Subsequent purchasers remain bound by prior registered mortgages despite erroneous encumbrance certificates.

Respondent No. 2 borrowed money from the Karnataka State Khadi & Village Industries Board and, in 1991, created registered mortgages over the properties in dispute.

The petitioners claimed to have subsequently acquired those properties from respondent No. 2 under sale transactions dated 22 August 1994 and 18 November 1996.

After default, the Board initiated recovery proceedings and auctioned the properties on 26 August 2009; respondents 3 and 4 were declared successful bidders.

The petitioners challenged the auction, alleging procedural irregularities and seeking to have the Board accept payment from them.

Whether the petitioners’ later acquisitions were unaffected by the prior mortgages created by respondent No. 2 in favour of the Board.

Whether the petitioners had established grounds to quash the public auction conducted on 26 August 2009.

Section 22A of the Karnataka Khadi and Village Industries Act, 1956 permits sums due to the Board to be recovered as arrears of land revenue through the applicable recovery procedure.

Under Sections 157(2) and 161 of the Karnataka Land Revenue Act, 1964, the Act provides for recovery processes, including attachment and sale of immovable property; Sections 168, 176 and 177 address notice, applications to set aside a sale, and confirmation of sale.

A person acquiring immovable property after a duly registered instrument affecting it is deemed to have notice of that instrument under the principles discussed in M. Ramakrishna Reddy v. Sub-Registrar, ILR 1999 Kar 2033; an encumbrance certificate is informational and does not itself create or extinguish title.

Under Section 176, a sale may be set aside on the specified grounds, including material irregularity, mistake or fraud causing loss or injury, but an application must be made within the prescribed period.

The mortgages were registered before the petitioners’ claimed acquisitions, and the Court held that the later transactions were therefore subject to the Board’s prior rights.

The petitioners could not rely on an encumbrance certificate that omitted the mortgage to avoid the effect of its registration; their own 12 October 2009 representations also acknowledged the mortgage and the auction.

The Court rejected the procedural challenge, noting that notice had been served on the borrowers/mortgagors and that the petitioners’ representations sought settlement and waiver of interest, rather than setting aside the sale under Section 176.

It also distinguished the Division Bench decision relied on by the petitioners because that case involved a borrower challenging the auction, whereas the borrower here had not done so.

It held that their later acquisitions remained subject to the prior registered mortgages and that they had not established grounds to invalidate the auction or made a qualifying application under Section 176.

Both writ petitions were dismissed.