Bank can not auction pledged gold ornaments without adhering to the contract

Orissa High Court Quashes Canara Bank's Auction of Pledged Gold, Citing Breach of Contractual Terms. Court Orders Restoration of Gold or Equivalent Compensation to Petitioner; Criticizes Lack of Transparency and Fairness in Auction Process

In a significant ruling, the Orissa High Court has quashed the auction conducted by Canara Bank involving pledged gold ornaments, deeming it illegal due to the breach of contractual terms and lack of transparency in the auction process. The judgment, delivered by Dr. Sanjeeb K Panigrahi, J., emphasizes the necessity of adhering to contractual obligations and statutory norms, notably the requirement of a 30-day redemption period post-loan maturity.

The case, brought forth by petitioner Mamina Mallick, challenged the auction conducted by Canara Bank on January 17, 2025, which took place merely five days after the maturity of the gold loan on January 12, 2025. The petitioner argued that the auction violated the contractual assurance of a 30-day redemption period, as stated in the loan sanction letter. Moreover, Mallick claimed that the auction process was opaque, with limited bidder participation and inadequate disclosure of auction details.

The judgment highlighted several procedural lapses by the bank, including the failure to specify the auction date in prior communications, lack of transparency regarding the reserve price, exclusion of the petitioner from the auction proceedings, and refusal to disclose the auction results. The court noted that these actions violated the principles of natural justice and banking norms, warranting the nullification of the auction.

Dr. Panigrahi underscored the importance of fair and transparent auction processes, particularly when property rights are at stake. Citing previous Supreme Court judgments, the court reaffirmed the need for banks to provide borrowers with a real opportunity to redeem pledged assets before proceeding with irreversible sales.

The court ordered the restoration of the pledged gold ornaments to the petitioner if they remain in the bank's possession. If the jewelry has been sold, the bank is directed to compensate the petitioner with either the full sale proceeds or the current market value of the jewelry, along with interest. Additionally, the court mandated the reversal of appropriations made from the auction proceeds towards unrelated liabilities, such as the petitioner's housing loan account.

The ruling serves as a stern reminder to financial institutions to uphold contractual commitments and ensure transparency in recovery processes. It reinforces the notion that regulatory prudence cannot override statutory and contractual guarantees provided to borrowers.

Bottom Line:

Auction of pledged gold ornaments by the bank without adhering to the contractually assured 30-day redemption period post-maturity and without transparency in the auction process held to be illegal and quashed. Adjustment of surplus proceeds towards other liabilities, including housing loan, deemed unsustainable and reversed.

Statutory provision(s): Indian Contract Act, 1872 Sections 176, 171; SARFAESI Act, 2002; RBI Master Circular on Asset Classification (01.07.2014).

Mamina Mallick v. Authorised Officer, Canara Bank, (Orissa) : Law Finder Doc Id # 2796615