Karnataka High Court
Tulip Data Services Pvt Ltd vs Saturn Realters Private Limited on 19 September, 2022
Author: Alok Aradhe
Bench: Alok Aradhe
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 19TH DAY OF SEPTEMBER, 2022
PRESENT
THE HON'BLE MR. ALOK ARADHE
ACTING CHIEF JUSTICE
AND
THE HON'BLE MR. JUSTICE S.VISHWAJITH SHETTY
W.A.No.635 OF 2022 (GM-RES)
C/W
W.A.NO.724 OF 2022 (GM-RES)
IN W.A.No.635 OF 2022:
BETWEEN:
EDELWEISS ASSET RECONSTRUCTION
COMPANY LIMITED
(ACTING IN ITS CAPACITY AS
A TRUSTEE OF EARC TRUST SC 244)
REGISTERED OFFICE AT EDELWEISS
HOUSE, OFF CST ROAD, KALINA
MUMBAI - 400 098
REPRESENTED BY ITS
AUTHORIZED REPRESENTATIVE
MS. DOLLY BHARTI
D/O SHRI MUKESH CHAND
AGED ABOUT 25 YEARS. ... APPELLANT
(BY SRI K.G. RAGHAVAN, SR. COUNSEL FOR
SMT. ANUPARNA BORDOLOI, ADV.,)
AND:
1. SATURN REALTORS PVT. LTD.
REGISTERED OFFICE AT
2
SY NO.86, 87, 90, 91
SANDHYA TECHNO -1
OPP. SUNSHINE HOSPITAL
RAIDURG MAIN ROAD
HYDERABAD - 500 032
TELANGANA
BY ITS DIRECTOR AND
AUTHORIZED REPRESENTATIVE
MR. MURALIDHAR SARANALA.
2. TULIP DATA SERVICES PVT. LTD.
THROUGH ITS AUTHORIZED SIGNATORY
MR. VINEET KRISHNAN
HAVING ITS OFFICE AT 162(P)
163(P), 165(P), EPIP
INDUSTRIAL AREA, WHITEFILED
BEGNALURU - 560066.
3. SADA IT PARKS PVT. LTD.
THROUGH ITS AUTHORIZED SIGNATORY
MR. VINEET KRISHNAN
HAVING ITS OFFICE AT 162(P)
163(P),165(P), EPIP
INDUSTRIAL AREA, WHITEFILED
BENGALURU- 560066. ... RESPONDENTS
(BY SRI K.N. PHANINDRA, SR. COUNSEL FOR
SRI BHARATH K, ADV., FOR R-2 & R-3
SRI D.R. RAVISHANKAR, SR. COUNSEL FOR
SRI. ARJUN RAO, ADV., FOR C/R-1)
THIS WRIT APPEAL IS FILED U/S 4 OF THE KARNATAKA
HIGH COURT ACT, PRAYING TO SET ASIDE THE IMPUGNED
ORDER DATED 06/07/2022 PASSED BY THE LEARNED SINGLE
JUDGE ON IN WP NO.2710/2022 (GM-RES) IN SO FAR AS IT
DIRECTS THE APPELLANT TO THE EXTENT THAT IT DIRECTS
THE APPELLANT 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 AND ETC.
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IN W.A.No.724 OF 2022
BETWEEN:
1. TULIP DATA SERVICES PVT. LTD.
THROUGH ITS AUTHORIZED SIGNATORY
MR. VINEET KRISHNAN
HAVING ITS OFFICE AT NO.162(P)
163(P), 164(P), 165(P), EPIP INDUSTRIAL AREA
WHITEFIELD, BANGALORE, KA - 560 066.
2. SADA IT PARKS PVT. LTD.
THROUGH ITS AUTHORIZED SIGNATORY
MR. VINEET KRISHNAN
HAVING ITS OFFICE AT NO.162(P)
163(P), 164(P), 165(P),
EPIP INDUSTRIAL AREA,
WHITEFIELD, BANGALORE,
KA - 560 066. ... APPELLANTS
(BY SRI K.N. PHANINDRA, SR. COUNSEL FOR
SRI BHARATH K, ADV.,)
AND:
1. SATURN REALTERS PRIVATE LIMITED
REGISTERED OFFICE AT
SY NO.86, 87, 90, 91
SANDHYA TECHNO-1
OPP. SUNSHINE HOSPITAL
RAIDURGA MAN ROAD
HYDERABAD, TELANGANA - 500 032.
