Mortgage Without MIDC’s Consent Is Not Void Ab Initio; Title of Auction Purchaser Cannot Be Denied: Bombay High Court Dismisses MIDC’s Writ

“Failure to Enforce Right of Re-entry Bars MIDC from Challenging Validity of Mortgage or Auction Title” — In a significant ruling that clarifies the enforceability of lease covenants and the limits of administrative intervention in public land leases, the Bombay High Court on 26 May 2025 dismissed a writ petition filed by the Maharashtra Industrial Development Corporation (MIDC) challenging the auction sale of a leasehold plot mortgaged without its prior consent.

In MIDC v. Union Bank of India & Others (Writ Petition No. 1930 of 2011), a Division Bench comprising Justice A.S. Chandurkar and Justice M.M. Sathaye upheld the Debts Recovery Appellate Tribunal (DRAT)’s judgment validating the mortgage and auction sale of the plot. The Court ruled that the mortgage, though in breach of lease terms, was not void, and that MIDC’s inaction in invoking its right of re-entry under the lease barred it from later disputing the title acquired by the successful auction purchaser.

The Court observed: “Though the mortgage deed was executed without the consent of the MIDC, it was not void. It was open for the MIDC to exercise its right of re-entry due to breach of a covenant—which it failed to enforce.”

Plot Mortgaged Without MIDC Consent—But Lease Not Terminated

The dispute arose over Plot No. D-9, leased by MIDC to M/s Benelon Industries (BI) for 95 years from 1975. The lease deed contained a covenant (Clause 2(t)) prohibiting mortgage or assignment without MIDC’s prior written approval. BI, however, mortgaged the leasehold rights to Union Bank of India (UBI) without obtaining this consent. After BI defaulted, UBI secured a decree and initiated recovery proceedings before the Debts Recovery Tribunal (DRT), leading to the auction of the plot to Kalindi Properties Pvt. Ltd. (KPPL) on 10 October 2008.

MIDC, after belatedly issuing a show cause notice in October 2007 for unauthorised subletting, filed a challenge before the DRAT and subsequently approached the High Court under Article 226 of the Constitution. It argued that the mortgage and the consequent sale were void ab initio due to breach of lease conditions and that KPPL had no valid title.

Rejecting this argument, the Court noted, “While the mortgage created by BI was indeed in violation of Clause 2(t), MIDC had clear remedies under Clause 4 of the lease—by issuing notice and exercising its right of re-entry. No such steps were taken after the 2007 inspection, and that inaction is fatal to the Corporation’s present claims.”

The Court emphasized that the lease expressly provided the remedy for breach, and the failure to act on it precluded MIDC from asserting nullity of the mortgage. “The consequence of a breach of covenant is provided in the lease itself. The creation of the mortgage cannot be treated as void merely because consent was not obtained.”

Auction Purchaser Acquired Valid Rights—Title Cannot Be Denied Post-Facto

Kalindi Properties Pvt. Ltd. (KPPL), the successful bidder in the DRT auction, paid a total of ₹14.51 crores as sale consideration and further deposited ₹1.71 crores as differential premium as required under an earlier High Court direction. MIDC, however, resisted executing the lease deed in its favour, arguing that the initial mortgage was void and thus tainted the sale.

The High Court firmly rejected this contention, observing that “KPPL, having paid the full auction price and the differential premium as per this Court’s directions, acquired valid leasehold rights. MIDC’s failure to act against the lease violation precludes it from challenging the auction sale.”

The Court held that KPPL stepped into the shoes of the lessee lawfully under the sale and that there was no merit in the belated objection to its title. It remarked that “KPPL cannot be deprived of its rights, especially when the MIDC itself failed to secure possession or take any steps to enforce its lease rights.”

Subletting Charges Not Backed by Law—Limited Only to Period Before Auction

Another key issue was MIDC’s demand for subletting charges based on internal circulars and the MIDC Disposal of Land Regulations, 1975. The DRAT had earlier limited this liability to the period between 18 August 2007 (when MIDC allegedly discovered unauthorised use) and 10 October 2008 (the date of auction).

Upholding this limited liability, the High Court observed: “There is no statutory provision under the 1975 Regulations which empowers MIDC to levy subletting charges. The demand was based on circulars that lack force of law.”

The Court referred to its earlier ruling in Prakash Fabricators Pvt. Ltd. and reaffirmed: “The circular relied upon by MIDC was an internal communication of its CEO and cannot form the legal basis for such a monetary levy.”

While noting the limited period allowed by DRAT for imposing subletting charges, the Court held this to be reasonable and binding since KPPL had not contested that direction. “The direction to pay subletting charges from 18/08/2007 to 10/10/2008 has attained finality. There is no legal basis to extend this demand further.”

Fraud Allegation Raised Too Late—Cannot Be Adjudicated in Writ

MIDC further claimed that UBI’s decree was obtained by fraud and suppression of material facts. The High Court dismissed this as a belated and unsubstantiated plea, observing: “Allegation of fraud was never raised before the DRT or DRAT. It involves disputed questions of fact and law which cannot be gone into for the first time in writ jurisdiction.”

The Court added that “a decree passed by a competent court cannot be impeached collaterally unless specific fraud is pleaded and proved before the original adjudicating authority.”

The Bombay High Court’s decision delivers a strong message about contractual discipline, statutory limitations on public authorities, and the sanctity of judicial sales. It underscores that public bodies like MIDC must act within the remedies provided under their own agreements and cannot nullify transactions ex post facto without legal basis.

As the Court concluded: “We do not find any legal ground whatsoever to interfere with the DRAT judgment. The directions issued are with a view to enable the claims of the litigating parties to be duly satisfied.”

The writ petition was accordingly dismissed, and all interim applications were disposed of. The Court also clarified that any further disputes concerning possession or encroachments must be adjudicated independently in the pending civil suits.

Date of Decision: 26 May 2025