Karnataka High Court
Saturn Realters Private Limited vs Edelweiss Asset Construction Company ... on 6 July, 2022
Author: S.G.Pandit
Bench: S.G.Pandit
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 6TH DAY OF JULY, 2022
BEFORE
THE HON'BLE MR.JUSTICE S.G.PANDIT
WRIT PETITION NO.2710/2022 (GM-RES)
BETWEEN:
SATURN REALTERS PRIVATE LIMITED
HAVING ITS REGISTERED OFFICE AT
SY.NO.NO.86, 87, 90, 91
SANDHYA TECHNO-1
OPP. SUNSHINE HOSPITAL
RAIDURG MAIN ROAD
HYDERABAD, TELANGANA
REP. BY ITS DIRECTOR AND
AUTHORIZED REPRESENTATIVE
MR. MURALIDHAR SARANALA.
...PETITIONER
(BY SRI G KRISHNAMURTHY, SR.COUNSEL A/W
SRI PALLAVA R, ADV.)
AND:
EDELWEISS ASSET CONSTRUCTION COMPANY LTD.,
EDELWEISS HOUSE, OFF CST ROAD
KALIAN, MUMBAI-400098
REP. BY ITS MANAGING DIRECTOR & CEO.
...RESPONDENT
(BY SRI DHYAN CHINNAPPA, SR.COUNSEL A/W SRI NIKHIL JOY , ADV.;
SRI. K.N.PHANEENDRA, SR.COUNSEL A/W SRI.K.BHARATH, ADV. FOR
IMPLEADING APPLICANT IN I.A.NO.3/2022; and SRI.UDAYA HOLLA,
SR.COUNSEL A/W SRI.NIKHILESH RAO, ADV. FOR IMPLEADING
APPLICANT IN I.A.NO.4/2022)
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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND
227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE
ENDORSEMENT DATED 25.01.2022 PASSED BY THE
RESPONDENT VIDE ANNEXURE-E AND PASS SUCH OTHER
APPROPRIATE ORDERS AS DEEMED PROPER AND DIRECT
RECONSIDERATION OF THE REPRESENTATION DATED
21.01.2022 VIDE ANNEXURE-D.
THIS PETITION COMING ON FOR FURTHER HEARING THIS
DAY, THE COURT MADE THE FOLLOWING:-
ORDER
The petitioner-auction purchaser in the auction conducted by the respondent-Edelweiss Asset Construction Company Limited (for short 'the Financial Institution') under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short "2002 Act") as well as Security Interest (Enforcement) Rules 2002 (for short "2002 Rules") is before this Court under Article 226 of the Constitution of India, praying for a writ of certiorari to quash the endorsement dated 25.01.2022 bearing No.EdelARC/3166/2021-22 (Annexure-E) wherein the petitioner was informed by the respondent to pay balance amount within the stipulated time, 3 failing which, it was informed that the respondent would be constrained to forfeit the part sale proceeds deposited with the respondent and cancel the auction sale in terms of the provisions of the 2002 Rules and for a writ of mandamus directing reconsideration of the representation dated 21.01.2022 vide Annexure-D.
2. Heard learned Senior counsel Sri.G.Krishna Murthy for Sri.Pallava R, learned counsel for the petitioner; Sri.Dhyan Chinnappa, learned Senior counsel for Sri.Nikhil Joy, learned counsel for respondent; Sri.K.N.Phaneendra, learned Senior Counsel for Sri.K.Bharath, learned counsel for impleading applicants in I.A.No.3/2022 and Sri.Udaya Holla, learned Senior counsel for Sri.Nikhilesh Rao, learned counsel for impleading applicants in I.A.No.4/2022. Perused the writ petition papers.
