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TMI Blog2024 (8) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... t below the approved reserve price in an auction. For the reasons set out by us in this judgement, the orders of the DRT and the DRAT deserve to be quashed, with a direction to conduct the auction afresh in accordance with law, as declared in this judgement. The fundamental fallacy in them is that they have treated an unsecured creditor as a secured creditor and that too with priority over the secured creditors (beneficiaries of a mortgage over the secured asset). Factual Matrix: 3. In a nutshell, the following core facts are relevant to adjudicate the petition: a) The Petitioner, Asset Reconstruction Company (India) Ltd. ("ARCIL"), is the beneficiary of a mortgage over Flat No. 61, 6th Floor, Basant Apartment, Navrang Basant Cooperative Society, 101, Cuffe Parade, Backbay Reclamation, Colaba, Mumbai 400 005 ("Secured Asset"); b) The mortgage had been created on 15th May, 1998; by way of deposit of title deeds by Respondent Nos. 4 and 5; Mr. Kirit Karia and Ms. Nirupama Karia (collectively, the "Karias"); and the promoters of Respondent No. 3, Eastern Overseas Ltd. ("EOL"); to secure borrowings by EOL from a consortium of banks led by Indian Overseas Bank ("IOB"); c) On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explicit finding that the mortgagee had superior rights. In the same order, the DRT ruled that the Secured Asset may be sold either after evicting SCB, or by leaving it to the purchaser of the Secured Asset to evict SCB. SCB was directed to pay its arrears of license fees. The latter option (of selling the Secured Asset leaving it to the purchaser to evict SCB) was pursued for sale of the Secured Asset; l) SCB filed a suit against the Karias for recovery of the security deposit, being Suit No.1925 of 2003 ("SCB Recovery Suit"), and the same is pending in this High Court; m)On 6th February, 2004, the terms and conditions were set by the DRT Receiver for an auction of the Secured Asset on an as-is-whereis basis, including a term that the auction may not be at a price lower than a reserve price to be fixed; n) A public notice for the auction was given on 17th February, 2004, and the bidders were all informed about the LLA with SCB; o) Based on an independent valuation report dated 8th March, 2004, the DRT, on the same date, fixed the reserve price for sale of the Secured Asset at Rs. 1.17 crores. The reserve price was naturally not made public but it was a benchmark by wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placing IOB with ARCIL on 22nd March, 2012; and v) On 28th March, 2005, a status quo order was passed by this Court. On 26th September, 2005, rule was issued and the status quo has continued since then. Core Issue and Approach: 4. We are conscious of our jurisdiction being that of a writ court, and have accordingly examined the material on record from the perspective of whether due process and the foundational elements of law have been complied with. We are faced with considering the rights of a mortgagee (Petitioner), the rights of a licensee (SCB) and those claiming derived benefits from such rights of the licensee (Purported Acquirers). The Karias did not participate in the proceedings. Counsels who have appeared before us for the other parties, suggest that the Karias are absconding, but as will be seen, that need not detain us from considering and disposing of this writ petition. 5. In our opinion, the DRT Order and the DRAT Order (collectively, "Impugned Orders") are perverse and are manifestly contrary to law. The Impugned Orders turn on the head, well-established principles of law governing priority of security interests, the rules governing the auction that was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra would further emphasise that the terms and conditions for the auction had been finalized by the officers of IOB, and therefore, there has been a complete acquiescence to the position the Petitioner finds itself in. As regards the deep discount of the auction price to the reserve price, Mr. Balsara would assert that the valuation had not factored in the effect of SCB being in occupation of the Secured Asset and therefore the reserve price of Rs.1.17 Crores was merely an indicative price for market value between a willing buyer and a willing seller without regard to the problems posed by SCB's rights under the LLA. 9. Therefore, Mr.Balsara would argue, the effective price offered by the Purported Acquirers should be considered as Rs. 1.23 Crores (the sum of Rs.33 lakhs bid in the auction being enhanced by the amount of Rs.80 lakhs or more payable to SCB). In conclusion, Mr.Balsara would argue that the DRT and the DRAT have exercised judicial discretion in a non-arbitrary manner to confirm the sale of the Secured Asset at Rs.33 lakhs, since in their view, it would have been grossly unreasonable and illogical to expect full market value for the Secured Asset in the absence of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, we have examined the material on record to deal with the argument that despite the yawning gap between the reserve price and the auction price, the auction outcome was fair, considering that the Impugned Orders have sought to reconcile the competing interests of the Petitioner and of SCB, and thereby justified the bid of the Purported Acquirers. 