Lok Adalat Cannot Be Used as a Shortcut to Property Transfer Without Auction: Madras High Court Quashes Sale Certificate Issued Without Judicial Sale

“The Lok Adalat has no adjudicatory or judicial functions. It can only record a settlement — not override the legal mandate of public auction in enforcement of mortgage decrees” — In a landmark ruling Madras High Court set aside a Lok Adalat award and the consequential sale certificate issued by the State Bank of India, holding that the transfer of mortgaged property without a public auction and without notice to the original borrower was arbitrary, illegal, and non est in law.

Justice G.K. Ilanthiraiyan ruled that the entire transaction, which purported to transfer ownership of a valuable property via a Lok Adalat settlement between the bank and a third party, circumvented mandatory legal processes and could not be sustained in the eyes of law.

“A Sale Certificate Without Auction Is a Legal Fiction” — Court Rules Banker Had No Authority to Transfer Mortgaged Property Outside Execution Proceedings

The case arose out of a writ petition by Chengalpet Steel Rolling Mill, represented by its partner M. Ugamraj, challenging the registration of a sale certificate dated 09.09.2016, issued by SBI, and registered by the Sub-Registrar, Chengalpattu, on 08.03.2017.

The Court traced the origin of the dispute to a mortgage loan availed by the petitioner in the 1970s. The bank had obtained a mortgage decree in O.S.No.25 of 1979, and filed E.P. No.32 of 1985 to enforce it. However, the entire decree amount was later paid — not by the petitioner — but by a third party, one Mahaveer, who claimed to be the assignee of a sale agreement.

Crucially, the Execution Court recorded full satisfaction and terminated proceedings in 1997, but no auction sale ever occurred.

Almost two decades later, Mahaveer lodged a pre-litigation complaint before the Lok Adalat in 2016 and obtained a sale certificate via compromise with the bank — bypassing the borrower and the court’s auction procedure.

“Lok Adalat is Not a Court; It Cannot Decree or Adjudicate Rights” — Court Declares Award as Non-Est

Citing the Supreme Court’s judgment in State of Punjab v. Jalour Singh, (2008) 2 SCC 660, Justice Ilanthiraiyan held: “The Lok Adalats have no adjudicatory or judicial functions… It determines a reference on the basis of a compromise or settlement, but cannot adjudicate cases like a Court does.”

The Court stressed that the Lok Adalat merely records a compromise — it cannot confer ownership of immovable property where the underlying statutory requirements (like auction) have not been complied with.

Further, it was noted that the petitioner was not a party to the Lok Adalat proceedings, and that the entire decree amount had already been settled 19 years earlier through court-monitored execution. In such circumstances:

“The Award passed by the Lok Adalat itself cannot be sustained and it is non-est in the eye of law.”

“Paying Decree Amount Does Not Amount to Purchase” — Third Party Cannot Claim Ownership Without Judicial Sale

The Court rejected the argument that since Mahaveer had paid the decree amount, he was entitled to the property. It observed:

“Though the decreetal amount was paid by the third respondent through lodgment schedule, it does not mean that the property was purchased by the third respondent.”

Further, Justice Ilanthiraiyan clarified that a bank cannot issue a sale certificate except through a public auction process in execution proceedings. Since no such auction was held, the sale certificate was deemed illegal:

“The subject property was not at all brought to auction sale… the banker, being the second respondent, could not have issued the same without bringing the property for auction.”

“Award Recorded Behind Borrower’s Back Cannot Bind Him” — Petitioner’s Absence Fatal to Lok Adalat Proceeding

The Court condemned the fact that the petitioner (original borrower) was not a party to the Lok Adalat proceedings, despite having a direct interest in the mortgaged property. The Court noted:

“In the Lok Adalat proceedings, the petitioner was not a party. Therefore, it can be very well challenged under Article 226 of the Constitution.”

Sale Certificate and Encumbrance Entry Quashed; Bank Directed to Follow Due Process

Declaring the entire transaction illegal, the Court issued the following final directions:

“The Award dated 02.09.2016 passed in LSP No.1604 of 2015 by the Lok Adalat, District Legal Services Authority, Chengalpattu, and the consequential sale certificate issued by the second respondent in favour of the third respondent dated 09.09.2016 are hereby set aside.”

It further directed that the registration entry of the sale certificate be deleted from the records of the Sub-Registrar, and held that the third respondent is at liberty to approach the Execution Court for appropriate relief in accordance with law.

“A Sale Is a Legal Act, Not a Private Arrangement” — Court Reasserts the Rule of Law in Execution of Decrees

The ruling sends a strong message against the misuse of Lok Adalat mechanisms for property transfers, and reaffirms the principle that transfer of rights in immovable property must be done through transparent judicial process, not private compromises disguised as legal awards.

Justice Ilanthiraiyan concluded:

“The sale certificate issued by the second respondent cannot be sustained and is liable to be set aside… the consequential registration of the sale certificate is also set aside.”

Date of Decision: 18th September 2025