2. EDELWEISS ASSET RECONSTRUCTION
COMPANY LIMITED
(ACTING IN ITS CAPACITY AS
A TRUSTEE OF EARC TRUST SC 244)
REGISTERED OFFICE AT
EDELWEISS HOUSE, OFF CST ROAD
KALIN, MUMBAI - 400 098.
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3. SPACE WORLD DATA CENTRE
PRIVATE LIMITED
UNIT NO.125 AND 126, FIRST FLOOR
VARDHAMAN PREMIUM MALL
DEEPALI PITAMPURA
DELHI - 110 033. ... RESPONDENTS
(BY SRI D.R. RAVISHANKAR, SR. COUNSEL FOR
SRI ARJUN RAO, ADV., FOR C/R-1
SRI DHYAN CHINAPPA, SR. COUNSEL FOR
SMT. ANUPARNA BORDOLOI, ADV., FOR R-2
SRI UDAYA HOLLA, SR. COUNSEL FOR
SRI M.S. GANAPATHY AND
SRI ADITYA SETHI, ADVS., FOR R-3)
THIS WRIT APPEAL IS FILED U/S 4 OF THE KARNATAKA
HIGH COURT ACT PRAYING TO ISSUE A WRIT OF
CERTIORARI OR ANY OTHER APPROPRIATE WRIT OT QUASH
THE JUDGMENT DATED 06.07.2022 PASSED BY THE LD.
SINGLE JUDGE IN WP No.2710/2022 TITLED AS M/s SATURN
REALTERS PVT. LTD. vs EDELWEISS ASSET
RECONSTRUCTION Co. PVT. LTD.
THESE APPEALS HAVING BEEN HEARD AND RESERVED
FOR JUDGMENT ON 08.09.2022, COMING ON FOR
PRONOUNCEMENT OF JUDGMENT THIS DAY, VISHWAJITH
SHETTY J., DELIVERED THE FOLLOWING:
JUDGMENT
These two writ appeals are filed challenging the order dated 06.07.2022 passed by the learned Single Judge of this Court in W.P.No.2710/2022.
2. W.A.No.635/2022 is filed by the respondent in W.P.No.2710/2022, while W.A.No.724/2022 is filed by the borrowers/impleading applicants in IA-3/2022 filed in 5 W.P.No.2710/2022. Having regard to the similitude of facts involved in the appeals, with the consent of the learned Counsel appearing for the parties in these appeals, both the appeals are heard together and disposed of by this common judgment.
3. We have heard the learned Senior Counsel appearing for the parties and also perused the material on record.
4. Brief facts of the case, as revealed from the records are, the property belonging to the borrowers was brought for sale by the appellant (Financial Institution) in W.A.No.635/2022 under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, 'the Act of 2002') as well as the Security Interest (Enforcement) Rules, 2002 (for short, 'the Rules of 2002'). Respondent no.1 (hereinafter referred to as 'first auction purchaser') who was the successful bidder in the auction had failed to deposit the entire bid amount within the stipulated time, and therefore, a notice/endorsement dated 25.01.2022 was issued to him calling upon him to pay the balance amount within the 6 stipulated time, failing which, it was informed that the Financial Institution would be constrained to forfeit the deposited amount with it and cancel the auction sale in terms of the provisions of the Rules of 2002. The said notice/endorsement dated 25.01.2022 was challenged by the first auction purchaser in W.P.No.2710/2022. In the said writ petition, the Financial Institution was arrayed as the sole respondent.
5. Subsequently, during the pendency of the writ petition, IA-3/2022 was filed by the borrowers to implead them as party respondents to the writ petition. During the pendency of the writ petition, on 20.04.2022, the learned Single Judge of this Court after hearing the learned Senior Counsel appearing for all the parties including the impleading applicant, had passed a detailed order permitting the Financial Institution to conduct fresh auction with liberty to the first auction purchaser to participate in the fresh auction proceedings. The Financial Institution was directed not to insist for earnest money deposit from the first auction purchaser, since by then, the first auction purchaser had already deposited the entire bid amount of Rs.135.01 crores 7 before this Court pursuant to the interim orders passed by the learned Single Judge.
