Sanctity is the reward of legality: Supreme Court voids an Ooty resort auction
Justices P.S. Narasimha and Alok Aradhe set aside a sale certificate issued to a firm that neither bid nor existed on the date of the auction.
A hill resort at Ooty has been the subject of litigation for well over a decade, and the Supreme Court has now ended it by holding that the auction through which it was sold never complied with the law. The bid was taken while a tribunal order restrained the authorised officer from proceeding at all; the sale was closed before the mandatory thirty days expired; the sale certificate went to a partnership firm that had neither submitted the bid nor existed on the date of the auction; and the auction record was never produced. Justices P.S. Narasimha and Alok Aradhe set the certificate aside, allowing the borrower's appeals and dismissing the purchaser's. The judgment was authored by Justice Alok Aradhe.
A 1991 loan, and a charge over The Fernhill
The borrower has developed and marketed resorts on a timeshare basis since 1987. In 1991 it took a loan of Rs 2.06 crore from the Industrial Finance Corporation of India and a term loan of Rs 3.24 crore from the Tourism Finance Corporation of India on a consortium basis, securing them by a joint equitable mortgage creating a first charge over its resort property known as The Fernhill at Ooty, in the Nilgiris.
On default, the two lenders sued before the Debts Recovery Tribunal at Delhi in June 2000 for Rs 8,87,36,938. While that was pending, the first lender issued a demand notice under Section 13(2) of the SARFAESI Act in October 2007 for Rs 17,71,78,482, and the borrower's representation under Section 13(3A) drew no response. In August 2009 the authorised officer issued a notice under Section 13(4) recording that symbolic possession had been taken and that physical possession would follow. The borrower's securitisation application to the Chennai tribunal produced an interim order restraining physical possession on condition of a deposit, which was raised on appeal to Rs 4 crore and duly paid.
In October 2009 the Delhi tribunal decreed the recovery suit, quantifying the liabilities with interest. The borrower settled the second lender's claim in full for Rs 6.03 crore under a one-time settlement. In March 2010 the Chennai tribunal partly allowed the borrower's application, set aside the move to take physical possession, and allowed the creditor to proceed from the stage of symbolic possession. Acting on that liberty, the creditor issued an auction notice on 25 March 2010, fixing a reserve price of Rs 20 crore and the auction for 28 April 2010.
Then came the order that decided this case. On 7 April 2010 the appellate tribunal directed the borrower to deposit Rs 1 crore by 9 April and, on that deposit, restrained the authorised officer “from in any way proceeding further” under the SARFAESI Act. The condition was met on 8 April, and the restraint became operative that day.
The question the Court chose to decide
Counsel had argued a range of issues — the power of an authorised officer to cancel a sale certificate, whether such a certificate requires registration, and the scope of the right of redemption. The Court set them aside in favour of one question going to the root: whether the auction process begun by the notice of 25 March 2010 and ending in the sale certificate of 16 September 2011 was conducted according to law.
It first set out the scheme. Before a sale the authorised officer must obtain a valuation from an approved valuer and fix the reserve price in consultation with the secured creditor; must serve thirty days' notice of sale on the borrower and, for a public auction or tender, publish a public notice in two leading newspapers setting out the terms and affix it on a conspicuous part of the property; no sale may take place before thirty days expire from publication or service; the sale is confirmed in favour of the highest bidder subject to the creditor's confirmation, with twenty-five per cent paid immediately and the balance within fifteen days; and only on confirmation and compliance is a certificate issued. The auction notice added its own conditions: the purchaser is the successful bidder himself, a partnership firm must be registered in India to be eligible, bidders must disclose their constitution, and inter se bidding is mandatory where there are several eligible bidders.
That procedure, the Court held, is mandatory. Where a statute requires a thing to be done in a particular manner it must be done in that manner or not at all, and other modes are forbidden. The principle applies with particular rigour to the SARFAESI Act, which hands a secured creditor the extraordinary power to take possession of and sell a borrower's property without going to court. The Act's constitutional validity was upheld precisely because that power is hedged by procedural safeguards protecting the borrower — the safeguards being, as the Court put it, the very condition upon which the power exists. The thirty days' notice in particular is meant to give the borrower a real and final opportunity to redeem the asset under Section 13(8), which then provided that if the dues with costs were tendered at any time before the date fixed for sale, the asset shall not be sold and no further step shall be taken.
Four things that went wrong
The first and gravest was the bid taken during the restraint. The appellate tribunal's order was of the widest amplitude, and receiving bids and earnest money under an auction notice is unmistakably a step in the process of sale, and therefore a step under the Act. A bid with earnest money was nonetheless received after the restraint took effect. An act done in violation of an order of a court or tribunal, the Court held, is not merely irregular but bereft of legal effect, and a party will not be permitted to retain the advantage secured by such defiance. That the creditor refrained from opening the bids cured nothing: soliciting and receiving the bid was itself the forbidden step. Nor could a later judgment in the creditor's favour retrospectively validate what was done while the restraint subsisted. A bid received in contravention of a subsisting restraint cannot form the foundation of a valid sale.
The second was the timing: the sale was concluded before the thirty-day period prescribed by Rule 9(1) had expired. The third went to identity — the certificate was issued to an entity that neither submitted the bid nor existed on the date of the auction. The fourth was the absence of any auction record, which was withheld from the court.
The cumulative effect, the Court held, was unmistakable: the sale violated not only the Rules but the terms and conditions of the auction notice, and no sanctity in law could attach to such a process.
Finality, and what earns it
The Court acknowledged its own repeated emphasis on the sanctity of auction sales and the caution against lightly setting aside confirmed sales, lest public confidence in them be eroded. But the principle of finality, it held, presupposes an auction conducted in accordance with law. The same line of authority recognises that a sale vitiated by material irregularity, fraud or non-compliance with mandatory statutory procedure does not attract that protection and may be set aside even after confirmation. “Sanctity is the reward of legality, not a substitute for it.” The decisions the purchaser relied on concerned auctions whose legality was not in doubt, and were therefore of no assistance.
Four further considerations fortified the conclusion. The borrower had paid the creditor's entire dues under the decree by February 2012, while the sale certificate remained unregistered and possession remained with it — and preserving exactly that opportunity to save the asset by tendering the dues was the object of Section 13(8) as it then stood. The allegation of collusion between borrower and creditor was devoid of substance, the settlement having been brought to the High Court's notice before it allowed the writ petitions to be withdrawn. The purchaser had accepted and encashed the refund of its consideration with interest, so its investment was restored within five months, while possession of the resort had at all times remained with the borrower, whose undertaking continues to depend on it. And the right to property, though no longer a fundamental right, remains a constitutional right under Article 300A, so that a person may be deprived of property only by authority of law — which a sale disregarding the statutory procedure is not.
Order
The High Court's common judgment of 23 August 2013 was quashed and set aside. The borrower's appeals were allowed and the purchaser's dismissed.
Because the auction sale was itself vitiated in law and no right had therefore accrued to the purchaser, the Court declined to examine the questions it had left open — the authorised officer's power to cancel a sale certificate unilaterally, the application of Section 21 of the General Clauses Act, 1897, whether the certificate required registration, and the precise point at which the right of redemption stood extinguished under Section 13(8) as it then stood. For the same reason it was not inclined to proceed with the contempt petitions. And since the purchaser's claim had failed in its entirety, the separate petition about the sanction of a scheme of amalgamation of the borrower with Thomas Cook (India) Limited no longer survived and was dismissed. There was no order as to costs.