Allahabad High Court Imposes ₹25 Lakh Cost On Loan Guarantors For Deliberately Prolonging Litigation On Auctioned Property

The Allahabad High Court imposed a cost of Rs. 25 lakhs on guarantors of a loan for deliberately prolonging litigation regarding a property auctioned in 2017.

While directing the guarantors of the loan (petitioners) to vacate the auctioned premises and awarding the cost in favour of the auction purchaser, Justice Sangeeta Chandra held,

“This Court having gone through the judicial precedents as aforesaid relating to writ jurisdiction being an equitable jurisdiction and the responsibility of the litigant to approach this Court with frank and full disclosure of facts, avoiding any active misrepresentation and suppression of material facts, finds that the petitioners have filed this writ petition in an attempt to deliberately pollute the stream of justice.”

It added, “Not only this Court has found misrepresentation from the pleadings on record and documentary evidence filed by the Bank in its affidavits, this Court has also found deliberate attempt at protracting of litigation to enable the petitioners to continue to occupy House No.88, Sector-13, Indira Nagar Vistar Yojana, Lucknow, despite the property having been auctioned way back on 21.12.2017.”

Factual Background

It was pleaded that petitioners' relative applied for Rs. 90 lakhs loan to the Bank of Baroda under the “Kamdhenu Dairy Scheme”. Since petitioners were customers of the Bank, they were shown as the loan guarantors. Further, they were shown as joint holders of the property which was already mortgaged with the bank for another loan by the borrower. The loan account of borrower was declared a non performing asset and 1^st demand notice under the SARFAESI Act was issued on 21.07.2016.

Petitioner pleaded that he was never served the aforesaid notice, or the notice by which the bank took symbolic possession of the property. A letter of redemption was sent to the petitioners and thereafter summons were issued under Section 14 of the Act on 21.03.2017. Petitioners' objections were rejected and the property was put up for auction by the Bank in alleged non-compliance with Rule 8(6)(a) of the Security Interest (Enforcement) Rules, 2002 as the details of the outstanding loan on the said property were not disclosed.

DRT allowed petitioners application under Section 17 of the Act recording that the notice was not served upon them. DRT held that mere postal receipt was not sufficient to show actual receipt of the notice and when the property was jointly owned by petitioner and her husband, the notice should also have been served on her. The entire action by the bank was held to be void ab initio.

The Bank filed an appeal before DRAT which was allowed on grounds that once the notice was served on the same address to both the husband and the wife, the wife could not have claimed non-service of notice. It was held that the bank was not obligated to issue a notice to the petitioner prior to taking symbolic possession of the property. Lastly, the DRAT held that “Non-mentioning of such encumbrance on the properties in the sale notice was of no consequence” and such action could vitiate entire proceedings.

This order of DRAT was challenged before the High Court.

High Court Observations

The Court observed that in an earlier writ petition filed before the High Court, initially the petitioners had pleaded that they were guarantors and that recovery should be first made from the principal borrower, by way of an amendment they had tried to change their stance. The amendment sought was rejected by the Court as the Bank had produced document to show that the petitioners had signed as guarantors to the loan of their relative.

The Court observed that the documents by which loan was availed by the relative were all signed by the petitioners. Noting that specific findings of the DRT regarding the signing of loan papers were not challenged by the petitioners, the Court held that the petitioners had misrepresented before the writ Court.

Further, the Court observed that issue of non-service of notice was not raised by the petitioners in the writ petition. They had actually annexed the demand notice with the writ petition which showed that correct name was mentioned in the demand notice which never returned unserved.

To discuss the interplay between Section 114 of the Evidence Act and Section 27 of the General Clauses Act, Justice Chandra placed reliance on the decision of the Allahabad High Court in Krishna Kumar Gupta Vs. Manoj K Sahu, where reliance was placed on the decisions of the Supreme Court in C.C. Alavi Haji Vs. Palapetty Muhammed & Anr and M/s Ajeet Seeds Ltd Vs. K. Gopala Krishnaiah.

Justice Chandra held that Section 114 of the Evidence Act allows Court to presume that in the ordinary course the communication must have been delivered at the address of the addressee, however, under Section 27 of the General Clauses Act the presumption is stronger, i.e., it has to be presumed that the communication was sent to the correct address of the addressee by the registered post.

“In view of the said presumption, when stating that a notice has been sent by registered post to the address of the drawer, it is unnecessary to further aver that in spite of return of the notice unserved, it is deemed to have been served or that the addressee is deemed to have knowledge of the notice. Unless and until the contrary is proved by the addressee, service of notice is deemed to have been affected at the time at which the letter would have been delivered in the ordinary course of business.”

The Court held that mortgager/ guarantor/ petitioner (herein) could not have raised objections regarding non-mentioning of encumbrances on the sale notice.

“For establishing a charge as an encumbrance, the petitioners have to show three parties. One, who created the encumbrance, two, who has a superior or first charge under any Statute, and three, who has the inferior or second charge. It was also necessary that due to such encumbrance, the value of the property should diminish.”

The Court held that only two parties were involved in the present case, the bank and the auction purchaser and the sale certificate issued to the auction purchaser correctly mentioned that the property was free of all encumbrances.

The Court observed that the auction purchaser pleaded that despite depositing the entire sale consideration she was not able to enjoy her property due to the frivolous actions of the petitioners. The auction purchaser had submitted that she had incurred a total cost of more than Rs. 1 crore from 2018.

Amongst others, the Court relied on K. Jayaram Vs. BDA, where the Supreme Court had held that

“A litigant is bound to state all facts which are relevant to the litigation. If he withholds some vital or relevant material in order to gain advantage over the other side then he would be guilty of playing fraud with the court as well as with the opposite parties which cannot be countenanced.”

Further reliance was placed on A. Shanmugam Vs. Ariya Kshatriya Rajakula Vamsathu Madalaya Nandhavana Paripalani Sangam, where the Apex Court had held

““43.4. Once the court discovers falsehood, concealment, distortion, obstruction or confusion in pleadings and documents, the court should in addition to full restitution impose appropriate costs. The court must ensure that there is no incentive for wrongdoer in the temple of justice. Truth is the foundation of justice and it has to be the common endeavour of all to uphold the truth and no one should be permitted to pollute the stream of justice.”

Perusing judgments on litigants approaching the writ Court with clean hands, the Court held that the petitioners had not done so and that the petitioners had deliberately prolonged the litigation to enjoy the property which was auctioned back in 2017.

Dismissing the writ petition, the Court imposed a cost of Rs. 25 Lakhs on the petitioners which was to be released in favour of the auction purchaser and directed the petitioners to vacate the auctioned property within a period of one month from the date of judgment.

Case Title: Sunita Nishad And Anr. v. Debt Recovery Appellate Tribunal through Registrar And Ors. [WRIT - C No. - 35050 of 2019]

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