Madras High Court
R.Shanmugachandran (Deceased) vs The Chief Manager on 12 September, 2012
Bench: D.Murugesan, V.Ramasubramanian
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 12-09-2012 CORAM THE HON'BLE MR.JUSTICE D.MURUGESAN AND THE HON'BLE MR.JUSTICE V.RAMASUBRAMANIAN Writ Petition No.21364 of 2011 1. R.Shanmugachandran (Deceased) 2. S.Selvi 3. S.Deepa 4. S.Menaka 5. S.Gokulraj .. Petitioners (P2 to P5 substituted as LRs in the place of deceased petitioner vide order dated 19.6.2012 in M.P.No.2 of 2012.) Vs. The Chief Manager Indian Bank Asset Recovery Management Branch III Floor, No.31, Variety Hall Road Coimbatore 641 001. .. Respondent ----- Petition under Article 226 of the Constitution of India praying for a writ of Mandamus directing the respondent to refund the total Earnest Money Deposit to the tune of Rs.3,57,000/- paid by the petitioner on 02.8.2010 within time frame. ----- For Petitioners : Mr.T.Arockia Dass For Respondent : Mr.Jayesh B.Dolia ----- O R D E R
V.RAMASUBRAMANIAN,J.
A person, who participated in an auction conducted by the respondent-Bank under the SARFAESI Act, came up with the above writ petition seeking refund of the earnest money deposited by him. However, after the writ petition was filed, the writ petitioner died and his wife and children have been substituted in his place.
2. We have heard Mr.T.Arockiadas, learned counsel for the petitioners and Mr.Jayesh B.Dolia, learned counsel for the respondent-Bank.
3.In respect of credit facilities availed by one K.P.Nagarajan, Proprietor of M/s.L.G. Textiles, in the year 2001, the respondent-Bank initiated proceedings in O.A.No.360 of 2004 on the file of the Debt Recovery Tribunal, Madurai, for recovery of a sum of Rs.74,98,000/-. Subsequently, the Bank switched over to the SARFAESI Act and issued a demand notice under Section 13(2) on 27.8.2008. It was followed by a possession notice dated 28.02.2009. After taking possession, the Bank issued a sale notice dated 08.5.2009, fixing the auction sale on 15.6.2009. Since there was no bidders, another auction was fixed on 26.02.2010. Even this auction did not materialise. The properties were put up for auction for a third time on 02.8.2010.
4. In the auction held on 02.8.2010, the petitioner was declared as the successful bidder in respect of item Nos.1 and 5. In respect of item No.4, a person by name Karthik was the successful bidder.
5. On the date of the auction, namely 02.8.2010, the Bank called upon the petitioner to pay 25% of the bid amount immediately. The bid amount offered by the petitioner for item No.1 was Rs.44,80,000/-. Therefore, as per the terms and conditions of the auction sale, the writ petitioner was supposed to pay immediately, 25% of the bid amount, namely, Rs.11,20,000/- and he was supposed to pay the balance amount within 15 days. Similarly, the highest bid for item No.5 was Rs.27,55,000/- and the petitioner was supposed to pay 25% of the same immediately.
6. The writ petitioner did not pay 25% of the bid amount. On the contrary, the writ petitioner issued a legal notice dated 07.8.2010 calling upon the Bank to refund the amount paid on the date of the auction, namely Rs.3,57,000/-, on the ground that the properties were encumbered and that the encumbrances were not notified. However, the respondent-Bank forfeited the earnest money deposit made by the writ petitioner, on 16.8.2010. Therefore, after making a representation dated 19.4.2011, the writ petitioner came up with the above writ petition.
7. The main ground on which the writ petitioner seeks refund of the earnest money deposit made by him is that the property did not even stand in the name of the defaulter and that it had already been alienated. According to the writ petitioner, the Bank failed to disclose encumbrances and that the provisions of Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002, stood violated.
