Bombay High Court Orders Fresh Auction of Mortgaged Property, Quashes DRT and DRAT Orders as "Perverse and Contrary to Law"

In a significant ruling, the Bombay High Court has directed a fresh auction for a mortgaged apartment, setting aside the orders of the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT) for treating an unsecured creditor as a secured one. The Division Bench of B.P. Colabawalla and Somasekhar Sundaresan, JJ., described the orders as "perverse and manifestly contrary to law."

The case revolves around a property mortgaged by Asset Reconstruction Company (India) Ltd. (ARCIL) involving Flat No. 61, Basant Apartment, Mumbai. The DRT and DRAT had approved the sale of this property at an auction below the approved reserve price, which was strongly contested by ARCIL.

Justice Somasekhar Sundaresan observed, "The Impugned Orders turn on the head, well-established principles of law governing priority of security interests." The court highlighted that the DRT and DRAT erred in elevating the status of Standard Chartered Bank (SCB), an unsecured creditor, above the secured creditors, notably the consortium of banks led by Indian Overseas Bank (IOB), which held the mortgage.

- The court found that the auction sale price was significantly below the reserve price of Rs. 1.17 crores, terming it a ground for interference.

- SCB's claim over the proceeds from the sale of the property, based on a leave and license agreement with the Karias (property owners), was rejected.

- The High Court emphasized the supremacy of the mortgagee's rights over any licensee or unsecured creditor.

- Directions were issued for a fresh auction, treating the mortgagee as the only secured creditor.

This ruling underscores the protection of secured creditors' rights in property auctions and clarifies the legal position regarding the priority of claims in debt recovery processes. It serves as a critical reminder of the sanctity of secured debts and the legal framework governing their enforcement.

- A fresh auction to be conducted with the mortgagee as the only secured creditor.

- SCB to pursue recovery against the Karias, unrelated to the auction proceeds.

- The Purported Acquirers are entitled to a refund of any deposited amounts with interest.

The Court refrained from ordering costs, citing the peculiar circumstances of the case, and stressed the need for a swift resolution within six months. This decision is seen as a reaffirmation of established property and secured transaction laws, ensuring the fair treatment of secured creditors in debt recovery processes.

Date of Decided : 18-03-2024

ASSETS RECONSTRUCTION COMPANY (INDIA) LTD. Vs. UNION OF INDIA AND OTHERS