6. The Financial Institution conducted the fresh auction of the property belonging to the borrowers on 18.05.2022 and the first auction purchaser had participated in the said auction proceedings unsuccessfully. The successful bidder (hereinafter referred to as 'second auction purchaser') in the auction that was held on 18.05.2022 had filed IA-4/2022 before the learned Single Judge to implead it as a party respondent to the writ petition. In the meanwhile, the borrowers had approached the jurisdictional Debt Recovery Tribunal challenging the proceedings initiated by the Financial Institution under Section 13 of the Act of 2002 in TSA.No.10/2021 and the Debt Recovery Tribunal had granted an interim order of stay of the first sale. The said order was challenged by the Financial Institution in W.P.No.13795/2021 and the Delhi High Court by its order dated 06.12.2021 stayed the order of the Debt Recovery Tribunal with an observation that the sale would be subject to the result of the writ petition which was pending before the learned Single Judge of this Court.
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7. The learned Single Judge, thereafter, heard the learned Senior Counsel appearing for the parties to the writ petition and also the learned Senior Counsel appearing for the impleading applicants in the writ petition and vide the order impugned disposed of the writ petition permitting the Financial Institution to confirm the sale in favour of the second auction purchaser subject to the result of W.P.No.13795/2021 pending before the High Court of Delhi and the proceedings before the Debt Recovery Tribunal. The Financial Institution was also directed to repay the entire amount deposited by the first auction purchaser after deducting the sale expenses, within 15 days from the date of receipt of the copy of the order. All the contentions of the borrowers were kept open. Being aggrieved by the said order, the Financial Institution as well as the borrowers have preferred these two appeals.
8. Sri K.G.Raghavan, learned Senior Counsel appearing on behalf of the Financial Institution referring to Clauses 16 & 18 of the terms and conditions of the first auction sale at Annexure-R2, submits that the successful bidder was required to deposit 25% immediately on confirmation of the highest 9 bid or on the next day and the balance amount of sale consideration was to be paid within 15 days of the confirmation of sale. Failure to deposit the balance amount within the prescribed period, would entitle the Financial Institution to forfeit the earnest money deposit/deposited amount without any further notice and no claim shall be entertained against the Financial Institution in respect thereof. He submits that the first auction purchaser totally deposited an amount of Rs.34.50 Crores including the earnest money deposit on 12.11.2021 and though the sale was confirmed in its favour on 12.11.2021, the balance sale consideration was not deposited within 15 days thereafter and invoking Rule 9(4) of the Rules of 2002, further time was granted to the first auction purchaser to deposit the balance sale consideration, which expired on 09.02.2022. It is under these circumstances, the endorsement dated 25.01.2022 was issued to the first auction purchaser and instead of complying with the same, it had challenged the same in a writ petition and pursuant to the interim orders passed in the writ petition, the balance bid amount was deposited by the first auction purchaser on 31.03.2022.
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9. A reference is made to Rule 9(3) of the Rules of 2002 and it is submitted that 25% of the bid amount inclusive of the earnest money is required to be deposited on the same day or on the next day and Rule 9(4) provides that the balance amount is required to be deposited within 15 days from the date of confirmation of the sale. Reference is also made to Rule 9(5) of the Rules of 2002 and it is submitted that power to forfeit the deposit amount in the event of auction purchaser failing to comply Rule 9(4) is provided under the said Rule and in the absence of any challenge to the said Rule, the learned Single Judge was not justified in directing the Financial Institution to refund the earnest money/deposit amount to the first auction purchaser. He submits that the fact that the second auction purchaser has purchased the property for an amount of Rs.138 Crores, and therefore, the Financial Institution has not suffered any loss cannot be a ground to direct the Financial Institution to repay the amount forfeited by it in exercise of Rule 9(5) of the Rules of 2002. In support of the aforesaid submissions, reliance is placed on the judgment of the Hon'ble Supreme Court in the case of NATIONAL HIGHWAYS AUTHORITY OF 11 1 INDIA VS GANGA ENTERPRISES & ANOTHER and in G.M.FOODS & ANOTHER VS INCOME TAX & WEALTH TAX 2 SETTLEMENT COMMISSIONER . He also submits that similar power of forfeiture is found even under Order XXI Rule 86 CPC and reference is made to the judgment of the Hon'ble Supreme Court in the case of MANILAL MOHANLAL SHAH & OTHERS VS SARDAR SAYED AHMED SAYED MAHMAD & ANOTHER3 and it is submitted that in the said case it has been held that Order XXI Rule 86 CPC is mandatory in nature. It is further submitted that the sale certificate has been already issued to the second auction purchaser, and therefore, the auction is completed and the entire amount of Rs.138 Crores has been deposited by the second auction purchaser, and therefore, the writ appeal filed by the borrowers is not maintainable, more so for the reason that the orders passed by the learned Single Judge are made subject to the outcome of the proceedings initiated by the borrowers before the Debt Recovery Tribunal which is now the subject matter of the writ petition before the Delhi High Court.