8. Per contra, it is the contention of the Bank that a sale made by a secured creditor in terms of the provisions of the SARFAESI Act, would always convey a title free of encumbrances. All encumbrances made after the creation of the security interest in favour of the Bank, are of no consequence. More over, it is also contended by the Bank that the auction sale was only in "as is where is and as is what is" basis and that therefore, a person who participated in the auction subject to such terms and conditions, cannot go back and seek refund of the part payment.
9. In the light of the rival contentions, the question that arises for consideration is as to whether the Earnest Money Deposit made by the writ petitioner is liable to be refunded to the writ petitioner or forfeited by the Bank.
10. A perusal of the auction sale notice shows that five items of properties were brought to sale. The upset price in respect of item No.1 was fixed at Rs.44,00,000/- and the Earnest Money Deposit for the same was fixed at Rs.2,20,000/-. Similarly, the upset price for item No.5 was fixed as Rs.27,40,000/- and the Earnest Money Deposit was fixed at Rs.1,37,000/- lakhs. The auction sale notice states that tender forms and the conditions could be obtained by the participants from the Bank by paying a non refundable fee of Rs.500/- and that the interested parties were also entitled to inspect the property between 10 am and 4 pm on 26.7.2010. Offers were to be made in sealed covers along with the demand draft for Earnest Money Deposit on or before 31.7.2010 and the auction was proposed to be held at 11 am on 02.8.2010. The person whose offer is accepted should pay 25% of the bid amount immediately and the balance of the amount within 15 days.
11. In the schedule to the auction sale notice, the Bank furnished a tabular statement containing the description of the property, upset price fixed, Earnest Money Deposit to be made and prior encumbrances. The last column in the tabular statement of the schedule to the auction sale notice related to prior encumbrances. Under the said column, it was indicated that the sale would be subject to a partition suit pending on the file of the District Munsif Court, Erode, instituted by a minor son of one of the guarantors.
12. In the light of the contents of the auction sale notice, we must see if the forfeiture of the Earnest Money Deposit made by the respondent is right or wrong.
13. In Chinnasami Pillai v. K.Marappan (1996 (1) CTC 318), Abdul Hadi, J, was concerned with suits for recovery of the advance amounts paid under agreements of sale. In that context, the learned Judge referred to the decision of the Supreme Court in H.C.Mills v. Tata Air Craft (AIR 1970 SC 1986) and came to the conclusion that unless the term Earnest Money was used or there is a plea that the money was a guarantee for the fulfilment of the contract, it cannot be forfeited. If money was given only as advance, the same cannot be forfeited.
14. In Gemini Foundation v. V.B.Giri (1998 (3) CTC 489), an auction purchaser in respect of two properties, deposited 25% of the value of one property and 100% of the bid amount in respect of another property. But, the balance amount was not paid within the time granted. Therefore, the sale was cancelled by a single Judge and the application of the highest bidder for refund of 25% of the value deposited by him, was dismissed by the single Judge. The highest bidder filed an appeal and the Division Bench was confronted with the question as to whether an auction purchaser was entitled to refund of the said amount. Holding that the power of the Court under Order XXI, Rule 86, CPC, to forfeit the deposit money to the Government, was a matter of discretion required to be exercised in a judicious manner, the Division Bench of this Court held that the entire amount of Rs.20,00,000/- could not have been forfeited. Therefore, the Division Bench directed refund of sum of Rs.15,00,000/-, after deducting a sum of Rs.6,00,000/- towards loss by way of investment and interest.
15. In A.Murali & Co. v. State Trading Corporation of India Ltd. (AIR 2001 Madras 271), Prabha Sridevan, J, was confronted with a question relating to the validity of the forfeiture of a part of the Earnest Money Deposit in proportion to the reduced off-take of material by the auction purchaser. After referring to Sections 73 and 74 of the Contract Act and various decisions of this Court, the learned Judge held that the test to find out the validity of the forfeiture is to see if the Earnest Money is a genuine pre-estimate of damages or only a stipulation in terrorem.
