Whether Auction Purchasers In Pursuance Of Decree Will Have Preferential Right Over Purchaser Of Mortgaged Property Under SAFRAESI? Supreme Court To Consider

The bench of Justices Hemant Gupta and V Ramasubramanian agreed to consider the issue while dealing with the SLP assailing Madras High Court's order dated April 15, 2021.

Appearing for the petitioner, Senior Advocate K.V. Viswanathan had submitted that the auction purchaser in pursuance of a decree will not have a preferential right qua the mortgage property. It was also Senior Counsel's contention that the petitioner was a purchaser of the mortgage property under the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002, therefore the rights of the secured creditor could not be frustrated by such sale in pursuance of an ex-parte court decree.

Accordingly the bench in their order while staying the impugned order said, "Issue notice. In the meantime, operation of the impugned order shall remain stayed and the parties shall maintain status quo regarding possession."

Case Before Madras High Court

The issue before the bench for consideration was whether the sale in favor of the M/S Arc Investments Castings LLP under the SARFAESI Act in respect of the immovable property mortgaged to the Allahabad Bank as security for the loan would will prevail over the Court auction sale in favor of the respondent for recovery of money decree.

The appellant had approached the High Court assailing Trial Court's order of stating that the Trial Court erred in appreciating the evidence properly. It was contended in the appeal that the Trial Court failed to consider that the suit property was mortgaged with M/s Allahabad Bank as security for the loan amount borrowed by the second respondent. The appellant had further argued that the proceedings were taken under SARFAESI Act and was sold for value of Rs.7,01,00,000/- to the appellant and that purchase of the 3rd respondent was totally invalid.

It was also argued that the 2nd respondent had no alienable right or title over the property, since proceedings under Section 13(2) of the SARFAESI Act were already initiated by the lending bank and that the trial Court ought to have seen that the secured creditors have a paramount charge over the mortgaged property and have a secured right over the unsecured creditors.

While assailing Trial Court's judgment, M/S Arc Investments Castings LLP had also averred that the Court below erred in holding that the appellant LLP did not have any right to purchase property, since the LLP had not been incorporated on the date of purchase by overlooking the fact that the sale deed was executed only after the incorporation.

The bench of Justice G. Jayachandran while dismissing the appeal observed that the assignment deed in favour of the appellant was not registered in Tamil Nadu and was hence not enforceable.

The Court also noted :

"In the instant case, the sale completed and become absolute under Order XXI, Rule 92 of Civil Procedure Code. After the confirmation of sale, the sale certificate registered much before filing of petition under Order XXI, Rule 58 of Civil Procedure Code. 

The appellant had chosen to file the claim petition under Order XXI,Rule 58 of CPC, despite knowing that the property attached already sold, because sale under Order XXI, Rule 90 of CPC can be challenged only on the ground of material irregularity or fraud".

The High Court further noted :

"There is sufficient evidence to prove that the appellant and second respondent are parties to the negotiation in the private treaty. They had enough notice about the decree obtained by the first respondent against the second respondent and the Court auction purchase of the property by the 3rd respondent. With full knowledge and notice of these facts, they had entered into a private treaty to buy the property and to defeat the interest of the Court auction purchaser."

"Documents are created in favor of the appellant along with the second respondent. They have conveniently suppressed several facts which they had knowledge and had initiated the claim petition with ulterior design. Having failed before the Execution Court, the petition is filed for introduction of documents and new facts which were never pleaded. A prima facie scrutiny of those documents only add proof of embellishment of facts and records",Court further added.

Case Title: M/S Arc Investments Castings LLP V. M/S Interpump Hydraulics India Pvt. Ltd. & Ors.| Special Leave to Appeal (C) No(s). 714-716/2022

Coram: Justices Hemant Gupta and V Ramasubramanian