1 (2003)7 SCC 410 2 AIR 2015 CALCUTTA 245 3 AIR 1954 SC 349 12
10. Sri K.N.Phaneendra, learned Senior Counsel appearing for the borrowers submits that the first auction purchaser should have approached the Debt Recovery Tribunal if they were aggrieved by the endorsement dated 25.01.2022 and the writ petition against the same was not maintainable. He also submits that the Financial Institution is not a 'State' within the meaning of Article 12 of the Constitution of India, and therefore, the writ petition filed by the first auction purchaser was not maintainable. He submits that the first auction sale was stayed by the Debt Recovery Tribunal and the order passed by the Debt Recovery Tribunal is now the subject matter of the writ petition before the Delhi High Court. He also submits that the second auction was held in violation of Rule 8(5) of the Rules of 2002. In support of his argument, he has placed reliance on the judgment in the case of M/S. HOTEL VANDANA PALACE, BELGAUM VS THE AUTHORISED OFFICER & OTHERS4, W.P.No.2004/2022 disposed of on 08.08.2022, PHOENIX ARC PRIVATE LIMITED VS VISHWA BHARATI VIDYA MANDIR & OTHERS5.
4 2011 SCC Online Kar 3928 5 (2022)5 SCC 345 13
11. Per contra, Sri D.R.Ravishankar, learned Senior Counsel for the first auction purchaser submits that the Financial Institution has accepted the order dated 20.04.2022 passed by the learned Single Judge in its entirety, and therefore, there is no justification to turn around and now contend that it is entitled to forfeit the amount deposited by the first auction purchaser when admittedly the second auction purchaser has deposited the entire amount of Rs.138 Crores before the Financial Institution and the sale is already confirmed in its favour. He refers to the judgment of the Division Bench of this Court in W.A.No.262/2020 disposed of on 02.04.2021 and submits that Rule 9(5) of the Rules of 2002 must be given a practical interpretation rather than a liberal or pedantic interpretation, and submits that the word 'shall' found in the said Rule is directory and not mandatory. He also submits that since the second auction purchaser has now deposited the entire amount of Rs.138 Crores with the Financial Institution, the Financial Institution has not suffered any loss and in identical circumstances, the Hon'ble Supreme Court in the case of ALISHA KHAN VS INDIAN BANK in SLP(C).No.15959-60/2021 disposed of on 13.12.2021 has set 14 aside the order of forfeiture and directed the Bank to refund the amount earlier deposited by the auction purchaser. He submits that the judgments relied upon by the learned Senior Counsel appearing for the borrowers with regard to the maintainability of the writ petition are rendered in the writ petitions which were filed at the instance of the borrowers, and therefore, the said judgments would not be applicable to the facts of this case.
12. Sri Dhyan Chinnappa, learned Senior Counsel appearing for the Financial Institution in the appeal filed by the borrowers submits that the second sale was with the permission of the Court and the order passed by the learned Single Judge permitting the second sale was unsuccessfully challenged by the borrower in an intra court appeal. He refers to paragraph 15 of the impugned order passed by the learned Single Judge and submits that liberty is reserved to the borrowers to challenge the procedure adopted by the Financial Institution in bringing the property for sale by initiating appropriate proceedings before the Debt Recovery Tribunal, and therefore, they cannot be considered as aggrieved party, and accordingly, the writ appeal cannot be 15 maintained. He submits that the learned Single Judge has observed that the order passed in the writ petition would be subject to the outcome of the writ petition pending before the Delhi High Court, and therefore, the borrower cannot have any grievance against the order passed by the learned Single Judge and in the event he succeeds before the Delhi High Court, both the sales would get annulled. He, therefore, prays to dismiss the writ appeal filed by the borrowers.