16. In Kamil v. Central Diary Farm (AIR 2008 Allahabad 33), a learned Judge of the Allahabad High Court held that the security amount cannot be forfeited without proving any actual loss or damage. But, the said case arose out of a contract for supply of some material and the deposit of an amount as security for the due performance of the said contract.
17. In Jai Logistics v. The Authorised Officer, Syndicate Bank (2010 (4) CTC 627), a Division Bench of this Court, to which one of us was a party (D.Murugesan,J), had an occasion to consider the effect of Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002. It was held therein that the auction purchasers should also be put on notice of the encumbrances relating to the property, in the light of the said rule. Therefore, on the basis of the aforesaid decisions, it is contended by the learned counsel for the writ petitioner that the forfeiture of the Earnest Money Deposit by the respondent-Bank was illegal.
18. But, in the case on hand, we have seen from the auction sale notice that in the last column of the table under the schedule to the notice, the Bank has indicated the pendency of a partition suit at the instance of a minor son of one of the guarantors on the file of the District Munsif Court, Erode. The auction sale notice was issued on 28.6.2010. The last date for submission of tender forms was 31.7.2010 and the tenders were to be opened and auction conducted only on 02.8.2010. Therefore, all the participants had a time of more than 30 days to undertake a search in the records of the Sub-Registrar and conduct an enquiry that was required to be made by a prudent purchaser, especially in the light of the disclosure made in the auction notice that there was a partition suit pending at the instance of a minor son of one of the guarantors. The petitioner relies upon two encumbrance certificates, one dated 09.8.2010 relating to item No.1 and another dated 04.8.2010 relating to item No.5. It appears that the mortgage was created in favour of the respondent-Bank in December 2000. The encumbrance certificate relating to item No.1 dated 09.8.2010 does not disclose any encumbrance before the date of creation of mortgage. It appears that there was a sale agreement dated 22.01.1997, but the same was cancelled on 19.01.1998. Therefore, as on the date of creation of the mortgage, namely 08.12.2000, there was no encumbrance insofar as item No.1 is concerned.
19. Insofar as item No.5 is concerned, the borrower Nagarajan got the property only on 13.12.2000 under a sale deed dated 08.11.2000. Therefore, even in respect of this property, namely item No.5, there was no encumbrance on the date of creation of mortgage. After the creation of mortgage in favour of the bank, the borrower appears to have created certain encumbrances in respect of both the properties. It would be useful to extract the encumbrances so created, in respect of each of these properties, in the form of a tabular statement, for easy appreciation. Therefore, they are presented as follows:
Encumbrances in respect of item No.1 Sl. No. Nature of the document and date By whom In favour of Remarks 1 Partition deed dated 17.10.2003 Ganesan and Nagarajan Ganesan and Nagarajan Both Nagarajan and Ganesan are indebted to the Bank. Therefore, this partition deed did not make any difference.2
Mortgage deed dated 29.10.2003 K.P.Ganesan Chithode Uzhavar Pani Co-operative Society Though this mortgage is only a second mortgage, it was also discharged by K.P.Ganesan on 22.02.2006, as seen from a receipt, which is also registered and reflected in the encumbrance certificate.3
Mortgage deed dated 29.10.2003 P.Nagarajan Chithode Uzhavar Pani Co-operative Society Though this mortgage is only a second mortgage, it was also discharged by K.P.Ganesan on 22.02.2006, as seen from a receipt, which is also registered and reflected in the encumbrance certificate. (Discharged on the same day).4
Conveyance deed dated 29.3.2007 K.P.Ganesan, Kuzhandaisamy Gounder and others R.Sivaraman The sale is long after the mortgage in favour of the Bank.5
Conveyance deed dated 14.11.2007 Venkatesh R.Sivaraman 6 Conveyance deed dated 27.02.2009 R.Sivaraman S.Nirmala 7 Conveyance deed dated 03.9.2009 R.Sivaraman A.Palanisamy 8 Conveyance deed dated 03.9.2009 R.Sivaraman Neelaveni 9 Conveyance deed dated 16.9.2009 R.Sivaraman Stalin 10 Conveyance deed dated 28.10.2009 R.Sivaraman R.Lalithamani 11 Conveyance deed dated 27.11.2009 R.Sivaraman M.Kasinathan 12 Conveyance deed dated 22.01.2010 R.Sivaraman S.Kalaiselvi 13 Conveyance deed dated 14.6.2010 R.Sivaraman A.Chitra These are sales by subsequent purchaser R.Sivaraman. The conveyance covered several items of porperties, one of which is the land in survey No.166/10. This survey No.166/10 alone was the mortgaged property in favour of the bank. Therefore, these conveyances are only subject to the mortgage and the rights of the Bank. More over, these sales are actually after the notice dated 27.8.2009 under Section 13(2) and after the possession notice dated 28.02.2009. Therefore, they are null and void.
