TaxTMI 
TaxTMI 
2024 (8) TMI 388
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....llowing the sale of a mortgaged apartment at below the approved reserve price in an auction. For the reasons set out by us in this judgement, the orders of the DRT and the DRAT deserve to be quashed, with a direction to conduct the auction afresh in accordance with law, as declared in this judgement. The fundamental fallacy in them is that they have treated an unsecured creditor as a secured creditor and that too with priority over the secured creditors (beneficiaries of a mortgage over the secured asset). Factual Matrix: 3. In a nutshell, the following core facts are relevant to adjudicate the petition: a) The Petitioner, Asset Reconstruction Company (India) Ltd. ("ARCIL"), is the beneficiary of a mortgage over Flat No. 61, 6th Floor, Basant Apartment, Navrang Basant Cooperative Society, 101, Cuffe Parade, Backbay Reclamation, Colaba, Mumbai 400 005 ("Secured Asset"); b) The mortgage had been created on 15th May, 1998; by way of deposit of title deeds by Respondent Nos. 4 and 5; Mr. Kirit Karia and Ms. Nirupama Karia (collectively, the "Karias"); and the promoters of Respondent No. 3, Eastern Overseas Ltd. ("EOL"); to secure borrowings by EOL from a consort....
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....es until refund of the security deposit; k) On 3rd September, 2002, the DRT passed an order recording an explicit finding that the mortgagee had superior rights. In the same order, the DRT ruled that the Secured Asset may be sold either after evicting SCB, or by leaving it to the purchaser of the Secured Asset to evict SCB. SCB was directed to pay its arrears of license fees. The latter option (of selling the Secured Asset leaving it to the purchaser to evict SCB) was pursued for sale of the Secured Asset; l) SCB filed a suit against the Karias for recovery of the security deposit, being Suit No.1925 of 2003 ("SCB Recovery Suit"), and the same is pending in this High Court; m)On 6th February, 2004, the terms and conditions were set by the DRT Receiver for an auction of the Secured Asset on an as-is-whereis basis, including a term that the auction may not be at a price lower than a reserve price to be fixed; n) A public notice for the auction was given on 17th February, 2004, and the bidders were all informed about the LLA with SCB; o) Based on an independent valuation report dated 8th March, 2004, the DRT, on the same date, fixed the res....
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.... February 2005. After the filing of the petition, the debt of the IOB-led consortium eventually came to be assigned to the Petitioner and the petition came to be amended, replacing IOB with ARCIL on 22nd March, 2012; and v) On 28th March, 2005, a status quo order was passed by this Court. On 26th September, 2005, rule was issued and the status quo has continued since then. Core Issue and Approach: 4. We are conscious of our jurisdiction being that of a writ court, and have accordingly examined the material on record from the perspective of whether due process and the foundational elements of law have been complied with. We are faced with considering the rights of a mortgagee (Petitioner), the rights of a licensee (SCB) and those claiming derived benefits from such rights of the licensee (Purported Acquirers). The Karias did not participate in the proceedings. Counsels who have appeared before us for the other parties, suggest that the Karias are absconding, but as will be seen, that need not detain us from considering and disposing of this writ petition. 5. In our opinion, the DRT Order and the DRAT Order (collectively, "Impugned Orders") are perverse and are mani....
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....rgue, IOB (and therefore the Petitioner) is estopped from raising any dispute over the validity of the auction price, which had been approved by not only the DRT but also the DRAT. Mr. Balsara would further emphasise that the terms and conditions for the auction had been finalized by the officers of IOB, and therefore, there has been a complete acquiescence to the position the Petitioner finds itself in. As regards the deep discount of the auction price to the reserve price, Mr. Balsara would assert that the valuation had not factored in the effect of SCB being in occupation of the Secured Asset and therefore the reserve price of Rs.1.17 Crores was merely an indicative price for market value between a willing buyer and a willing seller without regard to the problems posed by SCB's rights under the LLA. 9. Therefore, Mr.Balsara would argue, the effective price offered by the Purported Acquirers should be considered as Rs. 1.23 Crores (the sum of Rs.33 lakhs bid in the auction being enhanced by the amount of Rs.80 lakhs or more payable to SCB). In conclusion, Mr.Balsara would argue that the DRT and the DRAT have exercised judicial discretion in a non-arbitrary manner to confirm th....
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....material on record and to the pleadings and contentions of the parties. The bid by the Purported Acquirers being below the reserve price, is adequate reason to set aside the outcome in the auction. However, we have examined the material on record to deal with the argument that despite the yawning gap between the reserve price and the auction price, the auction outcome was fair, considering that the Impugned Orders have sought to reconcile the competing interests of the Petitioner and of SCB, and thereby justified the bid of the Purported Acquirers. 13. In a nutshell, SCB is a creditor of the Karias and may have a cause of action to recover its dues from the Karias, for which it has instituted the SCB Recovery Suit, which would be eventually adjudicated. Should SCB succeed, the decree therein would have to be executed against the Karias. 14. The issue at hand is not whether SCB may have a legitimate right to recovery of the security deposit under its LLA which was admittedly entered into not only after the creation of the mortgage in favour of the Petitioner, but also after the Original Application was filed. Instead, the issue at hand is whether SCB has any right over the Sec....
