insufficient to justify withholding the sale certificate, particularly as there were no specific directions from the CBI or ED to stop the Auction process. Therefore, Rule 9(4), which would normally penalize a defaulting Auction purchaser, did not apply here because the delay was caused by the Bank’s refusal to accept the payment.

The Supreme Court emphasized that IDBI Bank’s unilateral cancellation of the Auction sale on December 24, 2019, without any prior notice or an opportunity for the Auction Purchasers to be heard, was a clear violation of the principles of natural justice. The Court held that any such cancellation should have been preceded by a proper notice to the Auction Purchasers, allowing them to present their case. The lack of notice rendered the Bank’s Actions illegal, reinforcing the Auction Purchasers’ right to seek relief.

The Supreme Court pointed out that IDBI Bank had issued the e-Auction notice despite being aware of the CBI Complaint and went ahead with the Auction process. The Court held that the Bank could not later use the CBI investigation or the ED advisory as a pretext to deny the issuance of the sale certificate. The Bank’s failure to disclose these issues at the time of the Auction and its subsequent refusal to accept the balance payment amounted to unjust conduct. As a result, the Bank was found responsible for the delay, and the cancellation of the Auction was deemed unjustified.

CONCLUSION:

Based on the aforementioned facts, the Supreme Court upheld the High Court’s ruling, concluding that IDBI Bank’s unilateral cancellation of the Auction was illegal and violated the principles of natural justice. The Auction Purchasers had consistently demonstrated their readiness to deposit the balance sale consideration, but the Bank’s refusal to accept the payment, due to external factors such as the CBI complaint and ED advisory, unjustly delayed the process. The Court clarified that Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, is not rigid and can be extended by mutual consent in writing, particularly when the delay is not caused by the purchaser. Since the Auction Purchasers were not at fault, the cancellation was unjustified. The Court directed IDBI Bank to issue the sale certificate and execute the sale deed, dismissing the Bank’s Appeals.

 

Sakshi Raghuvanshi

Senior Legal Associate

The Indian Lawyer

Sub-Rules (4) and (5) of Rule 9 of the Security Interest (Enforcement) Rules, 2002 are extracted below:

“(4) 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].

 

(5) 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.”