Facts of the Case

The petitioner had initially been sanctioned a loan of Rs.106 lakhs, followed by an additional amount of Rs.25 lakhs during 2011. The petitioner defaulted in servicing the loan, and the loan account was classified as a Non-Performing Asset (NPA). On 5 January 2017, possession of the secured assets described as the petition schedule property was taken over by KSFC. Proceedings were thereafter pursued under Section 29 of the State Financial Corporations Act, 1951, culminating in the sale of the schedule property in favour of respondent No.3 for Rs.232.75 lakhs.

The record showed that KSFC had issued a show-cause notice on 15 November 2012. The DRC, in meetings held on 19 November 2012 and 4 December 2012, accorded permission to take over the schedule property under Section 29. The primary assets were thereafter brought for sale through e-auction pursuant to advertisements issued on 26 March 2013 in newspapers including Deccan Herald, Vijaya Vani and Star of Mysore.

Following the e-auction advertisements, the petitioner requested rescheduling of the loan facility. That request was considered and additional time was granted, but the petitioner failed to comply with the rescheduled repayment arrangement. A further show-cause notice dated 16 August 2013 was issued. The petitioner thereafter issued a cheque dated 30 September 2013 for Rs.7,01,637, which was returned unpaid, resulting in proceedings under Section 138 of the Negotiable Instruments Act, 1881 in PCR No.3539/2013.

The record further reflected repeated concessions and opportunities. The petitioner made certain part-payments during 2013–2014, following which recovery action was deferred. The petitioner and guarantor subsequently agreed to arrange payment of Rs.20 lakhs by 30 June 2014, but the agreed payment was not made. Another show-cause notice was issued on 2 December 2014. KSFC also gave an option to pay 50% of the interest dues by February 2015 and the remaining 50% by March 2015, but the concession was not availed. The One Time Settlement proposal was also considered, and another show-cause notice dated 29 November 2016 was issued.

Fresh e-auction advertisements were issued on 17 March 2017, 24 June 2017, 13 January 2018 and 17 January 2019. The petitioner also sought three months’ time for closure of the account under an OTS arrangement. In 2019, it was suggested that the OTS proposal could be considered if the petitioner paid Rs.35 lakhs within ten days, but there was no response to that offer. A further e-auction advertisement was issued on 21 June 2019, with the fair price reserved at Rs.220.50 lakhs.

As recorded in the judgment, valuation was obtained under a report dated 20 June 2019. The market value of the property/assets was stated at Rs.216.25 lakhs, while external valuation of the primary asset was Rs.220 lakhs. The primary assets were ultimately sold in the e-auction dated 2 February 2021, with a reserve price of Rs.163 lakhs. The highest bid was Rs.232.75 lakhs. The purchaser deposited EMD of Rs.35 lakhs, the sale proposal was approved by the competent authority on 8 February 2021, the entire sale consideration together with applicable GST at 18% on the value of plant and machinery was remitted on 18 February 2021, and possession of the plant and machinery was handed over on 19 February 2021.

Issues Involved

The principal issues before the High Court were:

  1. Whether KSFC had conducted the e-auction of the secured assets in a hurried, arbitrary or non-transparent manner without providing sufficient opportunity to the petitioner to repay the outstanding loan.
  2. Whether the petitioner had been denied a reasonable opportunity to settle the loan account through a One Time Settlement (OTS) mechanism.
  3. Whether the schedule property had been undervalued and sold below a fair and proper value, thereby causing legal injury to the petitioner.
  4. Whether the sale conducted pursuant to recovery proceedings under Section 29 of the State Financial Corporations Act, 1951 warranted interference under Articles 226 and 227 of the Constitution of India.

Petitioner’s Arguments

The petitioner contended that KSFC had proceeded to auction the schedule property in a hurried manner without giving him adequate opportunity to repay the loan, including through a One Time Settlement process.

It was argued that the sale ought to have been conducted in a transparent manner and that the schedule property had been undervalued, though according to the petitioner it could have fetched a higher price.

The petitioner therefore asserted that legal injury had been caused because KSFC allegedly auctioned the secured property without following due process of law. The petitioner sought setting aside of the sale process conducted by respondent No.2 and challenged the communications dated 9 April 2021 and 12 April 2021.

Respondents’ Arguments

KSFC contended that the petitioner had been given several opportunities over a prolonged period, including opportunities to explore One Time Settlement, rescheduling of repayment obligations and other concessions.

The respondents relied upon the extensive sequence of notices, meetings, rescheduling arrangements, deferred recovery action, proposed payment arrangements and OTS consideration. According to KSFC, despite repeated accommodation, the petitioner failed to honour the repayment commitments.

The respondents further submitted that the property had been subjected to valuation. The market value was assessed at Rs.216.25 lakhs, while external valuation of the primary asset was Rs.220 lakhs. Despite the e-auction reserve price being fixed at Rs.163 lakhs, the highest bid obtained was Rs.232.75 lakhs.

KSFC also submitted that, as on the date of auction, the total outstanding amount was Rs.3,36,54,511.88. Against this amount, KSFC recovered Rs.232.75 lakhs through the e-auction, leaving the petitioner still liable for approximately Rs.1,03,79,511.88. On this basis, the respondents sought dismissal of the writ petition.

Court Order / Findings

The Karnataka High Court examined the records and noted that the petitioner’s principal grievance was that KSFC had allegedly conducted the e-auction and conveyed the property to respondent No.3 without providing sufficient opportunity.

The Court found that the detailed facts and circumstances narrated in the statement of objections were not disputed by the petitioner. Those undisputed facts demonstrated a prolonged history of defaults and repeated opportunities extended to the petitioner.

The Court held that, in light of the undisputed factual circumstances placed on record, the petitioner’s grounds could not be countenanced.

Accordingly, the High Court held that the petition failed and dismissed the writ petition.

Important Clarification

This decision is significant because the Court did not proceed on the proposition that every action under Section 29 is automatically immune from judicial review. Rather, the dismissal turned on the specific and undisputed factual record showing repeated opportunities, rescheduling, deferred recovery action, OTS consideration, multiple show-cause notices and several rounds of e-auction attempts before the final sale.

The judgment further indicates that a borrower’s allegation of inadequate opportunity may not sustain judicial interference where the record establishes that the financial corporation repeatedly accommodated repayment requests and settlement proposals, but the borrower failed to comply.

On the undervaluation contention, the factual record was also material: the property had valuation figures of approximately Rs.216.25 lakhs and Rs.220 lakhs, while the successful e-auction bid reached Rs.232.75 lakhs. Thus, the successful bid exceeded the valuation figures recorded in the proceedings.

The judgment must therefore be understood in its own factual context: repeated default, multiple repayment opportunities, consideration of OTS proposals, several sale attempts and an ultimately higher successful bid formed the foundation for refusal of writ interference.

Sections

Section 29 of the State Financial Corporations Act, 1951 — Power of a Financial Corporation to take over management or possession of an industrial concern and exercise statutory recovery rights in case of default.

Section 138 of the Negotiable Instruments Act, 1881 — Referred to in the factual background concerning proceedings arising from dishonour of the petitioner’s cheque.

Articles 226 and 227 of the Constitution of India — Constitutional jurisdiction invoked by the petitioner for judicial review and supervisory relief against the impugned auction and related recovery action.

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https://www.mytaxexpert.co.in/uploads/1783068624_427compressed.pdf

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