The Supreme Court has clarified the scope of Section 29 of the State Financial Corporations Act, 1951, holding that while financial corporations must act fairly and reasonably, borrowers cannot abuse legal processes to delay recovery. The judgment underscores that financial corporations are not obligated to indefinitely accommodate defaulting borrowers, particularly when they engage in dilatory litigation tactics.
Background & Facts
The Dispute
The respondents, Bhushan Singh & Ors. (hereinafter referred to as the ‘borrowers’), obtained loans from the Bihar State Financial Corporation (BSFC) for setting up an industrial unit. The loans, initially sanctioned on 29.05.1982 (Rs. 8.50 Lakhs) and 12.07.1984 (Rs. 3.15 Lakhs), were secured by an equitable mortgage over the borrowers’ property. Despite multiple opportunities to regularize their account, the borrowers persistently defaulted, prompting BSFC to initiate recovery proceedings under Section 29 of the SFC Act.
Key Facts
- Loan Sanction and Default: The borrowers defaulted on repayment, leading BSFC to issue a notice on 24.11.1988 under Section 29 of the SFC Act.
- High Court Intervention: The borrowers challenged the notice in CWJC No. 6104 of 1990, wherein the High Court, vide order dated 06.11.1990, fixed a repayment schedule. The borrowers failed to comply, depositing only a fraction of the required amount.
- Subsequent Notices: BSFC issued another notice on 27.09.1994 under Sections 29 and 30 of the SFC Act, calling upon the borrowers to discharge their liabilities within three months. The borrowers neither challenged the notice nor complied with its terms.
- Auction Process: BSFC published a sale advertisement on 02.03.1996 in Hindustan Times. The auction was held on 18.03.1996, and Sri Ramshekhar Singh (the auction purchaser) was declared successful. BSFC later approved the tender on 10.05.1996 and executed a sale agreement on 07.06.1996.
- Possession: The borrowers’ mortgaged property was handed over to the auction purchaser on 03.08.1996.
Procedural History
The borrowers filed multiple legal proceedings to challenge the auction sale:
- 26.03.1996: Filed Title Suit No. 39/1996 before the Trial Court seeking to set aside the auction sale and restore possession.
- 04.07.1991: Filed an interlocutory application before the High Court seeking extension of time to repay the loan. The application was dismissed on 11.07.1991.
- 10.07.1996: Filed CWJC No. 6641 of 1996 before the High Court seeking an interim injunction. The High Court passed an interim order on 17.07.1996, which was later recalled on 25.07.1996.
- 1997: Filed CWJC No. 3472 of 1997 seeking quashing of the auction sale. The writ petition was dismissed as withdrawn on 05.05.1998.
- 19.05.1999: The Trial Court decreed Title Suit No. 39/1996 in part, setting aside the auction sale and directing BSFC to restore possession to the borrowers.
- 1999: BSFC and the auction purchaser filed First Appeal No. 268 of 1999 and First Appeal No. 272 of 1999 before the High Court.
- 18.03.2025: The High Court dismissed both appeals, affirming the Trial Court’s decree.
- 2025: BSFC and the auction purchaser filed SLP(C) Nos. 16552-53 of 2025 and SLP(C) No. 24073 of 2025 before the Supreme Court.
Relief Sought
The appellants (BSFC and the auction purchaser) sought:
- Setting aside of the impugned judgment dated 18.03.2025 passed by the High Court.
- Restoration of the auction sale dated 18.03.1996.
- A declaration that the borrowers’ suit was barred by principles of res judicata, acquiescence, and Section 69(2) of the Partnership Act, 1932.
The Legal Issue
The central question before the Supreme Court was whether the auction sale conducted by BSFC under Sections 29 and 30 of the SFC Act was vitiated by unfairness, arbitrariness, or procedural irregularities, warranting its setting aside by the Courts below.
Arguments Presented
For the Appellants (BSFC and Auction Purchaser)
- Statutory Power: BSFC acted within its statutory powers under Section 29 of the SFC Act, which permits the sale of mortgaged property upon default.
- Bona Fide Purchaser: The auction purchaser is a bona fide purchaser who deposited the entire auction sale consideration and has been in possession for nearly three decades.
- Borrower’s Conduct: The borrowers are habitual defaulters who resorted to successive litigation to delay recovery. Their conduct disentitles them to equitable relief.
