Mr. Gaurav Mahajan, Ms. Mehak Joshi and Mr. Kanak Shori, Advocates v. THE NAINITAL BANK LTD ANR

Judgment

1. The present petition filed under Articles 226 & 227 of the Constitution of India1 assails the Order dated 10.12.2018 passed by the Ld. Debt Recovery Appellate Tribunal2 in Appeal No. 144/2018 in S.A. No. 40/2017 titled as “The Nainital Bank Ltd. vs Mohd. Kasim” whereby the Ld. DRAT set aside the order dated 22.03.2018 passed by 1 Constitution 2 DRAT W.P. (C) 13954/2018 the Ld. Debt Recovery Tribunal3 and upheld the auction sale of one of the Petitioner’s properties conducted by Respondent No. 1 in favour of Respondent No. 2. BRIEF FACTS:

2. 3. The brief facts leading to the present petition are a bit chequered. The Petitioner had availed certain loans from the Respondent Bank and for the same, had mortgaged two properties. Due to non- payment of dues, the loan accounts of the Petitioner were declared Non- Performing Accounts4 and a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20025 came to be issued against the Petitioner on 03.10.2013. 4. Consequent to taking possession of the mortgaged properties by the Respondent Bank, the Petitioner preferred an application bearing S.A. No. 79/2014 before the Ld. DRT. 5. Vide order dated 29.12.2015, the Ld. DRT disposed of the application with a direction to deposit the outstanding dues with 15% simple interest by way of equal monthly installments by 31.03.2016. It was also directed that in case of any default on the part of the Petitioner, the Respondent Bank would be at liberty to proceed further under the SARFAESI Act. 6. Pursuant to the passage of the said order, the Petitioner was unable to make the payment as directed by the Ld. DRT. 3 DRT 4 NPA 5 SARFAESI Act W.P. (C) 13954/2018

7. On 20.07.2016, the Petitioner approached the bank for a One Time Settlement6. By communication dated 30.07.2016, the Respondent Bank accepted the Petitioner’s request in the following terms: “In this connection, we inform you that the matter was placed before higher authorities who after, observing the circumstances of the case and broad parameter of Recovery Policy of the Bank, in principal agree to accept Rs. 2.50 Crore (Rupees Two Crore Fifty Lac) towards full and final settlement of Bank's dues involved in the accounts M/S Deepali Electrical Pvt Ltd & M/s Times International Traders, on following terms and conditions. However the final decision will be communicated after clearance from competent authority which please note. THAT Rs 2.15 Crore shall be deposited within 30 days from the date of this letter including Rs. 25.00 Lac (Rupees Twenty five Lac) which you have already deposited with the Branch on 10.06.2016. THAT Rs. 35 Lac (Rupees Thirty Five Lac) i.e. the remaining amount shall be deposited within 90 days thereafter. THAT the original document/Title Deeds of the one mortgaged property i.e. industrial property situated at KH No-16/19, Sewa Dham Road, Mandoli, Delhi-110092 will be released only after deposit of Rs 2.15 Crore within 30 days as mentioned aforesaid. The original document/ Title Deeds another mortgaged property i.e. residential property i.e. flat at G-87, Azad apartment Delhi will be released only after depositing the final payment of compromise amount i.e. Rs. 35 Lac before the aforementioned stipulated period of 90 days. However, please also note that the said compromise is without prejudice to the Bank's legal right towards this NPA Account and if there is a single default in payment of compromised amount within stipulated period, bank will withdraw all the concessions, granted in the compromise and will be free to take suitable action for recovery of bank's dues at your cost and responsibility. To remove all, doubts it is made amply clear that in case of a single default by the party (Borrower/ Guarantor) to honor the terms and conditions of compromise proposal aforesaid, Bank reserves its right 6 OTS W.P. (C) 13954/2018 to institute legal action/ recovery action for its dues and to proceed under law.”

8. As per the OTS terms, the Petitioner made a payment of Rs. 2.15 crores to the Respondent Bank. Consequent to this payment, on

12.08.2016, the Respondent released the documents relating to the commercial property bearing No. KH No. 16/19 Sewa Dham Road, Mandoli, Delhi-1100927. 9. The Petitioner, however, was unable to carry out the remaining payments, resulting in the Respondent Bank withdrawing the OTS vide letter dated 24.02.2017 in the following terms: “Reference is made to the compromise letter dated 30.07.2016, relating to NPA Accounts of Dedpali Electricals Private Limited and Times International Traders, wherein the concessions were granted by the Bank against the total dues on the said accounts. It was decided that you have to deposit Rs. 250.00 Lac within the stipulated period and the same was duly accepted by all the constituents of the accounts. It is unfortunate to note that you have failed to observe the terms of compromise and consequently failed to deposit the compromised amount within the timeframe stipulated in the said compromise letter. Further, it is communicated that the concessions granted by the Bank against the terms of compromise under reference stands withdrawn and the proceeding under SARFAESI against the secured asset has been initiated solely at your cost and expenses. To avoid any future unpleasant situations, it is advised to repay the balance dues of the Bank as per the demand notice dated 03.10.2013 along with interest (up-to-date as well as future), costs and expenses.”

