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Calcutta High Court Nullifies Auction Sale Due to Loan Repayment under OTS

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LI Network

Published on: 24 July 2023 at 11:30 IST

The Calcutta High Court has directed the State Bank of India (SBI) to refund the entire bid amount of Rs. 55,19,250, along with interest, to a petitioner company that emerged as the successful bidder in an e-auction conducted under the SARFAESI Act, 2002.

The auction was initiated by the bank after a debtor defaulted on their loan payment.

Justice Sabyasachi Bhattacharyya, presiding over the case, stated that the auction sale, which was geared up to be conducted in favor of the petitioner, got nullified the moment SBI accepted the borrower’s proposal for a One Time Settlement (OTS) and the borrower repaid the outstanding amount.

According to the court, once the loan was repaid as per the terms of the OTS, the basis for the auction sale, which was the non-payment of the loan, became obsolete, leaving no option for the petitioner but to claim a refund of the bid money.

The court further clarified that Phoenix, a third-party assignee of the Bank, did not have the right to unilaterally execute the Sale Certificate pertaining to the auction sale, and any such attempt was considered illegal and void ab initio, as it violated a restraint order.

The High Court emphasized that the bank, as the entity conducting and confirming the auction sale, was responsible for issuing the Sale Certificate to the successful bidder, in this case, the petitioner.

The case revolved around Avlokan, the petitioner, who had participated in an auction sale organized by SBI and had paid the winning bid amount. However, the bank failed to issue the Sale Certificate in favor of Avlokan, prompting them to demand either the issuance of the certificate or a refund of the bid amount along with interest.

Initially, SBI cited a restraining order from the Debt Recovery Tribunal (DRT) as the reason for the delay, but later informed Avlokan that the loan account was being assigned to Phoenix ARC Private Limited, advising them to address the matter with Phoenix after the assignment.

Subsequently, Avlokan filed a petition seeking a refund, and although the court initially ruled in their favor, SBI appealed against the decision. During the proceedings, the court found that the Bank, despite its earlier assurance of refund, was attempting to evade its liability towards the petitioner.

The High Court observed that the Bank had offered a One Time Settlement to the borrower, which resulted in an amicable settlement. The Bank hurriedly issued a letter after a month, stating its intention to refund the entire consideration amount along with interest to Avlokan if the sale was set aside.

In conclusion, the court ruled that the auction sale never materialized legally, as the Sale Certificate was not issued to the petitioner in due process.

Therefore, the auction sale was nullified, and the High Court allowed the petitioner’s claim, directing SBI to refund the bid amount and interest.