Borrowers can directly challenge Recovery Officer’s confirmed auction sale without pre-deposit, Allahabad HC rules; sale set aside over major irregularities

M/s Durga Rice and Dall Mills, a proprietorship concern, obtained a cash-credit facility of ₹12 lakhs from Banaras State Bank Limited, secured by equitable mortgages over immovable properties.

Upon default, the Bank initiated recovery proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”).

The DRT issued a recovery certificate for ₹38,36,871 with interest and permitted recovery through sale of hypothecated and mortgaged assets.

The Recovery Officer attached an immovable property measuring approximately 4,950 square yards and auctioned it on 25 August 2003 for ₹35,20,000 in favour of Shri Ram Avtar.

The sale was confirmed on 9 January 2004 despite an interim order of the DRAT staying confirmation of the sale.

The borrower challenged the confirmation before the DRT under Section 30 of the RDDBFI Act.

The DRT set aside the confirmation of sale on 29 April 2005, finding, inter alia, irregularities in the description and valuation of the property and the auction process.

The borrower subsequently compromised with the Bank, which issued a No-Objection Certificate.

The auction purchaser challenged the DRT’s order before the DRAT, but his appeal was dismissed.

In a writ petition, the learned Single Judge set aside the DRT and DRAT orders, holding that the borrower’s appeal was not maintainable without the deposit contemplated under Rules 60 or 61 of the Second Schedule to the Income-tax Act, 1961, that the DRT had granted relief beyond the prayer, and that the effect of the interim order disappeared upon withdrawal of the borrower’s earlier appeal.

Whether an aggrieved borrower may directly challenge an order confirming an auction sale under Section 30 of the RDDBFI Act without first invoking Rules 60 or 61 of the Second Schedule to the Income-tax Act, 1961 and making the prescribed deposit?

Whether the order confirming the sale is an order of the Recovery Officer under Section 25(a) of the RDDBFI Act, thereby attracting the appellate jurisdiction under Section 30?

Whether the DRT could set aside the auction proceedings and related orders when the borrower had specifically prayed only for setting aside the confirmation of sale and sale certificate?

Whether the withdrawal of the borrower’s earlier appeal, and the consequent cessation of the interim stay, invalidated the DRT’s later decision under Section 30?

Whether the auction sale was vitiated by material irregularities sufficient to override the ordinary protection accorded to a bona fide auction purchaser?

The Court applied Sections 25, 29 and 30 of the RDDBFI Act, 1993.

Section 25(a) authorises the Recovery Officer to recover debts through attachment and sale of the debtor’s property, while Section 29 incorporates the Second and Third Schedules to the Income-tax Act, 1961 only with necessary modifications for the recovery procedure.

Section 30, beginning with a non-obstante clause, confers on any person aggrieved by an order of the Recovery Officer a direct right of appeal to the DRT within thirty days and permits the DRT to confirm, modify or set aside the order.

Applying Kamal Kishore Dheer v. Debts Recovery Appellate Tribunal, the Court held that the remedies under Rules 60/61 and Section 30 are concurrent and that a borrower need not first approach the Recovery Officer or make a pre-deposit before filing a Section 30 appeal.

Rule 63 of the Second Schedule makes confirmation of sale the final stage by which the sale becomes absolute; the confirmation order therefore derives its authority from Section 25(a) and is appealable under Section 30.

Rule 18 of the DRT Procedure Rules, 1993 empowers the Tribunal to pass orders necessary to give effect to its decision, prevent abuse of process and secure the ends of justice.

The Court relied on Hindalco Industries Ltd. v. Union of India for the principle that a Tribunal may mould ancillary relief consistently with the pleadings and established facts.

It also applied Valji Khimji & Co. v. Official Liquidator to hold that, where a sale is subject to confirmation, no enforceable right accrues to the auction purchaser until confirmation.

Under Rule 52(2), a sale proclamation must be made in the language of the district; and auction proceedings must be fair, transparent and directed towards obtaining the maximum realisable value, as recognised in Om Sakthi Sekar v. V. Sukumar and related authorities.

The Court held that confirmation of sale under Rule 63 was merely the procedural culmination of the Recovery Officer’s statutory power under Section 25(a).

Consequently, Section 30’s non-obstante clause enabled the borrower to appeal directly against the confirmation order, independently of Rules 60 or 61 and without any pre-deposit.

The borrower’s memorandum of appeal expressly challenged the property description, reserve price, publication of notice and participation of only one bidder.

The DRT framed an issue covering the legality of the attachment, proclamation, auction and confirmation, and the auction purchaser did not object to that issue or claim prejudice during the proceedings.

The Court therefore held that setting aside the confirmation naturally required setting aside the antecedent auction steps and was within the DRT’s power under Rule 18; the absence of a separate prayer did not invalidate the relief.

The Court further held that the borrower’s earlier appeal and the interim stay therein were not determinative of the Section 30 appeal, which had to be decided independently on the legality of the Recovery Officer’s order.

The learned Single Judge therefore erred in treating the withdrawal of the earlier appeal as extinguishing the borrower’s substantive challenge.

On merits, the property described in the original recovery application measured 694 square yards, whereas the property auctioned was described as measuring 4,950 square yards; the sale proclamation was published in English rather than Hindi, contrary to Rule 52(2); only one bidder participated; and the property’s forced-sale value was assessed at approximately ₹56.12 lakhs, substantially above the auction price of ₹35.20 lakhs.

These defects constituted material irregularities affecting the fairness and value of the sale.

Accordingly, the ordinary protection given to a bona fide auction purchaser could not validate the defective proceedings.

The DRT had jurisdiction to examine the legality of the entire auction process and to set aside the consequential auction orders under Rule 18, notwithstanding the absence of a separate prayer seeking annulment of every antecedent step.

The auction was vitiated by material irregularities, including an incorrect property description, non-compliant publication, inadequate valuation and a sale to a single bidder at a price below the forced-sale value.

The judgment of the learned Single Judge was set aside, Writ-C No. 68334 of 2005 was dismissed, and the orders of the DRT and DRAT setting aside the confirmation of sale were restored.

Both special appeals were allowed, with no order as to costs.