Bombay Mercantile Cooperative Bank Ltd. through its Authorized Signatory Vs. M/s. U.P Gun House
Background
In 1996, Saeedul Hasan Khan, sole proprietor of M/s. U.P Gun House, took a loan of ₹2,00,000 from Bombay Mercantile Cooperative Bank Ltd., secured by mortgaging immovable property. The loan turned into a non-performing asset (NPA) in 2002 due to non-repayment. The bank initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and eventually auctioned the mortgaged property in 2012 to recover dues.
Dispute
The respondent (Khan) contested the auction, claiming he never received the mandatory notice under Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, which require proper notice before auctioning secured assets. The bank, however, asserted that notice was served and that Khan was aware of the auction. The auction purchaser, Abdul Haleem Siddiqui, had already constructed and sold flats to third parties on the property, further complicating the matter.
Legal Issues
The Supreme Court examined whether the auction sale could be upheld despite lapses in the service of notice, especially considering the equities involved and the subsequent third-party interests created on the property. The Court referred to the precedent in Mathew Varghese v. M. Amritha Kumar, which mandates strict compliance with notice requirements under the SARFAESI Rules.
Supreme Court’s Findings
The Court found that the bank had not maintained adequate records to prove proper service of the auction notice. However, it also acknowledged that the respondent was aware of the auction process and that third-party rights had since vested in good faith purchasers. The Court, exercising its extraordinary powers under Article 142 of the Constitution, sought to balance the equities between the parties.
Order and Directions
The Supreme Court upheld the auction sale in favor of the purchaser, thereby protecting the interests of third parties who had acquired rights in the property.
The Court directed the bank to pay ₹54,00,000 to the respondent (Khan) as full and final settlement of his claims, to be paid within five weeks from the date of receipt of the order. If the bank failed to pay within this period, interest at 12% per annum would accrue until actual payment.
The impugned orders of the High Court were set aside.
Significance
This judgment underscores the mandatory nature of notice requirements under the SARFAESI Act but also demonstrates the Supreme Court’s willingness to use its equitable powers to resolve complex disputes where third-party rights have intervened. The decision balances statutory compliance with practical realities, ensuring fair compensation to the aggrieved borrower while protecting bona fide purchasers.
Conclusion
The Supreme Court’s resolution in this case provides important guidance on handling procedural lapses in asset recovery and auctions, especially where subsequent third-party interests are at stake, and reinforces the need for transparency and fairness in enforcement actions under the SARFAESI Act.
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