13. In a nutshell, SCB is a creditor of the Karias and may have a cause of action to recover its dues from the Karias, for which it has instituted the SCB Recovery Suit, which would be eventually adjudicated. Should SCB succeed, the decree therein would have to be executed against the Karias. 14. The issue at hand is not whether SCB may have a legitimate right to recovery of the security deposit under its LLA which was admittedly entered into not only after the creation of the mortgage in favour of the Petitioner, but also after the Original Application was filed. Instead, the issue at hand is whether SCB has any right over the Secured Asset to recover its dues from the Karias. The Petitioner being a prior mortgagee in whose favour the Karias created the mortgage over the Secured Asset, it is the Petitioner who has the foremost an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ToP Act, no lease of a mortgaged property may be made for a period exceeding three years, and no clause for renewal may be contracted. The agreement with SCB is a mere leave and license agreement and not even a lease, and it purports to contain a perpetual license pending repayment of security deposit with 36% interest - provisions that must necessarily yield to the mortgage being enforced; f) Despite a licensee being a position inferior to a lessee, and despite even a lessee not having any right to retain possession beyond three years in such property, the Impugned Orders effectively endorse SCB as having a superior right - only because of the foundational error of treating SCB's rights as a "charge" or "encumbrance", when it did not even have a contractual right to possession, being a recipient of a bare license to use the Secured Asset; g) Worse, the manner in which the LLA was executed and SCB entered upon the premises, does not even point to any equities being available either to SCB or to the Purported Acquirers, who derive benefit on the premise of SCB's rights. The LLA was created on 20th August, 2000, well after the institution of the Original Application on 28th Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted a stance that some other proceedings would be necessary to evict SCB, and thereby ruled that SCB had a charge. Therefore, the DRT justified the approval of the Purported Acquirers' bid amount of Rs. 33 lakhs, in the teeth of the reserve price of Rs. 1.17 crores, treating the amount purportedly payable to SCB as being added to the bid amount. 16. To put it in a nutshell, SCB, the unsecured creditor was now, by virtue of the Impugned Orders converted into a secured creditor, and worse, in preference to the consortium of banks led by IOB, the secured creditors, whose interest is now owned by the Petitioner. Even if we were to assume for the sake of argument that the LLA created any sort of "charge" in favour of SCB, it would make no difference for the simple reason that the LLA executed with SCB was way after the mortgage created in favour of IOB (now assigned to the Petitioner) and even after the Original Application was filed by IOB in the DRT. Therefore, any so-called "charge" of SCB would in any event be subservient to the charge of IOB (now the Petitioner). Yet, the effect of the Impugned Orders are that SCB will get priority over and above IOB. 17. The LLA having been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured creditor. Sumikin Bussan is of no assistance in resolving this conflict of rights in a manner that places the unsecured licensee above the secured mortgagee. 21. In any case, the LLA was nothing but a mere bare license to use the mortgaged asset as a residence. Even a bare perusal of the LLA would show that under Clause 22(b) of the LLA, it is the Karias who are in "in legal possession and full charge and control of" the Secured Asset at all times. It is an explicit provision in the LLA that the LLA was "a mere license" and SCB shall at no time be deemed to have "exclusive possession" of the Secured Asset. 22. Clause 15 of the LLA also explicitly provided that neither SCB nor any person claiming through SCB would be entitled to put up any claim of tenancy, sub-tenancy or any other adverse right or title in the Secured Asset. This clause would bring the Purported Acquirers within its sweep. This clause explicitly provided that the LLA would create no such right or title over the Secured Asset in favour of SCB, which had "a bare license with a mere limited rights of user for the residence purpose only". 