Encumbrances in respect of item No.5 Sl. No. Nature of the document and date By whom In favour of Remarks 1 Settlement deed dated 03.11.2003 P.Nagarajan Papathi The settlee is the mother of the settlor, who is the mortgagor.2
Mortgage deed dated 24.11.2003 Papathi Chithode Uzhavar Pani Co-operative Society 3 Agreement dated 27.5.2005 Between R.Loganathan and L.Mohan Kumar 4 Conveyance deed dated 14.9.2005 Papathi T.M.Ramasamy 5 Gift deed dated 16.9.2005 Papathi Gangapuram Panchayat Union 6 Conveyance deed dated 16.9.2005 Papathi Rajaji 7 Conveyance deed dated 07.11.2005 Papathi C.Jaganathan and G.Selvakumar 8 Conveyance deed dated 07.11.2005 Papathi G.Sampathkumar 9 Conveyance deed dated 07.11.2005 Papathi T.Sekar 10 Conveyance deed dated 07.11.2005 Papathi T.Venugopal 11 Conveyance deed dated 24.11.2005 Papathi T.Iyappan and others 12 Discharge of mortgage dated 05.9.2006 Chithode Uzhavar Pani Co-operative Society Papathi 13 Conveyance deed dated 20.12.2007 M.Ponnusamy K.P.Ganesan 14 Gift deed dated 30.6.2008 E.Ganesan Tamil Nadu Governor / Gangapuram Panchayat President 15 Conveyance deed dated 04.7.2008 E.Ganesan K.A.Manikandan 16 Conveyance deed dated 31.8.2009 Papathi & Others Poovathal 17 Conveyance deed dated 31.8.2009 Papathi & Others A.Thilagavathy 18 Conveyance deed dated 12.11.2009 Papathi & Others A.Thilagavathy 19 Conveyance deed dated 06.01.2010 Papathi & Others G.Murugesan & V.Chitra 20 Mortgage deed dated 25.3.2010 Papathi & Others P.Kuppusamy 21 Agreement dated 06.4.2010 Between Papathi, Ganesan, Kavya, Nagarajan, Gopika, Thilgavathy, Vijayakumar and Thulasimani 22 Conveyance deed dated 23.4.2010 Papathi & Others Velumani, Shanti, R.Kumaran & K.Kalyani The settlement of the property by a borrower in favour of his own mother is after the mortgage in favour of the Bank. All other transactions are by the mother. Some of the conveyances are even after the possession notice by the Bank.
20. It is interesting to note that the certificate of encumbrances obtained by the writ petitioner in respect of item No.5 is dated 04.8.2010, which was just two days after the auction sale. Similarly, the certificate of encumbrance in respect of item No.1 was applied on 09.8.2010 by the writ petitioner, 5 days after the auction sale. There is no explanation in the affidavit as to why the writ petitioner did not take care to apply for the encumbrance certificate from the date of the advertisement, namely 28.6.2010, till he submitted his tender on 31.7.2010. What the writ petitioner had done within 2 days of the date of the auction, could have been and should have been done by him, when he had 33 days time from the date of the paper publication upto the date of auction.