3. Learned Senior counsel Sri.G.Krishna Murthy submits that the petitioner is before this Court under Article 226 of the Constitution of India against the action of the respondent 4 in forfeiting part sale proceeds deposited with the respondent. Learned Senior counsel would submit that the respondent- Financial Institution brought the secured asset for sale to realize the amount due from Tulip Data Services Private Limited/applicant No.1 in I.A.No.3/2022. The petitioner was successful bidder in the sale held on 11.11.2021 and the petitioner deposited 25% of the bid amount on the same day. The petitioner had quoted price of Rs.135.01 crores and the sale was confirmed in favour of the petitioner on 12.11.2021. In terms of sale notification dated 11.11.2021, the petitioner was required to deposit the balance sale consideration amount within 15 days. Learned Senior counsel would submit that the petitioner sought extension of time for deposit of balance sale consideration amount. It is also submitted that Rule 9(4) permits extension of time up to 90 days and the petitioner was granted extension of time. Before the petitioner could deposit the balance sale consideration, the applicant No.1 in I.A.No.3/2022 approached the Debt Recovery Tribunal, New Delhi in TSA No.10/2021 challenging 5 the entire proceedings initiated under Section 13(2) of the 2002 Act. Therefore, it is submitted that the petitioner sought further time to deposit the balance sale consideration and also for the reason that it came to the knowledge of the petitioner that there was one other Civil litigation pending against the property in question. The respondent-Financial Institution issued Annexure-E dated 25.01.2022 informing the petitioner to pay the balance amount within the stipulated time, failing which, it would forfeit the part of sale proceeds deposited by the petitioner, by canceling the sale in terms of provisions of 2002 Act and Rules. Challenging the same, the petitioner is before this Court.
4. The respondent-Financial Institution by filing its statement of objections opposed the prayer of the petitioner and contended that as the petitioner has failed to deposit the balance sale consideration amount within the time prescribed under Rule 9 of 2002 Rules, the respondent-Financial Institution could forfeit 25% of the sale amount deposited by 6 the petitioner. Further, learned Senior Counsel for the petitioner submitted that the respondent-Financial Institution could forfeit the amount to an extent of loss suffered by the Financial Institution between the first sale and the next sale. Learned Senior Counsel would submit that the petitioner had deposited Rs.30.00 crores as directed by this Court in pursuance of the interim order dated 07.02.2022. Thereafter the petitioner is said to have deposited the entire sale consideration of Rs.135.01 crores by 31.03.2021 before the respondent-Financial Institution, which is not disputed by respondent.
5. On 20.04.2022, when the matter was taken up for hearing, learned Senior Counsel Sri.D.R.Ravishankar appeared for the petitioner, Sri.Dhyan Chinnappa, learned Senior Counsel appeared for respondent-Financial Institution and Sri.Arvind Kamath, learned Senior Counsel appeared for impleading applicants in I.A.No.3/2022. After hearing the learned Senior Counsels, this Court, by detailed order 7 permitted the respondent-Financial Institution to conduct fresh auction, with liberty to the petitioner to participate in the auction proceedings. The respondent-Financial Institution was directed not to insist for Earnest Money Deposit from the petitioner, since the petitioner had already deposited Rs.135.01 Crores with the respondent-Financial Institution. This Court observed that, if the petitioner is sole participant in the sale proceedings, the respondent is permitted to confirm the sale in favour of the petitioner for sale consideration of Rs.135.01 crores and if the sale is to be confirmed in favour of any other person, the respondent shall take leave of this Court before confirmation.
6. Thereafter, the respondent-Financial Institution conducted sale proceedings on 18.05.2022. The petitioner and applicant in I.A.No.4/2022 participated in the sale proceedings, where applicant in I.A.No.4/2022 succeeded in the sale proceedings having bid for Rs.138.10 crores. 8
7. In view of the fact that the respondent-Financial Institution has received more than the offer of the petitioner in respect of the property in question, the question of forfeiting the Earnest Money Deposit or recovering any loss from the petitioner would not arise.
8. Rule 9 of 2002 Rules would be relevant for the present case. Rule 9(3) requires the purchaser of immovable property to deposit 25% of the amount of sale price on the same day or not later than next working day, as the case may be, including earnest money deposit. Rule 9(4) states that the balance amount of purchase price payable shall be paid by the purchaser to the authorised 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, i.e., ninety days. Rule 9(5) makes it clear that in default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the 9 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.
9. In the instant case, the petitioner was given extension of time to pay the balance sale consideration upto 09.02.2022. Thereafter, by virtue of interim order passed by this Court on 07.02.2022, time got extended. Subsequently, as stated above by 31.03.2022, the petitioner had deposited the entire sale consideration of Rs.135.01 Crores before the respondent- Financial Institution.
