Telangana High Court Orders Union Bank to Refund Auction Deposit for Lack of Transparency

Bank's Failure to Disclose Pending Court Orders Invalidates Forfeiture of Auction Purchaser's Deposit

In a significant ruling, the Telangana High Court has directed the Union Bank of India to refund Rs. 2,16,25,000 to K. Indra Mohan, an auction purchaser, due to the bank's failure to disclose crucial pending court orders during an e-auction process. The judgment highlights the bank's lack of transparency and its unjust enrichment by withholding essential information from the auction participant.

The case centered around an e-auction conducted by the Union Bank on March 14, 2023, where K. Indra Mohan was declared the highest bidder for a property with a bid of Rs. 8,65,00,000. As per the auction rules under the SARFAESI Act, Mohan deposited 25% of the sale consideration, amounting to Rs. 2,16,25,000. However, unbeknownst to Mohan, a pending case (S.A.No.58 of 2023) related to the property was active in the Debts Recovery Tribunal (DRT), Hyderabad, which restrained the bank from confirming the sale.

Despite the High Court's explicit restraint order issued on March 20, 2023, preventing the bank from confirming the sale, Union Bank insisted on the payment of the remaining 75% of the sale price from Mohan. The bank's failure to inform Mohan of the court's order was deemed a breach of the principles of natural justice, prompting Mohan to file a writ petition challenging the bank's forfeiture of his deposit.

The bench, comprising Justices Moushumi Bhattacharya and Gadi Praveen Kumar, ruled in favor of Mohan, emphasizing that the bank's conduct violated Rule 9 of The Security Interest (Enforcement) Rules, 2002, which mandates full disclosure to auction purchasers. The court criticized the bank for its dual approach of demanding payment from both the auction purchaser and the guarantor in separate proceedings, labeling it as unjust enrichment.

The judgment sets a precedent for auction processes, reinforcing the obligation of financial institutions to ensure transparency and compliance with court orders. The court dismissed the bank's argument that Mohan had alternative remedies under the SARFAESI Act, citing the breach of natural justice as a valid ground for the writ petition.

Mohan's counsel, Mr. Avinash Desai, argued that the bank's non-disclosure of material facts deprived his client of making an informed decision. The court agreed, directing the bank to return the deposit within four weeks and vacating any interim orders.

The decision serves as a cautionary tale for banks to uphold their duty of transparency and protect the interests of auction participants.

Bottom Line:

SARFAESI Act - Bank cannot forfeit the deposit made by the auction purchaser without adequate disclosure of pending Court orders regarding the property. Auction purchaser entitled to refund of deposit when the Bank fails to comply with its obligations of transparency and full disclosure.

Statutory provision(s): SARFAESI Act, 2002 Rule 9(5)

K. Indra Mohan v. Union of India, (Telangana)(DB) : Law Finder Doc Id # 2799309