The Supreme Court has recommended auction as the most preferable mode of disposal of property and national resources, though the president has referred back to the court the government’s serious reservations about it in the 2G controversy. The auction process itself is not all that foolproof and is often the subject of bitter litigation.
Many aggrieved people grin and bear injustice avoiding decades of litigation. We read about artworks being sold for millions of rupees at much publicised auctions, but a painter recently lamented that all he got was congratulatory messages from his friends.
When one’s property is auctioned for the fault of one’s ancestors, the only perceptible course is civil litigation. Last month, the Supreme Court decided a case in which the inheritor of debts won a pyrrhic victory. It took two decades to get a final verdict (Ram Kishun vs State of UP).
The story goes back to 1982 when Union Bank of India gave an agricultural loan. The debtor defaulted after three years and died soon thereafter. His property was auctioned. But that was not enough to repay the bank. So it proceeded against the guarantor. Since he had also died, his successor’s property was auctioned. It yielded a surplus of Rs 16,000 after clearing the debt. However, it was not paid to the owner. So, he approached the board of revenue and the Allahabad High Court challenging the auction and his liability for his ancestors’ sins. He lost all the way and, thus, he reached the Supreme Court.
The court declared that the auction was improper. But that gave little relief to the land owner. During the past decades, the auction purchaser had made improvements on the land and, therefore, the court declined to take back the land and give it to the owner. Instead, the owner was asked to approach the collector for the surplus money after the payment of the debt. After all his tenacious efforts, he might get Rs 16,000 from the 1986 auction of more than a bigha of land.
However, the court made certain altruistic observations worth citing in legal dissertations and appropriate court proceedings in the future. Examples: “The right to hold property is a constitutional right as well as a human right. A person cannot be deprived of his property except in accordance with the provisions of statute.”
“Undoubtedly, public money should be recovered and recovery should be made expeditiously. But it does not mean that the financial institutions which are concerned only with the recovery of loans, may be permitted to behave like property dealers and be permitted further to dispose of the secured assets in any unreasonable or arbitrary manner in flagrant violation of statutory provisions.”
There could be several other irregularities in auctions. In a 2008 case, FCS Software Solutions Ltd vs La Medical Devices Ltd, the court found after confirmation of the auction sale that the valuation of movable and immovable properties, fixation of reserve price, inventory of plant and machinery had not been made in the proclamation of sale, nor disclosed at the time of sale notice. The sale was set aside even after confirmation.
The sale must be confirmed by the company judge or the high court. This is a safeguard against the property being sold at an inadequate price. The court should see that the price fetched at the auction is an adequate price even if there is no hint of irregularity or fraud.
In the case Navalkha & Sons vs Sri Ramanya Das, the court emphasised that there must be a proper valuation report that should be communicated to the debtor and he should file his own valuation report. After confirmation of the sale, there should be issuance of sale certificate. The court would not normally interfere unless it found that some material irregularity in the conduct of sale has been committed.
The court allowed the appeal case Union Bank of India vs Official Liquidator and asked the Official Liquidator of the Calcutta High Court to re-auction the property after obtaining a fresh valuation report from reliable experts. This was done since the first auction was not based on proper valuation.
The Supreme Court has maintained that the company court has a duty to sell only such property or portions of it as necessary to satisfy the debt. The authority conducting the debt recovery has also a duty to decide whether sale of part of the mortgaged property would meet the outstanding demand. Valuation, according to the court, is a question of fact and it should be done fairly and reasonably.
The court has also emphasised that it would not normally interfere in auction unless there was fraud, favouritism or material irregularity. For example, in case of inadequate publicity or on evidence that the property could have fetched more value and that there is someone who can offer a substantially higher amount. Thus, transparency is vital even in auctions.