10. The Division Bench of this Court in W.A.No.262 of 2020 (GM-DRT) dated 02.02.2021 (The Authorised Officer, Bank of Maharashtra V/S S.N.Mahadeva) while considering similar fact situation wherein purchaser of immovable property under 2002 Rules failed to deposit the balance sale consideration and the amount in deposit was adjusted to the appropriate account and intimated that the amount stood forfeited. The Division Bench considering Rules 8 and 9 of 10 2002 Rules at paragraph Nos.9, 10 and 11, it is held as follows:
9. The question is, whether, in every case the secured creditor has to forfeit the earnest money deposited, merely because of the use of the word 'shall' in Sub-rule (5) of Rule 9 of 2002 Rules. On a reading of the same, we find that the expression 'shall' has to be read not in a mandatory way, but is only an enabling provision, which is directory. It should be read as 'may' giving a discretion to the secured creditor to either forfeit or not to forfeit the earnest money deposit, keeping in mind the facts and circumstances of each case. In the event, the earnest money deposited is not forfeited, then the defaulting auction purchaser can be given an other opportunity to participate in the subsequent sale and if he turns out to be highest bidder, the earnest money already deposited by him can be adjusted towards the bid amount subsequently bid by the auction purchaser and thereafter, the provisions of Sub-Rules (2) to (4) of Rule 9 of 2002 Rules shall apply.
10. The object of reading the expression 'shall' as 'may' in Sub-rule (5) of Rule 9 of 2002 Rules is to give the auction purchaser one more opportunity to bid for the secured asset offered for sale and a free play to the secured creditor, so that ultimately the 11 secured creditor will be able to sell the secured asset and if circumstances are such, the auction purchaser, who was a defaulter, may ultimately clinch the deal in a subsequent sale, in which event, he must be given the benefit of earnest money that he has already deposited. The reason as to why we say so is, if discretion is given to the secured creditor not to forfeit the earnest money deposited and instead, give the defaulting purchaser another opportunity to bid for the secured asset, that would ensure that there is a bidder who would ultimately bid for the secured asset, as there are many occasions, when the secured asset would not attract any bidder at all. In such a case, any number of bids or sale notices put up by the secured creditor would be frustrated when there are ultimately no bidders or takers for the said secured assets. Under the circumstances, we feel that discretion should be given to the secured creditor not to forfeit the bid amount in the event there is default in payment of balance bid amount and instead, if the property is offered for sale subsequently, an opportunity must be given to the defaulting bidder to have an other opportunity to bid for the said secured asset and in the event, such a defaulting bidder happens to be the highest bidder, the benefit of the earnest money deposited earlier 12 must be given to such a bidder and adjusted accordingly.
11. We also find that the object of the Act and the Rules made thereunder are for recovery of outstanding debts by sale of the secured assets and bearing in mind the same, we do not think that the object and purpose of Sub-Rule (5) of Rule 9 is to punish the auction purchaser or to cause hardship to him, rather, the Rule must be read in such a manner that the secured creditor ultimately has the discretion to ensure that there is certain auction purchaser or bidder, who is interested in buying the secured asset, which would ultimately ensure recovery of outstanding debts from the borrowers. Thus the Sub-
rule (5) of Rule 9 must be given a purposeful and a practical interpretation rather than a literal or pedantic one. In this context, it is relevant to observe usually, use of the expression "may" is directory requirement and the expression "shall" would mean mandatory requirement. Normally, mandatory enactment must be obeyed or fulfilled exactly. But, it is sufficient that directory enactment be obeyed or fulfilled substantially. However, a directory provision must be distinguished from a discretionary power. A directory provision gives no discretion and has to be obeyed, but, failure to obey it does nor render in disobedience of it, a nullity. But, a discretionary 13 power would leave the donee of the power free to use or not to use it at his discretion. A mandatory provision could also be read as giving discretion to the authority to exercise power having regard to the object of the Act. Usually, use of expression "shall" would raise a presumption that the particular provision is imperative. However, this prima facie inference about the provisions being imperative may be rebutted by other considerations such as object and scope of the enactment and the consequences flowing from such construction. (Source: Justice G.P.Singh "Principles of Statutory Interpretation" 13th Edition) Thus, there are numerous instances where the word "shall" has been construed as merely directory. Rule 9(5) of the 2002 Rules is one such example. This would be so on ascertaining the real intention of the legislature by carefully understanding the object of the provision.
