Gujarat HC Orders Fresh Hearing on South Indian Bank’s Claim to Proceeds From Flat Auctioned for Rival Bank’s Debt

The petitioner-bank asserted that Flat No. B-504, Pushparaj Towers, Ahmedabad, had been equitably mortgaged to it in 1999 as security for a housing loan.

In recovery proceedings initiated by the respondent-bank, the Recovery Officer attached and auctioned the flat in 2007.

The petitioner consented to the sale, while seeking priority payment of its claim and a share of the balance proceeds.

The Recovery Officer rejected the petitioner’s claim to the sale proceeds; the DRT dismissed its appeal, and the DRAT dismissed a further appeal.

Meanwhile, the petitioner’s civil suit was decreed in 2023 for the loan amount and interest, but the court did not order sale of the property, which had already been sold.

The petitioner challenged the DRAT’s 2024 decision by writ petition.

Section 73 CPC provides for rateable distribution of execution-sale proceeds among qualifying decree-holders, subject to its conditions; under Section 73(1)(b), where property liable to sale in execution is subject to a mortgage or charge, the court may, with the mortgagee’s consent, order sale free of that security and give the mortgagee the same interest in the proceeds as it had in the property.

In Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, the Supreme Court stated that a claimant invoking Section 73 must have obtained a decree or adjudication and comply with the other statutory conditions.

The judgment treats a mortgagee’s consent to a sale as potentially transferring the security interest from the property to the sale proceeds.

The High Court held that the tribunals had misconstrued the civil court’s refusal to order sale of the flat.

By the time the civil suit was decided, the property had already been auctioned in the recovery proceedings, so there was no occasion for the civil court to direct its sale.

The civil court’s findings supported the petitioner’s case that the borrowers had executed the mortgage documents, while the petitioner had consistently asserted its mortgage and consented to the auction subject to its claim against the proceeds.

The DRAT therefore erred in treating the refusal of the sale relief as defeating the petitioner’s claim and in failing to assess that claim under Section 73 CPC.

The High Court did not finally determine the petitioner’s entitlement; it directed the DRAT to reconsider the appeals in light of its observations and the applicable law.

It remanded Appeal No. 119 of 2009 to the DRAT to reconsider the validity of the DRT and Recovery Officer orders, taking account of the Court’s observations and the law.

The DRAT was requested to decide the appeal preferably within six months.