Rule 9 Of Security Interest (Enforcement) Rules Does Not Apply When Secured Creditor Suppressed Material Facts: Telangana High Court

The Telangana High Court has directed the Union Bank of India to return INR 2,16,25,000 paid by K. Indra Mohan as 25% of the sale consideration, holding that the Bank had not adequately disclosed to the purchaser the pending litigation over the subject property.

The Division Bench of Justice Moushumi Bhattacharya and Justice Gadi Praveen Kumar, referring to Rule 9 of The Security Interest (Enforcement) Rules, 2002, noted that an impeachable burden was cast on the secured creditor of full disclosure. Additionally, the bench noted that, as per the rules, a sale could only be made of secured assets.

“The sequence of the sub-rules under Rule 9 of the 2002 Rules proceeds on the basis of a clean sale by the secured creditor in favour of a purchaser pursuant to an e-auction. Rule 9 presumes unimpeachable conduct on the part of the secured creditor which would include full disclosure to the purchaser/highest bidder. In other words, Rule 9 only takes into account compliance in terms of making payment by the purchaser for the secured asset within the required time frames. Therefore, Rule 9 envisages a perfect factual state of affairs and not a situation where the secured creditor is itself at fault for not making the required disclosure to the purchaser of any pending Court orders.”

Background:

The petitioner herein was the purchaser/highest bidder in the e-auction. His case was that he participated in the e-action, came out as the highest bidder, and deposited an amount of 25% of the sale consideration as directed by the bank. He contended that he was only informed about a pending case before the Debt Recovery Tribunal, wherein the bank was directed to go ahead with the e-auction but not confirm the sale; but not about a Writ petition filed before the High Court, wherein a division bench of the High Court had directed the Bank not to take further proceedings pursuant to the e-auction and not to confirm the sale in favour of the petitioner.

The petitioner contended that the High Court passed the final order on March 20^th, 2023, but the same was not communicated to him by the Bank. In fact, according to the petitioner, when he reached out to the Bank on March 28^th, 2023, enquiring about the order passed by the division bench, the Bank did not give him an answer but insisted on payment of the remaining 75% balance amount.

The Bench noted that while the Bank had disclosed the pending case before the DRT, it failed to inform the petitioner regarding the comprehensive reliefs sought by the guarantor. The bench also noted that the DTR had stayed all further proceedings, except for the conduct of the e-auction. Curiously, when the initial e-auction did not materialise, the Bank issued a fresh notice, despite the stay issued by the Tribunal. Thus, the Bench held that the Bank was not at liberty to issue a fresh e-auction notification (in which the petitioner was held the highest bidder)

The Bench further noted that the order passed by the DRT was subject to the guarantor depositing 1 crore, which the bank had collected. Simultaneously, the Bank was insisting on full payment by the petitioner. This, the bench held, 'reeks of unjust enrichment.'

“The stand of the Bank would show that the Bank sought to enrich itself both from the petitioner as well as the guarantor. While insisting upon the balance sale price from the petitioner/auction purchaser, the Bank also participated in the DRT proceedings where the guarantor was directed to make payments to the Bank for stay of the auction. This duality reeks of unjust enrichment at the expense of the petitioner/auction purchaser being kept in the dark at the relevant point of time.”

With that observation, the bench concluded that while the petitioner would not be entitled to a direction against the bank to receive the balance sale consideration, he is entitled to a refund of 25% of sale consideration paid by him.

K. Indra Mohan vs. Union of India

Counsel for petitioner: Sr. Counsel Avinash Desai appearing on behalf of Zainab Khan

Counsel for respondents: K. Arvind Kumar, V. Sethu Madhava Rao counsel on behalf of V. Dyumani and K. Krishna Shrawan.