23. A decision by another Division Bench of this Court states that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... validly executing the memorandum of mortgage in favour of the mortgagee. The Court further held that section 65-A of the Transfer of Property Act clearly mandates that the duration of lease to be executed by the mortgagor cannot exceed 3 years. The Court therefore, concluded in paragraph 6 as follows: "Manifestly the said unregistered lease was created for the alleged unlimited period through unregistered lease deed in complete contravention of section 65-A of the Transfer of Property Act as per the said provision of section 65-A, the lessee can enjoy the protection if the lease is created by the mortgagor in conformity with the mandate of requirements laid down in section 65-A of Transfer of Property Act and not otherwise. Neither the mortgagor nor the lessee can defeat the right of mortgagee and no lessee can claim any protection unless his tenancy is as per the requirements of section 65-A of Transfer of Property Act." 8. In the present case, the claim of the respondent bank stands on a much better footing since the petitioner is neither a tenant nor lessee of the mortgaged premises and claims its right over the mortgaged premises on the basis of possessory lien. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be set aside. It is a matter of record that the LLA was executed after the proceedings pursuant to the Original Application were underway. It is also a matter of record that on 13th September 2000, the housing society informed SCB about the mortgage over the Secured Asset, insisting that permission from IOB should be obtained. By this time, SCB obtained knowledge of the mortgage or at least that of a purported mortgage. Worse, the Karias initiated litigation in the Co-operative Court constituted under the Maharashtra Co-operative Societies Act, 1960, without making the mortgagee a party, to obtain an interim order granting SCB entry into the premises. 26. Even at this stage, SCB, itself being a commercial bank, and therefore, fully conversant with the law on security interests, incredibly, chose to avail of the benefit of access to the Secured Asset obtained from the Co-operative Court by the Karias behind the back of the mortgagee, and that too with full knowledge that the Secured Asset was mortgaged. SCB and the Karias went on to register the LLA on 12th December, 2000, despite SCB too being aware by this time, about the existence of the mortgage, and having knowledge of the Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction proceedings would have to be undertaken, instead of ruling upon the law and applying to the facts, which would have rightly declared the right of a licensee to be inferior to the right of a mortgagee, leaving it to SCB to prosecute recovery against the Karias in the SCB Recovery Suit, rather than enabling recovery against the Secured Asset. 30. The vital nature of the element of the reserve price in auctions in security enforcement is well summarised by a Division Bench of this Court in Goldie Sud vs. Punjab National Bank & Ors. [2011(2) Mh.L.J. 944] in the following words: "8. In the present case, the terms and conditions of sale provided that the property would not be sold a t a price less than the reserve price. There was, therefore, in this case a clear indication by the first respondent that it would not agree to any amount less than the reserve price. No bidder was therefore entitled to assume that a bid at an amount less than the reserve price would possibly meet the consent of the secured creditor. The secured creditor had in advance clearly set forth its intent not to accept any bid below the reserve price. [ Emphasis Supplied ] 31. The DRT and the DRAT ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. Directions Issued: 34. Consequently, in these circumstances, we allow the writ petition in the following terms: a) The DRT Order upholding the sale of the Secured Asset to the Purported Acquirers, and all consequential actions such as issuance of the sale certificate and other formalities flowing from the DRT order are hereby quashed and set aside; b) The DRT is directed to conduct and oversee an auction afresh in accordance with law, treating the mortgagee as the only secured creditor with a charge in the form of the mortgage over the Secured Asset; c) SCB is free to pursue recovery proceedings against the Karias to recover the amount so deposited, which is in fact, the subject matter of the SCB Recovery Suit; d) Since the non-compliant auction was conducted way back in 2004, we request the DRT to endeavour to complete the auction and dispose of the Original Application as expeditiously as possible, and endeavour to do so within a period of six months from today; e) The Purported Acquirers shall be entitled to refund of any amounts deposited by them towards the purchase of the Secured Asset with interest that would have been earned thereon from the date of the pay ..... 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