IDBI Bank's Cancellation of Auction Sale Declared Illegal for Denial of Sale Certificate: Supreme Court

Bank’s Unilateral Action Without Hearing Violates Principles of Natural Justice, Court Directs Issuance of Sale Certificate to Purchasers - Supreme Court delivered a significant ruling in the case of IDBI Bank Ltd. vs. Ramswaroop Daliya and Others, quashing IDBI Bank’s cancellation of an auction sale. The Court found that the bank’s actions were not only unjustified but also violated the principles of natural justice. The auction sale, which took place on April 10, 2018, had been unilaterally canceled by the bank without providing the auction purchasers a proper opportunity to be heard.

In March 2018, IDBI Bank had issued an e-auction notice for the sale of 2 guntas of land located in Bogaram village, Telangana. The respondents, Ramswaroop Daliya and others, emerged as the highest bidders in the auction held on April 10, 2018, with a winning bid of ₹1.42 crore. They promptly deposited 25% of the bid amount (₹36 lakh) on the same day, as required by auction rules.

However, complications arose when IDBI Bank refused to accept the remaining balance of ₹1.06 crore, citing multiple reasons, including a writ petition filed by the guarantor of the auctioned property and an advisory issued by the Enforcement Directorate (ED) in connection with a complaint lodged by the bank with the Central Bureau of Investigation (CBI).

The auction purchasers approached the High Court of Telangana, challenging IDBI Bank’s refusal to issue the sale certificate despite their willingness to pay the balance. In September 2022, the High Court ruled in favor of the auction purchasers, directing the bank to accept the balance payment and issue the sale certificate.

IDBI Bank, aggrieved by the High Court’s decision, appealed to the Supreme Court, arguing that the purchasers had defaulted in paying the balance amount within the mandatory 15-day period specified under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002.

The Supreme Court, after hearing both parties, dismissed the bank’s appeal, holding that there was no default on the part of the auction purchasers in depositing the balance amount. The Court observed that the bank had itself refused to accept the balance payment due to factors unrelated to the purchasers, including the advisory from the ED and the guarantor's writ petition.

Justice Pankaj Mithal, writing the judgment, noted that the bank’s reasons for canceling the auction were unjustified, as the respondents had consistently shown their readiness and willingness to deposit the balance auction amount. The Court pointed out that Rule 9(4) allows for an extension of the payment period, provided both parties agree in writing, and that the bank’s refusal to accept the balance payment amounted to implied consent to an extension.

Auction Purchasers Ready and Willing to Pay

The Court further emphasized that the auction purchasers had repeatedly expressed their willingness to pay the balance amount and had even submitted a bank draft for ₹1.06 crore to the bank. However, IDBI Bank delayed issuing the sale certificate, first due to the writ petition and then based on the ED advisory.

"The respondents were always ready and willing to deposit the balance auction amount of ₹1.06 crore and had rather submitted a bank draft dated 15.10.2022," the Court noted, affirming that the respondents' bona fide efforts were met with unjustified refusal from the bank.

Violation of Natural Justice and Unilateral Cancellation

The Supreme Court was particularly critical of IDBI Bank's decision to unilaterally cancel the auction sale on December 24, 2019, without giving the auction purchasers a chance to explain their position. The Court held that this cancellation was "per se in violation of the principles of natural justice" and therefore illegal.

Justice Mithal remarked that the reasons cited by the bank for canceling the auction—such as the stay granted in the writ petition and the advisory from the ED—were not material to the auction purchasers' obligations. The Court concluded that there was no fault on the part of the purchasers that would justify the cancellation.

Rule 9(4): Period to Pay Balance Not Sacrosanct

Addressing the bank’s argument that the balance payment was not made within the 15-day period under Rule 9(4), the Court clarified that the time period was not sacrosanct and could be extended with mutual agreement. The Court cited previous rulings in Varimadugu Obi Reddy v. Sreenivasulu and General Manager, Sri Siddeshwara Cooperative Bank Ltd. v. Ikbal, which established that the time period for payment of the balance could be extended by agreement between the parties.

The Court further explained that Rule 9(5), which deals with the consequences of default, only applies when there is an actual failure by the purchaser to make the payment, which was not the case here.

In conclusion, the Supreme Court upheld the High Court's decision, dismissing IDBI Bank’s appeal. The Court directed IDBI Bank to issue the sale certificate and execute the sale deed in favor of the auction purchasers after receiving the balance payment within four weeks.

The Court also underscored that there were no delays or defaults on the part of the purchasers, and the bank’s actions had caused undue delay in the issuance of the sale certificate.

Key Takeaways from the Judgment:

No Default by Auction Purchasers: The respondents were not at fault for the delay in depositing the balance payment; it was due to external factors cited by IDBI Bank.

Extension of Time for Payment: Rule 9(4) of the Security Interest (Enforcement) Rules allows for the extension of the payment period by mutual agreement, and the 15-day period is not absolute.

Violation of Natural Justice: IDBI Bank’s unilateral cancellation of the auction sale without giving the auction purchasers an opportunity to be heard violated basic principles of fairness.

Sale Certificate to Be Issued: The Supreme Court directed the bank to issue the sale certificate after receiving the balance payment.

The Supreme Court’s ruling has reaffirmed the rights of auction purchasers, particularly when they are not at fault, and emphasized the need for banks and financial institutions to act fairly in such transactions.

Date of decision: 16/10/2024