Bank Sold What It Never Lawfully Possessed: Supreme Court Cancels Auction Over Illegal Mortgage of DDA Land

“Restitution becomes not merely a legal device but a moral imperative… the auction purchaser neither breached the covenant nor failed in diligence” — Supreme Court of India delivered a judgment that goes to the heart of property law, public trust, and auction jurisprudence. The Court quashed an auction of leasehold land by Corporation Bank, observing that the bank had mortgaged and auctioned a property over which it had no lawful title, due to lack of mandatory permission from the Delhi Development Authority (DDA).

In a powerful indictment of procedural impropriety and institutional failure, the Court not only annulled the sale but ordered full restitution to the innocent auction purchaser, invoking both legal obligation and moral conscience.

“Mortgage Without Prior Permission is Void — No Transfer of Interest Can Take Place”: Apex Court Reinforces Leasehold Obligations

At the core of the case lay Clause 5(b) of the perpetual lease deed executed on 28.01.2005 between DDA and Sarita Vihar Club — the original lessee — which explicitly required prior written consent of the Lieutenant Governor of Delhi before any mortgage or charge could be created over the property.

Despite this clear contractual restraint, Corporation Bank accepted the lease deed as collateral, disbursed loans, and subsequently auctioned the property after the club defaulted. DDA objected, asserting that no valid mortgage existed, and that the auction was void ab initio. The Court agreed:

“No consent in writing of the Lieutenant Governor before creation of mortgage in favour of the Bank was taken… therefore the mortgage in favour of the Bank is illegal.”【12】

“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.”【31】

“Rule 53 of Income Tax Act Was Violated — Auction Process Lacked Transparency on Statutory Dues”: Procedural Safeguards Flouted

The auction process was initiated under the Recovery of Debts and Bankruptcy Act, 1993, read with Rule 53 of the Second Schedule of the Income Tax Act, 1961, which mandates that the proclamation of sale must disclose all material facts, including encumbrances.

However, the e-auction notice dated 27.09.2012 made no mention of DDA’s statutory claim of unearned increase, nor did it disclose that prior consent for mortgage was never obtained. The Court held that both the Bank and Recovery Officer violated the statutory mandate:

“It is evident that e-auction notice was issued in violation of Rule 53 of the Second Schedule… as well as Rule 16 of the Rules, 1962. Therefore, no sanctity can be attached to the e-auction sale notice…”【27】

“Auction Purchaser Is Not at Fault — Law Must Protect the Innocent”: Court Upholds Restitution and Orders 9% Interest

Perhaps the most compelling aspect of this decision was the Court’s empathetic protection of the auction purchaser, M/s Jay Bharat Commercial Enterprises Pvt. Ltd., who had deposited ₹13.15 crores and later found itself entangled in an illegal transaction it had no part in creating.

“Among all the actors in this legal drama, [the auction purchaser] alone stands innocent… The Auction Purchaser neither breached the covenant nor failed in diligence.”【31】

Invoking the doctrine of unjust enrichment, the Court cited Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., observing:

“Restitution therefore becomes not merely a legal device but a moral imperative… the jurisdiction to make restitution is inherent in every court and will be exercised wherever the justice of the case demands.”【30】

Accordingly, the Court directed that the entire amount deposited by the auction purchaser be refunded with 9% interest, compensating for the time value of money:

“The balance amount… be returned to the Auction Purchaser with an interest at the rate of 9% per annum within a month.”【32】

“DDA’s Objection Not Barred by Res Judicata — Bank’s Undertaking Was Breached”: Fresh Cause of Action Recognized

Corporation Bank attempted to invoke res judicata, pointing to DDA’s earlier withdrawal of a writ petition in 2012 after the bank gave an undertaking before the Delhi High Court that auction would follow lease terms.

But the Court drew a sharp line: “The earlier writ petition was not decided on merits… the DDA had a right to insist that auction is held in accordance with terms and conditions of the lease.”【29】

The violation of this undertaking constituted a fresh cause of action: “Auction was held in violation of terms of the lease… principles analogous to Section 11 of the CPC did not apply.”【29】

Institutions Cannot Betray Trust — Public Property Must Be Protected with Due Diligence

This ruling is a landmark precedent on the sanctity of lease covenants, public land regulation, and institutional accountability. By holding that a bank cannot auction property it has no authority to mortgage, the Court reinforced the fiduciary responsibility of state instrumentalities and financial institutions alike.

The judgment ensures that:

• DDA’s statutory rights over leasehold land are protected;

• Banks cannot ignore lease restrictions while disbursing loans or auctioning properties;

• Auction purchasers are safeguarded from illegality they did not participate in.

Date of Decision: September 25, 2025