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.... being sold for a value far lower than even the reserve price, which in itself, is a ground for interference by reason of the sale being in direct conflict with a core condition applicable to the auction; e) Under Section 65-A of the ToP Act, no lease of a mortgaged property may be made for a period exceeding three years, and no clause for renewal may be contracted. The agreement with SCB is a mere leave and license agreement and not even a lease, and it purports to contain a perpetual license pending repayment of security deposit with 36% interest - provisions that must necessarily yield to the mortgage being enforced; f) Despite a licensee being a position inferior to a lessee, and despite even a lessee not having any right to retain possession beyond three years in such property, the Impugned Orders effectively endorse SCB as having a superior right - only because of the foundational error of treating SCB's rights as a "charge" or "encumbrance", when it did not even have a contractual right to possession, being a recipient of a bare license to use the Secured Asset; g) Worse, the manner in which the LLA was executed and SCB entered upon the premises, d....
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.... LLA was evidently created well after the presentation of the Original Application before the DRT. The DRT ought to have dealt with this factual position, and ruled on the same as a matter of law. The DRT did recognise that the rights of the secured creditors were superior and yet adopted a stance that some other proceedings would be necessary to evict SCB, and thereby ruled that SCB had a charge. Therefore, the DRT justified the approval of the Purported Acquirers' bid amount of Rs. 33 lakhs, in the teeth of the reserve price of Rs. 1.17 crores, treating the amount purportedly payable to SCB as being added to the bid amount. 16. To put it in a nutshell, SCB, the unsecured creditor was now, by virtue of the Impugned Orders converted into a secured creditor, and worse, in preference to the consortium of banks led by IOB, the secured creditors, whose interest is now owned by the Petitioner. Even if we were to assume for the sake of argument that the LLA created any sort of "charge" in favour of SCB, it would make no difference for the simple reason that the LLA executed with SCB was way after the mortgage created in favour of IOB (now assigned to the Petitioner) and even after the....
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....at the heart of this writ petition is the question of whether (as ruled by the DRT and DRAT) the conflict between the rights of a licensee under the LLA and the rights of a mortgagee can be resolved by giving primacy to the unsecured licensee, making the secured mortgagee, subservient to the unsecured creditor. Sumikin Bussan is of no assistance in resolving this conflict of rights in a manner that places the unsecured licensee above the secured mortgagee. 21. In any case, the LLA was nothing but a mere bare license to use the mortgaged asset as a residence. Even a bare perusal of the LLA would show that under Clause 22(b) of the LLA, it is the Karias who are in "in legal possession and full charge and control of" the Secured Asset at all times. It is an explicit provision in the LLA that the LLA was "a mere license" and SCB shall at no time be deemed to have "exclusive possession" of the Secured Asset. 22. Clause 15 of the LLA also explicitly provided that neither SCB nor any person claiming through SCB would be entitled to put up any claim of tenancy, sub-tenancy or any other adverse right or title in the Secured Asset. This clause would bring the Purported Acquirers within....
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.... and the right of the tenant is fully protected notwithstanding anything contrary contained in any other law or contract. This protection is however not available against the mortgagee who seeks to enforce his right under the SARFAESI Act against the principal borrower who had mortgaged the property in question by duly and validly executing the memorandum of mortgage in favour of the mortgagee. The Court further held that section 65-A of the Transfer of Property Act clearly mandates that the duration of lease to be executed by the mortgagor cannot exceed 3 years. The Court therefore, concluded in paragraph 6 as follows: "Manifestly the said unregistered lease was created for the alleged unlimited period through unregistered lease deed in complete contravention of section 65-A of the Transfer of Property Act as per the said provision of section 65-A, the lessee can enjoy the protection if the lease is created by the mortgagor in conformity with the mandate of requirements laid down in section 65-A of Transfer of Property Act and not otherwise. Neither the mortgagor nor the lessee can defeat the right of mortgagee and no lessee can claim any protection unless his tenancy is ....
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....t they believed would need to be paid to SCB for SCB to give up possession. Equitable Considerations do not arise: 25. The submission by the Purported Acquirers and by SCB, that SCB became a party to the LLA without notice of the mortgage does not inspire confidence of a degree that could alter our view that the Impugned Orders deserve to be set aside. It is a matter of record that the LLA was executed after the proceedings pursuant to the Original Application were underway. It is also a matter of record that on 13th September 2000, the housing society informed SCB about the mortgage over the Secured Asset, insisting that permission from IOB should be obtained. By this time, SCB obtained knowledge of the mortgage or at least that of a purported mortgage. Worse, the Karias initiated litigation in the Co-operative Court constituted under the Maharashtra Co-operative Societies Act, 1960, without making the mortgagee a party, to obtain an interim order granting SCB entry into the premises. 26. Even at this stage, SCB, itself being a commercial bank, and therefore, fully conversant with the law on security interests, incredibly, chose to avail of the benefit of access to the Se....
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....to have applied their minds to the core issue of whether a bid below the reserve price could be justified by resort to treating SCB as enjoying a charge with a right to get the value ascribed to the Secured Asset. In effect, both forums ended up granting primacy to an unsecured licensee over the secured mortgagee, by highlighting that some separate eviction proceedings would have to be undertaken, instead of ruling upon the law and applying to the facts, which would have rightly declared the right of a licensee to be inferior to the right of a mortgagee, leaving it to SCB to prosecute recovery against the Karias in the SCB Recovery Suit, rather than enabling recovery against the Secured Asset. 30. The vital nature of the element of the reserve price in auctions in security enforcement is well summarised by a Division Bench of this Court in Goldie Sud vs. Punjab National Bank & Ors. [2011(2) Mh.L.J. 944] in the following words: "8. In the present case, the terms and conditions of sale provided that the property would not be sold a t a price less than the reserve price. There was, therefore, in this case a clear indication by the first respondent that it would not agree t....