The Supreme Court of India, in a significant ruling, has quashed the e-auction of a leasehold plot belonging to the Delhi Development Authority (DDA), holding that the sale was conducted in violation of mandatory statutory procedures. The Court found that the Debts Recovery Tribunal’s (DRT) Recovery Officer and the creditor bank failed to disclose material encumbrances on the property, thereby rendering the auction notice and subsequent sale invalid.
The judgment was delivered by a bench comprising Justice Sanjay Kumar and Justice Alok Aradhe. The bench set aside the auction, the sale certificate issued to the purchaser, and a Delhi High Court order that had earlier dismissed the DDA’s challenge on grounds of res judicata. The apex court directed Corporation Bank to refund the entire purchase amount to the auction purchaser with interest, holding the bank responsible for the consequences of advancing a loan on an “illegal mortgage.”
The case involved a plot in Jasola, New Delhi, which the DDA had allotted to the Sarita Vihar Club on a leasehold basis. The club mortgaged the plot to Corporation Bank without obtaining the requisite prior written consent from the Lieutenant Governor of Delhi, a condition stipulated in the perpetual lease deed.
Background of the Case
The DDA allotted the plot to Sarita Vihar Club on October 1, 2001. The lease deed, executed on January 28, 2005, contained a specific condition in Clause 5(b) that required prior written consent of the Lieutenant Governor for any mortgage or charge on the plot.
The club, having applied for a loan from Corporation Bank, received a No-Objection Certificate (NOC) from the DDA on February 22, 2002, merely to apply for the loan to pay the premium. The DDA explicitly stated that permission for the mortgage would only be issued after the execution and registration of the lease deed. Despite this, the plot was mortgaged.
When the club defaulted on its loan repayments, the bank initiated recovery proceedings before the DRT, which passed an order in its favour on August 27, 2010. Subsequently, the DRT’s Recovery Officer issued a notice for the proclamation of sale.
Arguments of the Parties
The DDA objected to the sale before the Recovery Officer, arguing that the mortgage was illegal and void as it was created without the mandatory prior permission. The DDA also asserted its pre-emptive right to purchase the plot and its claim to an “unearned increase” as per the lease terms. These objections were rejected by the Recovery Officer on February 27, 2012.
The DDA then approached the Delhi High Court. In those proceedings, on November 5, 2012, counsel for the bank made a statement that the auction would be “subject to terms and conditions of the lease.” In view of this undertaking, the DDA withdrew its writ petition.
However, the e-auction notice published on September 27, 2012, did not disclose the DDA’s claims or the specific lease conditions. The plot was auctioned on November 9, 2012, and M/s Jay Bharat Commercial Enterprises Pvt. Ltd. was declared the highest bidder at Rs. 13.15 crores.
The DDA filed a second writ petition before the High Court challenging the auction, which was dismissed on August 11, 2014, on the grounds that the issues were barred by principles analogous to res judicata, as the earlier petition had been withdrawn. This dismissal led to the present appeal before the Supreme Court.
Before the Supreme Court, the DDA argued that the sale was conducted in contravention of the statement made before the High Court. The bank contended that the DDA was estopped from challenging the sale as it had remained silent for years after being informed of the mortgage. The auction purchaser argued that the sale was void for non-disclosure of material claims in the sale proclamation, as required by law, and sought a refund of its money with interest.
Court’s Analysis and Findings
The Supreme Court found merit in the arguments of the DDA and the auction purchaser. The Court’s analysis focused on two key legal issues: the validity of the auction process and the applicability of res judicata.
1. Violation of Statutory Procedure:
The Court noted that Section 29 of the Recovery of Debts and Bankruptcy Act, 1993, makes the procedure laid down in the Second Schedule of the Income Tax Act, 1961, applicable to such sales. Rule 53 of this schedule mandates that a sale proclamation must specify, “as fairly and accurately as possible,” any material information a purchaser needs to judge the property’s nature and value.
The Court held that the DDA’s claim for an “unearned increase” was a material encumbrance that should have been ascertained and disclosed in the auction notice. Justice Aradhe observed, “The Recovery Officer without directing the DDA to quantify its claim on account of unearned increase in relation to the subject plot and without ascertaining the same, directed, that sale proclamation be issued.”
The judgment further concluded:
“Thus, it is evident that e-auction notice was issued in violation of Rule 53 of the Second Schedule to the 1961 Act as well as Rule 16 of the Rules, 1962. Therefore, no sanctity can be attached to the e-auction sale notice and proclamation of sale dated 27.09.2012 as well as confirmation of sale and sale certificate… issued in favour of the Auction Purchaser.”
2. Res Judicata Not Applicable:
The Supreme Court held that the High Court erred in dismissing the DDA’s second petition on grounds of res judicata. The Court clarified that the earlier writ petition was not decided on its merits but was withdrawn based on the bank’s undertaking. The subsequent breach of this undertaking gave the DDA a fresh cause of action. The Court stated:
“The earlier writ petition i.e. Writ Petition (C) No. 6972 of 2012 filed by the DDA was withdrawn in view of the undertaking furnished by the bank that the auction shall take place in accordance with terms and conditions of the lease… Therefore, the DDA had a fresh cause of action to approach the Court.”
3. Restitution for the Auction Purchaser:
The Court acknowledged the plight of the auction purchaser, describing it as an innocent party “caught in the undertow of circumstances, not of its making.” Invoking the principle of restitution to prevent unjust enrichment, the Court held the bank solely responsible.
“The Bank having advanced the money of an illegal mortgage and having chosen to auction what it never lawfully possessed, bears the responsibility for the consequences,” the judgment declared. “The restitution therefore becomes not merely a legal device but a moral imperative.”
Decision
In its final order, the Supreme Court quashed the Delhi High Court’s order of August 11, 2014, the e-auction notice dated September 27, 2012, the auction conducted on November 9, 2012, and the sale certificate issued to the auction purchaser.
The Court directed Corporation Bank to refund the entire amount deposited by the auction purchaser with interest at 9% per annum from the date of deposit until the date of repayment. The appeal filed by the DDA was accordingly allowed.
