Financial Corporation’s Duty as Trustee Mandates Ensuring Fair Competition and Prohibits Financing Auction Purchasers

The Appellant, a building firm, defaulted on a loan of ₹4.89 crores from the Kerala Financial Corporation (KFC).

KFC initiated recovery under Section 29 of the State Financial Corporations Act (SFC Act), took possession of the mortgaged property, and conducted an e-auction on 12.03.2021.

At the auction, Respondent 11 was the highest bidder at ₹9.18 crores against a reserve price of ₹9.15 crores.

Respondent 11 failed to pay the 25% deposit within the stipulated 7 days and requested the sale be confirmed in favor of his nominees, Respondents 7 to 10 (a partnership firm).

Notably, Respondent 9 was the son of the only other bidder (Respondent 12).

KFC then sanctioned a loan of ₹5 crores to these nominees to facilitate the purchase, adjusting it against the sale consideration beyond the 30-day deadline.

The Appellant challenged the sale in a writ petition, which was dismissed by a Single Judge on 12.11.2024.

1. Whether the Kerala Financial Corporation exercised its power under Section 29 of the SFC Act in a fair and reasonable manner consistent with its role as a "trustee" of the mortgaged property

2. Whether the financing of the auction purchasers by the creditor (KFC) using the mortgaged property as security, and the relaxation of auction terms, vitiated the sale process

The court applied Section 29 of the SFC Act, interpreting the Financial Corporation's role as that of a "trustee" for the debtor, which necessitates obtaining the best possible price through a transparent and competitive process.

It relied on Mahesh Chandra v. Regional Manager, U.P. Financial Corporation (1993), which established that the Corporation must act as a prudent owner and that any unfair or unreasonable action is arbitrary and ultra vires.

The court further cited Om Sakthi Sekar v. V. Sukumar (2026) and M.R. Vasumathi v. Authorized Officer (2026), affirming that the protection of a bona fide auction purchaser is not absolute if the process remains legally infirm or if competitive bidding is curtailed.

The court found that KFC failed to act as a prudent trustee. Highlighting procedural irregularities, the court noted that the successful bidder (Respondent 11) did not pay the 25% deposit within the 7-day limit prescribed in the auction notice, which should have resulted in an automatic revocation of the sale.

Furthermore, KFC's decision to finance the nominees of the highest bidder—one of whom was the son of the only other competing bidder—strongly suggested the existence of a cartel and lacked transparency.

The court criticized KFC's internal circular (Credit Circular No. 81) which allowed financing auction purchasers, noting it was illogical to identify a "best price" by selecting a purchaser who lacked the independent means to pay.

Finally, the court observed that by adjusting a sanctioned loan against the sale price nearly a month late, KFC flouted its own auction conditions and statutory obligations to the borrower.

The Writ Appeal was allowed, the judgment of the Single Judge upholding the sale was set aside, and the court ordered KFC to obtain a fresh valuation report and conduct a new auction within six months.