21. Keeping the above facts in mind, let us now turn to the statutory provisions. Section 13(4)(a) of the Act empowers the secured creditors to take possession of the secured assets and also sell the same for realising their dues. The procedure for the sale of a secured asset, if it is an immovable property, is detailed in Rule 8 of the Security Interest (Enforcement) Rules, 2002. Sub-rule (6) of Rule 8 obliges the Authorised Officer to serve on the borrower, a notice of 30 days, for the sale of the secured asset. The proviso to Sub-rule (6) imposes yet another obligation on the Authorised Officer, namely, to cause a publication in two leading newspapers, if the sale of the secured asset is effected either by inviting tenders from the public or by holding public auction. The proviso also details the matters that should be included in the public notice.
22. The matters that require to be mentioned in the public notice issued in terms of the proviso to Rule 8(6) are as follows:-
(i) The description of the property including the details of the encumbrances known to the secured creditor.
(ii) The secured debt for recovery of which the property is to be sold.
(iii) Reserve price.
(iv) Time and place of public auction.
(v) Deposit of Earnest Money and
(vi) Any other thing that the Authorised Officer considers material for a purchaser to know in order to judge the nature and value of the property.
23. The obligation of the Authorised Officer to include in the public notice issued under Rule 8(6), the details of the encumbrances known to the secured creditor, is actually traceable to Clause (a) under the proviso to Rule 8(6). Since the obligation to disclose encumbrances is inbuilt in Clause (a) of the proviso itself, there is no necessity even to fall back upon Clause (f) under the proviso to Rule 8(6). Clause (f) may relate to matters other than encumbrances, such as pendency of suits etc., subject to the condition that the secured creditor is aware of the same. In this case, the secured creditor appears to be aware of the pendency of a partition suit and they have disclosed the same in the last column of the table given in the auction sale notice. Therefore, the secured creditor has actually fulfilled the requirement of Clause (f) under the proviso to Rule 8(6).
24. In so far as the ratio laid down in Jai Logistics {2010 (4) CTC 627} is concerned, it must be clarified that the obligation on the part of the Authorised Officer to disclose the encumbrances, is limited only to "those encumbrances known to the secured creditor". Since the very wording of Clause (a) under the proviso to Rule 8(6) is of a restrictive nature, there is no scope for expanding the same to all kinds of encumbrances created by the borrower or guarantor behind the back of the secured creditor. The ratio laid down in Jai Logistics, cannot be understood to mean that the secured creditor as an obligation to obtain an encumbrance certificate upto the period one day preceding the date of publication of the auction sale notice. Reading such an obligation into Clause (a) under the proviso to Rule 8(6) would actually tantamount to some kind of a tacit approval of all illegal alienations made or encumbrances created by the mortgagor after the creation of the security interest.
25. As a matter of fact, the statutory provisions make it clear that a sale could take place only after the expiry of 30 days from the date of the public notice. This 30 days time is intended to serve two purposes. One for the borrower to gather resources and repay the loan and another for all intending purchasers to make sufficient enquiries as a person of normal diligence and ordinary prudence would do while buying any immovable property. The purport of Rule 8(6) cannot be extended to such an extent that it obliterates the liability of the purchaser to undertake due diligence and to scrutinise the title to the property. Therefore, the obligation of the Authorised Officer is only to disclose the encumbrance that had come to the notice of the secured creditor. It is for the auction purchaser to apply for encumbrance certificates, in the time of 30 days made available to the intending buyers to see if there are any encumbrances.
26. Having clarified the legal position on the purport of Rule 8(6), we must now pass on to what happened on the date of the auction viz., 2.8.2010 with reference to the provisions of Rule 9 of the Security Interest (Enforcement) Rules, 2002. Rule 9(2) of the Rules require the sale to be confirmed in favour of the purchaser who has offered the highest sale price. However, this confirmation by the Authorised Officer is subject to the confirmation by the secured creditor. In other words, Rule 9(2) speaks of two confirmations. The first confirmation is by the Authorised Officer and the next confirmation is by the secured creditor. The first confirmation can be taken to be provisional and the next confirmation can be taken to be final, since the first confirmation by the Authorised Officer is made, by the very language of Rule 9(2), as subject to the next confirmation by the secured creditor.
