The court mandates a fresh valuation and auction, citing breaches in statutory obligations and fairness by the State Financial Corporation.
In a significant ruling, the Kerala High Court has set aside the auction sale of a mortgaged property conducted by the Kerala Financial Corporation (KFC), deeming it non-compliant with statutory obligations under the State Financial Corporations Act, 1951. The Division Bench, comprising Dr. A.K. Jayasankaran Nambiar and Preeta A.K., found the auction sale process, conducted during the Covid pandemic, to be flawed and not in accordance with the principles of fairness and transparency required by law.
The case, M/s. Pearl Hill Builders and Developers v. Union of India, centered around the auction of a property mortgaged by Pearl Hill Builders for a loan of Rs. 4.89 crores, which was declared a Non-Performing Asset in 2014. The auction, held in March 2021, during the pandemic, was challenged on grounds of irregularities, including the financing of the auction purchaser by KFC and the lack of adherence to auction terms.
The court noted that KFC acted contrary to its role as a trustee of the mortgaged property by financing the buyers, who did not meet the criteria set by KFC's own circulars. The judgment emphasized that such actions breached statutory duties to secure the best possible price for the property and maintain the integrity of the auction process.
Highlighting the necessity of fairness and reasonableness, the court directed KFC to conduct a fresh valuation and auction within six months, ensuring a fair market price for the property. The decision underscores the judiciary's role in ensuring statutory bodies adhere to legal obligations, especially in asset recovery processes, to prevent injustice to borrowers.
Bottom line:-
Auction sale of mortgaged property by a State Financial Corporation must adhere to fairness, reasonableness, and statutory obligations under Section 29 of the SFC Act, 1951. Breach of such obligations, including non-compliance with auction conditions and financing of auction purchasers, can lead to judicial scrutiny and invalidation of the sale.
Statutory provision(s): Section 29 of the State Financial Corporations Act, 1951, Article 226 of the Constitution of India.
