Auction Sale Conducted Over Non-Payment Of Loan By Borrower Gets Nullified Once Loan Was Repaid In Terms Of OTS: Calcutta HC

In a refund claim, the Calcutta High Court has directed the State Bank of India (SBI) to refund the entire bid amount of Rs.55,19,250 along with interest to the petitioner company that was successful as bidders in an e-auction held under the SARFAESI Act, 2002 by the bank, consequent upon the default in payment of the loan by a debtor.

The Bench of Justice Sabyasachi Bhattacharyya stated that the moment SBI accepted the proposal of One Time Settlement (OTS) of the borrower and the borrower paid the amount, which was received by the Bank, the automatic effect in law was that the auction sale which was being geared up to be conducted in favour of the petitioners got nullified.

“Since the genesis of the sale was the non-payment of the loan taken by the borrower Sancheti, the moment the loan was repaid in terms of the OTS, the sale automatically fell through, thereby leaving no option for the petitioners but to be satisfied with a refund of the money paid for the sale”, added the Bench.

The High Court stated it was the Bank that undertook the auction sale and confirmed the sale, who was to execute the Sale Certificate in favour of the purchaser, and Phoenix, being a third-party assignee of the Bank, did not acquire any right to unilaterally execute such Sale Certificate about the auction sale.

The Bench Highlighted that “the purported Sale Certificate issued on March 28, 2022, that too, in the teeth of the restraint order from issuing such Sale Certificate, by Phoenix alone was palpably dehors the law and irregular as well as illegal. Such Sale Certificate, thus, was void ab initio, being in contravention of a restraint order, and, on the grounds as indicated above, cannot be given effect to at all”.

Senior Advocate Siddhartha Mitra appeared for the Petitioner, whereas Senior Advocate Joy Saha appeared for the Respondent.

In the present case, the petitioner (Avlokan) participated in an auction sale held by SBI. After winning the auction, Avlokan paid the bid amount of Rs.55,19,250. However, the bank did not issue a Sale Certificate in its favour. The petitioner, then repeatedly asked the bank to either issue the Sale Certificate or refund their bid amount with interest. SBI initially took the stand that they were restrained from issuing the Sale Certificate due to an order passed by the Debt Recovery Tribunal (DRT), thus, the Bank stated that the matter was sub-judice before the DRT and shall be put up before the said Forum to seek appropriate direction. Later, SBI stated that they were in the process of assigning the loan account to Phoenix ARC Private Limited and asked Avlokan to take up the matter with Phoenix once the deed of assignment was executed. Thereafter, the petitioner filed a petition seeking a refund wherein it was initially ordered that the SBI was to refund the petitioner's amount plus interest, however, SBI appealed.

The allegation regarding suppression of the purported Sale Certificate dated March 28, 2022, issued by Phoenix, was considered, but, SBI, and not Phoenix, was directed to deposit with the Registrar.

After considering the submission, the Bench found that the SBI, even after declaring its inability to transfer the property, was now resiling from the position that they were bound to refund the amount.

The Bench thus observed that though a Sale Certificate was issued by Phoenix which was invalid as SBI was restrained from issuing it, and stated that the auction sale never materialized in substance.

The High Court noted that “the intention of the Bank to avoid its liability towards the present petitioners is clear from the said developments. In the order recording amicable settlement, the SBI had it recorded conveniently, to suit its purpose, that SA No.168 of 2018 was disposed of under the category of “amicable settlement”.

The High Court found that the respondent Bank had offered and sanctioned the One Time Settlement (OTS) to the borrower, which led to the amicable settlement and the letter was hurriedly issued by the Bank, after about one month from the order of the co-ordinate Bench, under which the Bank was under duress to refund the entire amount of consideration, along with interest, to the petitioners in the event the sale was set aside.

“The net effect of the entire transactions was that the Bank had assigned the loan of the borrower to Phoenix, in a transaction in which the present petitioners were not parties and, as such, were not bound by the same”, added the Court.

Therefore, the Bench stated that for all practical purposes, the Sale Certificate having not been issued in due process of law to the petitioners, the auction sale never went through or was finalized.

Accordingly, the petition was allowed by the High Court.

Cause Title: Avlokan Commosales Private Limited v. State Bank of India

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