27. Even before or while crossing the stage of Rule 9(2), a contingency may arise in the form of the highest bidder not making the deposit of 25% of the bid amount. That contingency is taken care of Rule 9(3). Rule 9(3) reads as follows:-
"(3) On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty-five per cent of the amount of the sale price, to the authorised officer conducting the sale and in default of such deposit, the property shall forthwith be sold again."
28. A reading of Rule 9(3) shows that if the highest bidder fails to pay a deposit of 25% of the amount to the Authorised Officer immediately, the property should be forthwith sold again. It is not clear from Rule 9(3) whether it indicates a re-auction immediately at the same time or the acceptance of the second highest offer. In either case, the margin or difference between the highest bid and the next highest bid or the margin between the highest bid and the amount for which the property is sold will be immediately known. This difference can be taken to be a loss suffered by the secured creditor on account of the failure of the auction purchaser to deposit the money. An Authorised Officer or a secured creditor will be fully justified in forfeiting the Earnest Money to the extent of the loss so suffered by the Bank, since it will be in tune with Sections 73 and 74 of the Contract Act.
29. In the case on hand, the writ petitioner did not deposit 25% of the bid amount immediately in terms of Rule 9(3). Therefore, the Bank ought to have sold the property forthwith as mandated by Rule 9(3). If this had been done, the question whether the Earnest Money Deposit could be forfeited and the question as to what extent it could be forfeited could have been easily found out. But unfortunately, the Bank did not comply with the second part of Rule 9(3). The Bank simply kept on demanding 25% of the bid amount. Therefore, it is not possible to know the extent of loss that the Bank suffered on account of the failure of the purchaser to deposit 25% of the amount.
30. We also wish to point out that there are two kinds of default that the highest bidder in an auction could commit. The first type of default is when he fails to deposit 25% of the bid amount immediately after being declared the highest bidder. The next or second type of default that could be committed by the highest bidder is the stage at which he is required to pay 75% of the bid amount, after depositing 25% on the date of the auction.
31. If the default committed by the highest bidder falls under the first category, Rule 9(3) indicates the action to be taken. If the default falls under the second category, Rule 9(5) prescribes the forfeiture of the entire deposit of 25%. Therefore, in cases falling under the second category, there is no other option except forfeiture of the 25% of the bid amount. In other words, there is a distinction between forfeiture of the earnest money and the forfeiture of the deposit of 25% made under Rule 9(3). The forfeiture of the deposit of 25% made under Rule 9(3), is taken care of by Rule 9(5). But the forfeiture of the earnest money deposit is not taken care of by the Rules and hence the Bank may have to fall back upon the terms and conditions of sale.
32. In this case, the Bank has also failed to produce a copy of the terms and conditions of sale attached to the application. The public notice issued on 28.6.2010 fixing the date of auction as 2.8.2010, does not contain an indication about the forfeiture. We do not know whether there was a clause for forfeiture of the earnest money deposit in the terms and conditions of tender attached to the application forms. Therefore, in view of the failure of the Bank to produce a copy of the tender conditions and also their failure to follow the second part of Rule 9(3), we have no alternative except to grant relief to the writ petitioner, despite our finding that the Bank cannot be accused of non-disclosure of encumbrances and despite our interpretation to Rule 8(6).
33. In view of the above, the writ petition is allowed and a direction is issued to the respondent-Bank to refund the amount of Rs.3,57,000/- to the petitioners, within a period of 4 weeks from the date of receipt of a copy of this order. However, there shall be no order as to costs. Consequently, M.P.Nos.1 and 2 of 2011 are closed.
(D.M.J.) (V.R.S.J.) 12-09-2012 Index : Yes Internet: Yes kpl/Svn D.MURUGESAN,J, and V.RAMASUBRAMANIAN,J.
Kpl/Svn Order in W.P.No.21364 of 2011.
12-09-2012