Orissa High Court Declares Financial Corporation’s Auction Illegal: Judgment Analysis on Legality of Auctioning Mortgaged Property Under Section 29 of the SFC Act, 1951 – Reinforcing Protection of Bona Fide Purchasers and Limiting Scope of Section 29

Court’s Decision:

The court ruled that the auction proceedings initiated by the financial corporation under Section 29 of the State Financial Corporations Act, 1951 (SFC Act) were illegal and without jurisdiction. It set aside the auction and ordered the financial corporation to refund Rs. 4,00,000/- (which the petitioner had deposited earlier) along with 6% interest. The court held that Section 29 does not allow auctioning mortgaged property directly, and if the financial corporation wished to recover dues, it must proceed under Section 31.

Facts:

• The case involves a dispute over a piece of land mortgaged as security for a loan obtained by an industrial concern (a business entity) in 1980.
• The petitioner purchased the land in 1986 through registered sale deeds. Before purchasing, the petitioner obtained an encumbrance certificate, which showed no legal claim or mortgage over the property.
• In 2017, the petitioner discovered a newspaper notice stating that the financial corporation intended to auction the land due to loan default.
• The petitioner, fearing eviction from the property where he lived, challenged the auction proceedings by filing a writ petition in the Orissa High Court.

Issues Before the Court:

1. Does Section 29 of the SFC Act authorize the financial corporation to auction the property?
2. Does the petitioner, as a bona fide purchaser, have any legal claim over the property?
3. Does the petitioner have the right (locus standi) to challenge the auction?
4. Is the financial corporation’s claim time-barred, given that the loan was issued in 1980 and auction proceedings were initiated in 2015?

Petitioner’s Arguments:

• Rightful Ownership: The petitioner purchased the property lawfully and was unaware of any encumbrance at the time of purchase.
• Incorrect Use of Section 29: The financial corporation cannot auction mortgaged property under Section 29. If it wished to recover dues, it should have proceeded under Section 31, which requires judicial approval.
• Harm to Petitioner: The petitioner resides in the property and would face irreparable loss if evicted.
• Delay in Action: The loan was taken in 1980, and auction proceedings were started only in 2015, making the claim time-barred.
• Deposited Rs. 4,00,000/-: The petitioner had conditionally deposited Rs. 4,00,000/- to stop the auction and demanded a refund.

Respondent’s Arguments (Financial Corporation):

• No Locus Standi: The petitioner was not the original borrower or surety and had no right to challenge the auction.
• Right to Auction: Section 29 gives the financial corporation the power to take possession and auction assets of an industrial concern.
• Recovery of Public Money: The corporation’s action was essential to recover public funds.
• No Time Limit for Action: The law does not impose a time limit for proceedings under Section 29.
• Settlement Agreement: The petitioner had previously agreed to settle the dues but later refused to comply.

Analysis of the Law:

The court examined Sections 29 and 31 of the SFC Act:

• Section 29:
  • Allows financial corporations to take possession of an industrial concern and sell its assets if the borrower defaults.
  • However, it does not allow the corporation to auction mortgaged properties directly.
• Section 31:
  • If the financial corporation wants to sell mortgaged property, it must apply to a District Judge.
  • The corporation should have used this section instead of Section 29.

Precedent Analysis:

The court relied on previous Supreme Court and High Court judgments to support its decision:

• Karnataka State Financial Corporation v. N. Narasimahaiah (2008):
  • The Supreme Court ruled that financial corporations must follow Section 31 if they wish to sell mortgaged property.
• Himanshu Sekhar Panda v. Orissa State Financial Corporation (2012):
  • The Orissa High Court reaffirmed that financial corporations cannot auction mortgaged properties using Section 29.

Court’s Reasoning:

1. The financial corporation lacked jurisdiction to auction the property under Section 29.
2. The petitioner had the right to challenge the auction since he legally owned and lived on the property.
3. Auctioning the land would have violated the petitioner’s rights.
4. Proceedings were delayed (loan taken in 1980, action in 2015), raising questions of fairness.
5. The financial corporation should have followed Section 31 to auction the property.

Conclusion:

The court ruled in favor of the petitioner and:

• Declared the auction illegal.
• Ordered the financial corporation to refund the Rs. 4,00,000/- deposit with 6% interest.
• Invalidated all auction-related proceedings.

Implications of the Judgment:

1. Financial corporations must use Section 31 when selling mortgaged properties.
2. Bona fide purchasers have legal protection against wrongful foreclosure.
3. Financial corporations cannot delay proceedings indefinitely.
4. Ensures fair procedure and protects property rights.

Also Read – Delhi High Court Dismisses Petition Against Pre-Institution Mediation Requirement: “Legal Notice is Not a Substitute for Statutory Mediation Under Section 12A”