13. Sri Udaya Holla, learned Senior Counsel appearing on behalf of the second auction purchaser submits that the second auction has been held by the Financial Institution pursuant to the orders passed by the learned Single Judge on 20.04.2022 after hearing the parties to the writ petition and the said order was unsuccessfully challenged by the borrowers in an intra court appeal. He submits that since the sale of the property belonging to the borrowers is made subject to the outcome of the writ petition pending before the Delhi High Court, for which the borrowers are a party, there is no merit in the writ appeal filed by the borrowers, and accordingly, prays to dismiss the appeal.
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14. In reply, learned Senior Counsel appearing for the Financial Institution submits that the borrowers who admittedly have failed to repay the total outstanding of Rs.426 Crores, cannot maintain the writ appeal challenging the order passed by the learned Single Judge, when admittedly their challenge to the order dated 20.04.2022 passed by the learned Single Judge permitting the Financial Institution to conduct the second sale was rejected in an intra court appeal by this Court. He submits that both the sales are now made subject to the outcome of the writ petition which is pending before the Delhi High Court which arises out of the proceedings initiated by the borrowers before the Debt Recovery Tribunal, and therefore, the borrower cannot have any grievance against the order passed by the learned Single Judge.
15. We have considered the rival submissions made and have perused the records. The Financial Institution had brought the mortgaged property belonging to the borrower for sale since their loan account was over due and according to the Financial Institution the borrower were due to pay a total amount of Rs.426 crores to them. In the auction sale 17 that was held on 11.11.2021, the first auction purchaser was the successful bidder for a sum of Rs.135.01 crores. The first auction purchaser had deposited a sum of Rs.34.50 crores before the sale officer on 12.11.2021 which included the earnest money deposit and the sale was confirmed in its name on 12.11.2021. In the meanwhile, the borrower had challenged the sale notice before the Debt Recovery Tribunal, Delhi, and the said case was transferred to Debt Recovery Tribunal, Jaipur. On 18.11.2021, the Debt Recovery Tribunal, Jaipur, had granted an interim order of status quo with regard to the further proceedings related to public auction that was held on 11.11.2021. In the writ petition filed by the Financial Institution challenging the said order of status quo granted by Debt Recovery Tribunal, Jaipur, the High Court of Delhi stayed the order of status quo passed by Debt Recovery Tribunal, Jaipur, and in effect allowed the proceedings to continue in relation to the public auction held on 11.11.2021 in which the first auction purchaser was the successful bidder.
16. The first auction purchaser had requested for extension of time to deposit the balance sale consideration and after considering the same, the Financial Institution had 18 extended the time on 09.12.2021 which was to expire on 09.02.2022. On 25.01.2022, a letter was issued to the first auction purchaser by the financial institution to pay the balance sale consideration within the extended period of time, failing which, action was proposed to forfeit the amount in deposit. The said order dated 25.01.2022 was questioned by the first auction purchaser before the learned Single Judge of this Court in W.P.No.2710/2022 and on 07.02.2022, the learned Single Judge had granted two weeks time to the first auction purchaser to deposit a sum of Rs.15 crores and a further sum of Rs.15 crores was directed to be deposited within two weeks thereafter. In view of the interim order passed on 07.02.2022 by the learned Single Judge of this Court, on an application made by the Financial Institution, the further proceedings before the Debt Recovery Tribunal, Jaipur, was stayed by it.
17. The first auction purchaser thereafter deposited the balance sale consideration before the Financial Institution on 31.03.2022, and therefore, as on 31.03.2022, the entire bid amount of Rs.135.01 crores was deposited by the first auction purchaser. However, the fact remains that the first 19 auction purchaser had failed to deposit the bid amount within the prescribed time as provided under the Rules of 2002, and the terms and condition of the auction sale. It is under these circumstances, the learned Single Judge heard the learned Senior Counsel appearing for the parties to the writ petition and also the borrower who had filed an application for impleading, and by a detailed order dated 20.04.2022 permitted the Financial Institution to conduct a fresh auction and accordingly in the fresh auction that was held on 18.05.2022, the second auction purchaser was declared the successful bidder for a sum of Rs.138 crores and on deposit of the entire amount of Rs.138 crores within the time prescribed, the sale was also confirmed in its favour.
