Must Do Justice By Promoting Honesty’, Directions To SBI To Refund Forfeited Amount Over Failure To Disclose Encumbrance On Auction Property: In Karnataka High Court

The Karnataka High Court has ordered State Bank of India to refund the amount it withheld from a prospective purchaser of a property sold under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) because it failed to disclose that title to the subject property was not with the original borrower of the loan. 

In the case of P Balaji Babu v. State Bank of India (WRIT PETITION NO.46450 OF 2014), a single judge bench led by Honourable Justice P Krishna Bhat ordered the bank to refund the petitioner Rs.24,10,000/- plus interest at 8% p.a. from 15.11.2010 until the date of payment. 

According to the facts of the case, One Jignesh N. Patel was the owner of the immovable property in question. He obtained a loan for his business from SBI, Mysore, and as security, he created a mortgage on the aforementioned property. 

Due to the outstanding loan, SBI initiated proceedings and took possession of the mortgaged property. The property was put up for sale in order to recover the outstanding loan. SBI issued a newspaper publication in this regard. After noticing this, the petitioner deposited Rs.5,63,500 in earnest money and submitted his sealed tender. The same was accepted for Rs.56,40,000. 

As a result, the petitioner was directed to deposit 25% of the total amount on the same date, which included the EMD amount already deposited by him. As a result, he deposited Rs.24,10,000. Furthermore, according to an SBI communication, the petitioner was required to deposit the remaining Rs.42,30,000 by November 30, 2010. 

When he inquired at the jurisdictional Sub-Office, Registrar’s he discovered that the borrower had already alienated the property in favour of his wife, Naina J Patel, by executing a registered gift deed prior to the sale notification. As a result, petitioner made a representation to SBI to have the gift deed annulled in order to avoid any dispute over property title. 

However, SBI refused and insisted on the petitioner making full payment, forfeiting the amount of Rs.24,10,000 deposited by the petitioner. 

The Petitioner argued before the High Court that SBI suppressed the fact that the borrower did not have title to the property in the sale notification. Borrower’s liability to SBI was settled through One Time Settlement (OTS), and the borrower paid the amount and the account was closed. As a result, SBI has suffered no loss or damage as a result of the petitioner’s failure to deposit the balance amount. 

The Bank objected to the petition, claiming that under the terms of the sale notification inviting tenders, a successful bidder could not withdraw from the auction once the bid was completed. The petitioner was free to conduct his own inspections and inquiries about the property, and there was no suppression of any material facts about the property sold under the provisions of the SARFAESI Act. 

Furthermore, it was stated that subsequent events of the loan account settlement by OTS cannot be considered by the Court and that the refund of Rs.24.10 lakhs deposited by the petitioner cannot be ordered on that basis. 

Finally, it was argued that under Section 13 of the SARFAESI Act, the purchaser, such as the petitioner, would have received full title to the property purchased, and thus the petitioner should have deposited the entire sale price, and because he did not, this Court cannot order a refund of the amount prayed for. 

To begin, the court referred to Rule 8 of the Security Interest (Enforcement) Rules, 2002, and stated that the requirement of providing details of encumbrances known to the secured creditor applies not only to website sale publication, but also to newspaper publication. 

The Court also rejected the Bank’s contention that it had no knowledge of the gift deed because the Bank had not denied Petitioner’s assertion that it was a party to the suit filed by Naina Patel. 

“This clearly shows that on account of Smt. Naina J Patel filing W.P.No.122/2008, respondent No.1 was clearly aware that Sri. Jignesh N. Patel had transferred the title in her favour,” the court added. Despite this, respondent No.1 failed to mention this crucial aspect of title to the property brought for sale in the sale notice issued. 

The court went on to say, “Petitioner, therefore, was fully entitled to protect his interest, and in light of respondent No.1’s deliberate suppression of the material facts, he did not deposit the full sale price, and in such circumstances, respondent No.1 was not justified in forfeiting the amount deposited by the petitioner.” 

“Courts must do justice by promoting honesty and good faith as far as it lies in their power,” the bench reasoned. “A different conclusion would be ‘opposed to what is reasonable, probable, and fair.” 

The court also considered the fact that the loan account had been settled. It stated, “Respondent No.1 can no longer claim to have suffered any loss or damages because payment has been accepted and the loan account has been closed. If that is the case, respondent No.1 has no justification for keeping the amount deposited by the petitioner, in whose favor respondent No.1 was unable to pass full title due to the borrower/mortgagor transferring the property in favour of Smt. Naina J. Patel.” As a result, the petition was granted. 

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