10. After the cancellation, the Bank re-initiated proceedings under the SARFAESI Act and pursuant to the same, a Court receiver appointed by 7 Property No. 1 W.P. (C) 13954/2018 Ld. ACMM, Karkardooma Courts, issued notice for taking physical possession of the second property being Residential Flat No. A-87, Third Floor, Azad Apartments, IP Extension, Delhi-1100928, against which, the Petitioner preferred S.A. No. 40/2017 before the Ld. DRT. 11. During the proceedings of S.A. No. 40/2017 on 18.03.2017, the Petitioner deposited Rs. 5 lakhs by direct deposit and undertook to pay Rs. 12 lakhs by 31.03.2017, with the remaining Rs. 15 lakhs to be paid within one month from the date of the order. The order also directed that these payments carry simple interest at 15% per annum from the date of default, failing which the Respondent Bank was entitled to take possession of the property without further order. Accordingly, S.A. No.

40/2017 was disposed of. 12. Impugning the order dated 18.03.2017, the Respondent Bank preferred Appeal No. 192/2017 before Ld. DRAT. Vide its order dated

26.04.2017, Ld. DRAT issued notice and was pleased to stay the operation of the order dated 18.03.2017 in S.A. No. 40/2017 of the Ld. DRT. 13. The Respondent Bank thereafter proceeded to auction the Property No. 2/ Residential property on 07.07.2017 for a sale consideration of Rs.

96.65 lakhs to Respondent No. 2, being the successful auction purchaser. 14. Vide order dated 16.08.2017, the Ld. DRAT remanded the matter back to the Ld. DRT for a fresh consideration of S.A. No. 40/2017, which was disposed of vide order dated 18.03.2017 by the Ld. DRT. The Ld. DRAT, however, in the said order dated 16.08.2017 noted that with 8 Residential property/ Property No. 2 W.P. (C) 13954/2018 respect to the prayer for maintaining the status quo in respect of the Residential property/ Property No. 2 which already stood sold but awaited delivery of possession to Respondent No. 2, the Petitioner was at liberty to move an appropriate application in that respect before the Ld. DRT. Liberty was also granted to the Petitioner to seek a declaration in respect of the sale being declared illegal. The Ld. DRAT, while passing the said order, was cautious enough to record that no view was expressed on the “auction part” of the litigation. 15. Following the remand of S.A. No. 40/2017 and after hearing both parties in I.A. No. 1580/2017, on 30.08.2017, the Ld. DRT noted that the Petitioner had immediately paid Rs. 2.15 crores out of the agreed OTS amount of Rs. 2.50 crores. The remaining Rs. 35 lakhs could not be paid on time due to factors including demonetization, but was subsequently cleared during the pendency of the S.A. and the appeal before the Ld. DRAT. The Ld. DRT also recorded that the Respondent Bank received Rs. 67,500/- as interest for the delayed payment. After considering the matter in full, the Ld. DRT held that transferring possession of the residential property to Respondent No. 2, despite full payment by the Petitioner, would cause irreparable harm. Accordingly, the interim stay granted earlier was made absolute, and the Respondent Bank was restrained from handing over possession. The Ld. DRT found the auction was conducted lis pendens, justifying its intervention. 16. Aggrieved by the order dated 30.08.2017, the Respondent Bank filed Misc. Appeal No. 395/2017 before the Ld. DRAT. By its order dated 30.01.2018, the Ld. DRAT allowed impleadment of Respondent No. 2/ the auction purchaser, in S.A. No. 40/2017, which W.P. (C) 13954/2018 was pending before the Ld. DRT. With the consent of all parties, the Ld. DRAT also directed the Ld. DRT to dispose of S.A. No. 40/2017 within a maximum period of six weeks. 17. In compliance with these directions, the Ld. DRT, after hearing the parties, vide Order dated 22.03.2018, allowed S.A. No. 40/2017 and held as follows: “12. Now, the points for determinations are for allowing the applicant to deposit the OTS amount within a period of 60 days and set aside the SARFAESI proceedings under Section 13(2) & 13(4) and the sale conducted by the respondent bank during the pendency of the appeal before the Hon'ble DRAT, Delhi as prayed for?

26. In the result, the SA is allowed and the auction conducted by the respondent no.1 bank is hereby set aside directing the respondent bank to refund the amount of auction to the auction purchaser with interest @9% p.a. from the date of deposit till return. Before parting of the case, I am of the considered opinion that security applicant who defaulted cannot go scot free as he is to scale with cost of the auction conducted by the respondent no.1 bank. He should be directed to pay interest @15% p.a. from 30.11.2016 till payment on reducing balance basis. Respondent no. 1 bank shall file the affidavit of expenses and the amount recoverable for delayed period as stated above within one week and serve a copy of the affidavit to the security applicant or his counsel. On such service of affidavit, the security applicant shall pay the amount as stated above in the affidavit of the bank within 10 days thereafter.”