18. In the meanwhile, on 07.05.2022, the appeal filed by the borrower before the Debt Recovery Tribunal, Jaipur, in TSA NO.10/2021 was allowed and the said order was stayed by the Delhi High Court in W.P.No.7530/2022 on 13.05.2022. Therefore, before the mortgaged property was brought for sale on 18.05.2022 in the second auction sale, the order passed by Debt Recovery Tribunal, Jaipur, was stayed by the Delhi High Court.
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19. Before proceeding further, it is apposite to take note of Rule 9(5) which is extracted below for the facility of reference.
"(5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited 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."
20. A reading of Rule 9(5) of the Rules of 2002 makes it clear that the Financial Institution has power to forfeit the EMD/deposited amount if the successful purchaser does not deposit the entire sale consideration within the prescribed time. It is not in dispute that the auction purchaser has deposited the entire bid amount of Rs.135.01 crores only as on 31.03.2022, which admittedly was beyond the prescribed period. However, the fact remains that in the second auction sale that was held on 18.05.2022 pursuant to the order passed by the learned Single Judge on 20.04.2022, the second auction purchaser had quoted a bid amount of Rs.138 crores and was declared as a successful bidder and the entire bid amount of Rs.138 crores has been already deposited by it 21 before the Financial Institution who in turn has also confirmed the sale in favour of the second auction purchaser.
21. In similar circumstances, the Division Bench of this Court in W.A.No.262/2020 (THE AUTHORISED OFFICER vs. S.N.MAHADEVA) considering the provisions of the Rules of 2002, has held in paragraphs 9, 10 and 11 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 purchaser15 and thereafter, the provisions of 22 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 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 at16m 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 23 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 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 purchaser17 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 24 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 power would leave the18 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" 13 th 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 25 by carefully understanding the object of the provision".
22. It is in the background of the judgment in W.A.No.262/2020, the learned Single Judge had passed an order on 20.04.2022 permitting the Financial Institution to conduct fresh sale and also permitted the first auction purchaser to participate in the said sale proceedings without depositing any earnest money. In W.A.No.262/2020, the Division Bench of this Court has held that Rule 9(5) is required to be construed as directory and not mandatory. We are in agreement with the aforesaid reasons recorded by a Division Bench of this Court, wherein it is held that Rule 9(5) of the Rules of 2002 is directory in nature. In the case of Alisha Khan (supra), the Hon'ble Apex Court considering the fact that in the subsequent sale that was held by the bank, the property was sold and as such there was no loss caused to the bank, had set aside the order of forfeiture of 25% of the amount of auction sale consideration deposited by the successful bidder in the first auction and directed the bank to refund the amount after deducting the amount 26 towards expenditure incurred by the bank for conducting the second sale/fresh auction.
23. Earnest money/security is furnished to ensure that a genuine party participates in the bid. The principle of forfeiture of the earnest money in meant to deter non- genuine parties or imposters from participating in the bid. It is also meant to make good the loss the bank may suffer in the event of a non-genuine party or imposter participating in the bid commits default and also to recover the expenditure the bank incurs for conducting the sale. For justifying forfeiture, loss is required to be pleaded or proved. In the present case, the Financial Institution has not pleaded or proved any loss that it has suffered due to belated deposit of the bid amount by the first auction purchaser. In the absence of any pleading or proof regarding the loss suffered by the Financial Institution as a result of the default committed by first auction purchaser, there is no justification on the part of the Financial Institution in forfeiting the earned money deposit.
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24. The Hon'ble Supreme Court in the case of GENERAL M AN AG ER , SR I S I DD ESHW AR A C O OP ERAT IV E BA NK 6 LIMITED & ANOTHER , has held that though Rule 9 of the Rules of 2002 is mandatory in nature, it can always be waived by a party for whose benefit such provision has been made. This view has been reiterated in the subsequent judgment in VASU P.SHETTY VS HOTEL VANDANA PALACE & 7 OTHERS . In the said cases, the secured asset was not brought for second sale, whereas in the present case, the secured asset is brought for second sale and undisputedly, it is sold for a higher price compared to the first sale. In identical circumstances, the Hon'ble Supreme Court in Alisha Khan's case supra had directed the Bank to refund the amount that was deposited by the first auction purchaser. Though we are in respectful agreement with the law laid down by the Hon'ble Supreme Court in Ikbal's case as well as Vasu P.Shetty's case supra, in our considered view, the same cannot be made applicable to the facts of this case, as undisputedly, in the present case, the secured asset has been 6 (2013)10 SCC 83 7 (2014)5 SCC 660 28 brought for second sale and the Financial Institution has gained in the second sale.