11. In the case on hand also, this Court taking note of the above decision permitted the respondent-Financial Institution to bring the property for sale once again by order dated 20.04.2022, permitting the petitioner to participate in the sale proceedings and the Financial Institution was directed not to insist for earnest money deposit since the entire sale amount 14 of Rs.135.01 Crores was with the respondent-Financial Institution. The sale has taken place in pursuance of the order of this court on 20.04.2022. The applicant in I.A.No.4 is the successful bidder for a sum of Rs.138.10 Crores as against petitioner's offer of Rs.137 Crores. Thus, the present offer of applicant in I.A.No.4 is more than the offer of the petitioner in previous sale. I am of the view that the Financial Institution has not suffered any loss and there is no reason for the respondent-Financial Institution to forfeit the amount deposited by the petitioner. However, the respondent- Financial Institution could recover the expenses incurred for conducting the subsequent sale from the petitioner. Therefore, the respondent-Financial Institution is directed to return the amount deposited by the petitioner after deducting the sale expenses from and out of Rs.135.01 Crores deposited by the petitioner.
12. Learned Senior counsel Shri K.N.Phaneendra, appearing for the applicant in I.A.No.3, i.e., borrower whose property is 15 brought to sale submits that the borrower had challenged the initiation of the recovery proceedings by issuing 13(2) notice before the DRT, Delhi in TSA No.10/2021, which was subsequently transferred to Jaipur Bench. Initially, the Tribunal had granted stay of the sale, which had taken place on 11.11.2021. The said order was challenged before the Delhi High Court by the Respondent-Financial Institution and the Delhi High Court by order dated 06.12.2021 stayed the order of the Tribunal dated 18.11.2021, subject to the result of the writ petition, which means the High Court permitted to proceed in the matter of sale of property, which had taken place on 11.11.2021 wherein the petitioner was the successful bidder.
13. The learned Senior counsel further submits that this Court by order dated 20.04.2022 permitted the respondent- Financial Institution to bring the property in question for auction, but before the sale could take place in pursuance of the order dated 20.04.2022, on 07.05.2022, the SA bearing TSA No.10 of 2021 was allowed on 07.05.2022 holding that 16 the Demand Notice dated 17.04.2014, suffers material illegality, it does not have date of declaration of account as NPA and details of amount as outstanding in the light of order of High Court of Gujarat, in the matter of PNB Vs. Mitthilanchal Industries Private Limited. The said order in TSA No.10 of 2021 was challenged before the Delhi High Court in W.P.(C) 7530/2022 and the Delhi High Court by order dated 13.05.2022 stayed the order of the DRT, Jaipur dated 07.05.2022. It is to be noticed that before sale of property in pursuance of this Court order, the order of Debts Recovery Tribunal was stayed.
14. The learned Senior counsel would contend that the respondent-Financial Institution has not followed Rule 9 of 2002 Rules and has not obtained valuation as required for sale. Thus, he submits that the sale, which has taken place in pursuance of the order dated 20.04.2022 is illegal and is in violation of Rules 8 and 9 of 2002 Rules.
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15. This Court permitted the second sale by order dated 20.04.2022 so as to enable the Financial Institution to know as to whether the respondent-Financial Institution would get offer more than the offer made by the petitioner The sale, which is permitted would be subject to Rules 8 and 9 of 2002 Rules. The respondent-Financial Institution has to follow all the procedures for bringing the property for sale. This Court permitted the sale of the secured assets in accordance with law. This Court would not go into the validity of the sale under Article 226 of the Constitution of India. If the applicant in I.A.No.3, the borrower is aggrieved by the procedure adopted by the respondent-Financial Institution in bringing the property for sale, it is always open for the applicant to challenge sale before the appropriate Authority, i.e., before the DRT to establish that sale is contrary to Rules 8 and 9 of 2002 Rules. But, however, the property which is sold in pursuance of the order dated 20.04.2022 would be subject to the final orders in pending W.P.(C)7530/2022 before the Delhi High Court.
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With the above, Writ Petition stands disposed of. All contentions of the impleading applicant, i.e., borrower are kept open.
The respondent-Financial Institution is permitted to confirm the sale in respect of applicant in I.A.No.4, subject to the result of W.P.(C)7530/2022 pending before High Court of Delhi and the proceedings before the DRT.
The respondent-Financial Institution is directed to repay the entire amount deposited by the petitioner after deducting sale expenses, within 15 days from the date of receipt of a copy of this order.
In view of disposal of the writ petition, pending I.As also stand disposed of.
Sd/-
JUDGE mpk/dh CT:bms