In a significant judgment, the Supreme Court of India ruled that an auction purchaser, who was deprived of the use of the amount paid due to the setting aside of an auction sale, is entitled to compensation in the form of interest. The court directed the respondent bank to pay interest to the purchaser, setting a precedent on the rights of auction purchasers when sales are set aside based on equitable considerations. The judgment was delivered by a bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan in the case of Salil R. Uchil vs. Vishu Kumar & Ors (Civil Appeal No. 11693 of 2024, arising out of SLP(C) No. 5464 of 2023).
Background of the Case:
The case originated from a business loan of ₹25,00,000 that was taken by respondents Vishu Kumar and others from a co-operative bank (the fourth respondent). The borrowers defaulted on their payments, leading the bank to initiate recovery proceedings. The Assistant Registrar of Co-operative Societies, acting as the Recovery Officer, issued a sale proclamation for a property held by the borrowers, valued at ₹80,67,500. The auction held on July 22, 2019, resulted in the highest bid of ₹81,20,000 by the appellant, Salil R. Uchil, which was accepted, and a sale confirmation certificate was issued.
However, the borrowers later deposited ₹25,61,400 in court within three months of filing a writ petition challenging the auction. The Karnataka High Court set aside the auction sale based on the equitable grounds that the borrowers were not wilful defaulters, despite missing the 30-day deadline for challenging the auction under Rule 38(4)(b) of the Karnataka Co-operative Societies Rules, 1960.
Legal Issues Involved:
1. Entitlement to Compensation for Auction Purchasers: The primary legal issue was whether the appellant, as the auction purchaser, was entitled to compensation beyond the 5% solatium ordered by the High Court.
2. Validity of Auction Set Aside on Equitable Grounds: The court had to decide whether the auction, which was otherwise lawful, could be set aside on equitable considerations without adequately compensating the auction purchaser for being deprived of the use of their money for an extended period.
3. Interest Payment to Auction Purchasers: A critical issue was whether the appellant was entitled to interest on the auction amount from the date of deposit until the actual refund, given the significant delay in refunding the amount.
Decision of the Court:
The Supreme Court noted that while the High Court set aside the auction on equitable grounds, the 5% compensation ordered was insufficient to fully compensate the appellant, who had been deprived of the use of ₹81,20,000 since July 2019. The bench highlighted that even though the auction was set aside based on discretionary powers under Article 226 of the Constitution, the purchaser was entitled to adequate compensation for the delay in refunding the amount.
The court observed:
“The appellant was entitled to receive interest on the amount deposited with the Recovery Officer from the date of deposit till the date of refund. Compensation must reflect the loss of opportunity to use the deposited sum.”
The court further clarified that the Karnataka Co-operative Societies Rules, 1960, under Rule 38(4)(b), do not apply in this case, as the borrowers had not applied to set aside the auction within the stipulated 30-day period. However, the High Court exercised its discretionary jurisdiction and ordered 5% compensation, which the Supreme Court found inadequate.
Key Observations:
1. Compensation for Loss of Use of Funds: The court ruled that the auction purchaser must be compensated with interest for the loss of the opportunity to use the funds deposited. The court directed the fourth respondent (the co-operative bank) to pay simple interest at the rate of 6% per annum on the ₹81,20,000 from the date of deposit until the actual refund.
2. Responsibility of the Respondent Bank: The court held that the fourth respondent bank, which had retained the auction amount, was responsible for compensating the appellant. Even though the funds were lying with the Recovery Officer, the bank’s failure to challenge the High Court’s decision meant it was liable to pay the interest.
3. Equitable Setting Aside of Auctions: While setting aside an auction on equitable grounds, the court emphasized that compensation must be commensurate with the loss suffered by the auction purchaser. The mere payment of 5% solatium was deemed inadequate, considering the substantial sum involved and the long delay in refunding the money.
The appellant, Salil R. Uchil, was represented by his counsel, who argued that the compensation awarded by the High Court was insufficient, as the appellant had been deprived of the use of ₹81,20,000 for several years. The fourth respondent bank contended that the 5% solatium was sufficient compensation as per the Karnataka Co-operative Societies Rules.