25. Further, undisputedly, the borrower had challenged the sale notice and same was the subject matter of a appeal filed before Debt Recovery Tribunal, Jaipur, and writ petition filed before Delhi High Court. In this background, if the first auction purchaser had requested the Financial Institution to cancel the sale and refund the amount deposited by it at the time confirmation of first sale, the same cannot be found fault with. In the second auction sale the property was sold for a higher price, and therefore, the Financial Institution had gained and not suffered any loss. The purpose of forfeiture is to compensate the party adversely affected by non- performance of the contract. Therefore, there is no justification for the Financial Institution to forfeit the earnest money deposited by the first auction purchaser, more so having regard to the fact that the second auction purchaser had deposited the entire bid amount within the time prescribed before the Financial Institution. Therefore, in our considered view, the learned Single Judge was completely 29 justified in directing the Financial Institution to refund/return the entire amount deposited by the first auction purchaser.
26. The judgments on which the learned Senior Counsel appearing for the Financial Institution has placed reliance cannot be made applicable to the facts and circumstances of the present case. In none of the said cases, the bank/financial institution had successfully brought the secured assets for fresh sale fetching them a higher amount, resulting no financial loss to them. It is trite law that judgments can be relied as precedents only if it is established that it would be applicable to the facts and circumstances of the case on hand.
27. Reliance placed by the learned Senior Counsel appearing for the Financial Institution on Order XXI Rule 86 CPC is misconceived as there are specific provisions governing the sale herein under the Rules of 2002. Though we are in respectful agreement with the law laid down in Manilal Mohanlal Shahs's case (supra), the said judgment would not be applicable to the present case as the same has been rendered interpreting Order XXI Rule 86 of CPC. 30
28. In so far as the appeal filed by the borrowers is concerned, it is required to take note that in the writ petition filed by the first auction purchaser before the learned Single Judge in W.P.No.2710/2022, the lis was only between the first auction purchaser and the Financial Institution and the prayer made in the writ petition was to quash the notice/endorsement issued by the Financial Institution threatening forfeiture of deposited amount and reconsider their representation dated 21.01.2022 made with a request to cancel the sale and refund the deposited amount. The borrowers are, therefore, neither a necessary nor a proper party to the writ petition. The learned Single Judge had, therefore, rightly not ordered their impleadment as party respondent to the writ petition, though he has heard them. The only relief granted in the writ petition is against the Financial Institution, wherein the Financial Institution is directed to refund/return the entire deposited money to the first auction purchaser. The said order/direction is challenged by the Financial Institution in a independent appeal and the Financial Institution has not urged any ground before us regarding the maintainability of the writ petition before the 31 learned Single Judge. Therefore, in our considered view, it is not open for the borrowers to raise a plea regarding the maintainability of the writ petition, more so when the learned Single Judge has not recorded any finding with regard to the validity of the second auction sale that was held on 18.05.2022 and when the learned Single Judge has reserved liberty to the borrowers to challenge the validity of the said sale before the appropriate authority. All contentions of the borrower have been left open and second auction sale is made subject to the result of W.P.No.7530/2022 pending before the Delhi High Court. Therefore, we find merit in the contentions urged by learned Senior Counsels appearing for the financial institution as well as the second auction purchaser that the borrowers cannot be considered as aggrieved persons against the impugned order passed by the learned Single Judge. The question regarding the maintainability of writ petition therefore need not be considered by us at the instance of the borrower in an appeal filed by them against the order passed by the learned Single Judge for which undisputedly they are not a party and when 32 the Financial Institution who was the party respondent to the writ petition had not raised the said ground before us.
29. The question whether the second auction sale violates Rule 8(5) of the Rules of 2002 also need not be answered by us, as the learned Single Judge has not recorded any finding with regard to the validity of the second auction sale held on 18.05.2022. The borrowers have been granted liberty by the learned Single Judge to challenge the validity of second auction sale before the appropriate authority, and therefore, the validity of the second auction sale or otherwise need not be considered by us. Under the circumstances, we do not find any merit in the writ appeal filed by the borrowers. Accordingly the following order:
The writ appeals are dismissed.
SD/-
ACTING CHIEF JUSTICE SD/-
JUDGE KK