Once auction sale initiated by bank which continued for more than 7 days stands vacated because of stay order obtained by borrower, then such borrower can’t ask for fresh public notice: SC on Maharashtra Co-operative Societies Rules

Read Judgment: Deenadayal Nagari Sahakari Bank Ltd. & Another V. Munjaji And Others 

Pankaj Bajpai

New Delhi, February 17, 2022:  While considering an issue pertaining to initiation of auction sale by lender banks upon non-payment of dues, the Supreme Court has opined that once the borrower failed to apply to the Recovery Officer to set aside the sale of his mortgaged property on the ground of material irregularity within a period of thirty days from the date of sale of the immovable property and thereafter the Sale Certificate had been issued, normally the borrower couldnot be permitted to challenge the same subsequently. 

A Division Bench of Justice M.R Shah and Justice B.V Nagarathna observed that once the sale was required to be adjourned because of the stay order obtained by the borrower and the stay continued for more than seven days which came to be vacated subsequently, such borrower cannot be permitted to take the benefit of his action of obtaining the stay and contend that even if the sale was adjourned for more than seven days due to the stay order obtained by him, there shall be a fresh proclamation.

Going by the background of the case, Munjaji (First respondent – borrower), the Director of Vaishnavi Hatcheries Company Limited, borrowed loan from Deenadayal Nagari Sahakari Bank (First Appellant) and one Vaidanath Nagari Sahakari Bank (Second Appellant). As a security to the said loan, four properties were mortgaged. Since the borrower defaulted in payment, both the banks initiated separate recovery proceedings against First respondent and the borrower. Accordingly, Recovery Certificate was issued in favour of the appellant-bank u/s 101 of Maharashtra Co-operative Societies Act, 1960. 

Later, a proclamation was published in the daily newspaper ‘Sakal’ followed by a proclamation as per Rule 107(11) of the Maharashtra Co-operative Societies Rules, 1961 giving 30 days’ time to First respondent to pay the amount. The Deputy Joint Registrar, Co-operative Societies fixed the upset price at Rs.98,10,000/-, after which, Vaidanath Bank also initiated the process of auction of the property, which had attained finality. The upset price fixed by the Deputy Joint Registrar, Co-operative Societies was challenged by the First respondent. At the same time, the appellant-bank issued a tender notice to sell the mortgaged properties. However, on the date fixed for submission of tender, the Divisional Joint Registrar granted stay of the auction proceedings. 

Later, the bids were opened and Ratnakar Gutte was found to be the highest bidder and he offered the bid of Rs.1,26,00,000/-. The auction purchaser deposited 15% of the said amount on the same day and an application was made to the District Deputy Registrar for seeking approval to accept the balance 85% of the amount from the auction purchaser. Immediately on receipt of such approval, the auction purchaser deposited the remaining 85% balance. 

Accordingly, a Sale Certificate was issued in favour of the auction purchaser and the sale deed was also executed. Even though no objection was raised before the Recovery Officer about any irregularity or fraud as required under Rule 107(14) of the MCS Rules, 1961, the officers of the bank went to take possession of the property, where they were attacked and therefore the officers of the bank lodged an FIR while acquiring possession of the property.

On the other hand, first respondent challenged the auction proceedings alleging that the mortgaged deed of the property and sale deed are illegal. When the matter reached High Court, it had quashed the criminal proceedings initiated by first respondent against the officers of the bank and others. The High Court also set aside the auction sale and the Sale Certificate in favour of the auction purchaser. In addition, the High Court directed the appellant-bank to refund the sale price to the auction purchaser along with interest. Hence, present appeal. 

After considering the submissions, the Top Court found that once the borrower failed to apply to the Recovery Officer to set aside the auction sale on the grounds of material irregularity, mistake or fraud in publishing or conducting the auction sale within a period of thirty days from the date of sale of immovable property, thereafter it was not open for the borrower to challenge the sale on the ground of material irregularity. 

Even under Rule 107(14)(i) of the MCS Rules, 1961, no sale shall be set aside on the ground of material irregularity, mistake or fraud unless the Recovery Officer is satisfied that the applicant had sustained substantial injury by reason of such irregularity, mistake or fraud, added the Court.  

Speaking for the Bench, Justice Shah noted that in the present case, there was no finding recorded by the High Court that the borrower had sustained substantial injury and by reason of such irregularity the auction sale had to be set aside, and therefore, setting aside of auction sale/sale by the High Court was just contrary to the proviso to Rule 107(14)(i) of the MCS Rules, 1961. 

Within a period of seven days from the date of vacating stay and dismissal of the revision application, the auction was held, and therefore, it couldnot be said that the auction sale was in breach of Rule 107(11)(f) of the MCS Rules, as the period during which the stay was in operation was to be excluded, added the Bench. 

Accordingly, the Apex Court quashed the order passed by the High Court.