18. The Order dated 22.03.2018 of the Ld. DRT was challenged by the Respondent Bank vide Appeal No. 144/2018, culminating in the impugned order dated 10.12.2018. After reviewing the entire record, the Ld. DRAT allowed the appeal, holding that the Respondent Bank was entitled to succeed as the Petitioner had not challenged the legality of the W.P. (C) 13954/2018 measures taken under the SARFAESI Act, but had only sought for liberty to pay the dues in instalments. 19. The Ld. DRAT concluded that the Petitioner had effectively abandoned any challenge to the notices issued under Sections 13(2) and 13(4) of the SARFAESI Act and failed to comply with the payment timeline, resulting in the Bank taking possession of the Residential property. 20. The Ld. DRAT also criticized the Respondent Bank for offering the OTS despite having a favorable Order dated 29.12.2015. The Ld. DRAT further held that the Ld. DRT had erred in granting relief by cancelling a legally conducted auction, especially when no such relief had been specifically sought. The Ld. DRAT found that the Petitioner had no valid cause of action to invoke Section 17(1) of the SARFAESI Act the second time, after having “abandoned the legal fight in the first round where he accepted the disposal of his first SA with a direction to him to clear the bank’s entire dues in instalments”. 21. Furthermore, the Ld. DRAT held that the Respondent Bank’s decision not to condone the delay in OTS payment was within its discretion and not subject to judicial scrutiny. It noted that the Ld. DRT had extended “undue, unmerited, and undeserving” benefits to the Petitioner at various stages, disregarding public interest. 22. Rejecting the Petitioner’s request for further indulgence, the Ld. DRAT remarked that granting such relief would effectively reward a defaulter and set a poor precedent. Accordingly, the appeal was allowed, the Learned DRT’s order cancelling the auction was set aside, possession of the property was directed to be handed over to Respondent No. 2, and W.P. (C) 13954/2018 the Respondent Bank was permitted to recover the remaining dues as if the OTS had never been offered. SUBMISSIONS OF THE PETITIONER:

23. The Ld. counsel for the Petitioner would submit that the Petitioner fulfilled all substantial obligations under the OTS scheme, having paid Rs. 2.15 crores within the stipulated time and later depositing the remaining Rs. 35 lakhs along with penal interest of Rs. 2 lakhs. The delay in remitting the balance was purely due to the nationwide financial disruption caused by the demonetization announced on 08.11.2016. 24. The Ld. counsel for the Petitioner would endorse the decision and findings of the Ld. DRT and submit that the despite receiving nearly the full settlement amount, the Respondent Bank unilaterally and arbitrarily withdrew the OTS without adequately considering the Petitioner's requests for extension. It was argued that the Bank proceeded to auction the Residential property, even though full payment (including delayed interest) had been made in accordance with the DRT’s directions. This conduct was wholly unreasonable and violated the settled doctrine of legitimate expectation, as upheld in Ambience Pvt. Ltd. v. Punjab & Sind Bank9. 25. The Ld. counsel for the Petitioner would further submit that the Ld. DRT, in its judgment dated 22.03.2018, rightly held that time was not of the essence in the OTS agreement, particularly under the prevailing extraordinary circumstances. The Tribunal found that minor delays due to demonetization could not justify the forfeiture of 9 (2014) 208 DLT 459 W.P. (C) 13954/2018 settlement rights. Relying on, inter alia, P. D'Souza v. Shondrilo Naidu10 and SBI v. Vijay Kumar11, the Ld. DRT concluded that acceptance of substantial payments estopped the Bank from resiling from the settlement, though there was delay but it was not relevant, it being non-essential. 26. The Ld. counsel for the Petitioner would also submit that the auction was conducted while the appeal was pending before the Ld. DRAT, and the Auction Purchaser was fully aware of the ongoing litigation. The Ld. DRAT itself had recorded in order dated 16.08.2017 that any rights of the Auction Purchaser would be subject to the final outcome of the pending proceedings. The auction purchaser cannot claim bonafide status, and the sale lacks legal sanctity. 27. The Ld. counsel for the Petitioner would further submit that despite the Ld. DRT’s well-reasoned judgment setting aside the auction and recognizing the Petitioner’s full compliance, the Ld. DRAT reinstated the sale without due consideration of its own remand order dated 16.08.2017. This amounts to a grave miscarriage of justice and violates established principles of law, including the doctrine of estoppel and fair adjudication. 28. The Ld. counsel for the Petitioner would further submit that the Ld. DRT has the express power to invalidate a sale if it finds the creditor’s actions to be unlawful. Upon remand from the Ld. DRAT, the Ld. DRT rightly exercised this power and quashed the auction, ordering a refund to the auction purchaser with interest. The Ld. DRAT, however,