- Procedural Irregularities: Even if procedural irregularities existed, they cannot defeat substantive statutory rights in the absence of fraud or collusion. Reliance was placed on Patil Automation (P) Ltd. v. Rakheja Engineers (P) Ltd. [(2022) 10 SCC 1].
- Res Judicata and Partnership Act: The suit was barred by principles of res judicata and Section 69(2) of the Partnership Act, 1932, as the borrowers sought enforcement of a contractual right.
For the Respondents (Borrowers)
- Unfair and Arbitrary Action: BSFC acted arbitrarily and in collusion with the auction purchaser, as:
- No public auction took place on 18.03.1996; the sale was finalized through private negotiations on 03.04.1996.
- The mortgaged property was sold at an undervalued price without a valuation report.
- BSFC extended financial accommodation to the auction purchaser by permitting payment in instalments while denying similar relief to the borrowers.
- No Res Judicata: The orders passed in CWJC No. 6104 of 1990 and CWJC No. 3472 of 1997 did not adjudicate the validity of the auction sale, which was the subject matter of the title suit.
- No Bar Under Partnership Act: The suit was not barred by Section 69(2) of the Partnership Act, as the borrowers did not seek enforcement of a contract entered into in the course of business. Reliance was placed on Shiv Developers v. Aksharay Developers [(2022) 13 SCC 772].
The Court's Analysis
The Supreme Court undertook a detailed examination of Section 29 of the SFC Act, which empowers financial corporations to take over and sell the assets of defaulting borrowers. The Court relied on several precedents to delineate the scope of this provision:
"The fairness required of the Corporations cannot be carried to the extent of disabling them from recovering what is due to it. The matter can be looked at from another angle. The Corporation is an independent autonomous statutory body having its own constitution and rules to abide by, and functions and obligations to discharge. As such in the discharge of its functions, it is free to act according to its own light. The views it forms and decisions it takes are on the basis of the information in its possession and the advice it receives and according to its own perspective and calculations. Unless its action is mala fide, even a wrong decision by it is not open to challenge."
The Court emphasized that financial corporations must act fairly but are not obligated to indefinitely accommodate defaulting borrowers, particularly when they engage in dilatory litigation. Key observations included:
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Borrower’s Persistent Default: The borrowers failed to comply with multiple repayment schedules, including the High Court’s order dated 06.11.1990, and did not avail the opportunity to match the auction terms offered by BSFC on 17.04.1996.
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Fairness of Auction Process: The Courts below erred in setting aside the auction sale solely on the ground that the mortgaged property was not valued prior to auction. The borrowers did not object to the basis of the sale (i.e., the outstanding dues) at the relevant time and even sought to retain the property on the same terms offered to the auction purchaser.
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No Fraud or Collusion: The borrowers failed to establish any fraud or collusion between BSFC and the auction purchaser. The correspondence relied upon merely indicated the auction purchaser’s interest in the property, which was subsequently sold through a public advertisement.
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Commercial Decision: The decision of BSFC to permit the auction purchaser to pay the consideration in instalments, while denying similar relief to the borrowers, was a commercial decision taken in the ordinary course of business. The borrowers, being recalcitrant defaulters, could not claim parity with the auction purchaser.
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Abuse of Process: The borrowers’ conduct of initiating successive rounds of litigation to delay recovery was an abuse of process, disentitling them to equitable relief. The Court relied on Orissa State Financial Corpn. v. Hotel Jogendra [(1996) 5 SCC 357], which held that dilatory tactics defeat public policy.
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Finality of Auction Sales: The Court reiterated the principle that once an auction is confirmed, Courts must ordinarily refrain from setting it aside unless there is material irregularity or fraud. The borrowers failed to establish either, and the auction purchaser’s rights had crystallized over nearly three decades.
The Verdict
The Supreme Court allowed the appeals, setting aside the impugned judgment dated 18.03.2025 passed by the High Court and the decree dated 19.05.1999 passed by the Trial Court. The auction sale dated 18.03.1996 was upheld as valid, and the borrowers’ suit was dismissed. The Court, however, affirmed the findings of the Courts below that the suit was not barred by the principles of res judicata or Section 69(2) of the Partnership Act, 1932.
What This Means For Similar Cases
Financial Corporations Must Act Fairly, But Borrowers Cannot Abuse Process
- Fairness is a Two-Way Street: While financial corporations must exercise their powers under Section 29 of the SFC Act fairly and reasonably, borrowers cannot exploit legal processes to delay recovery. Courts will not intervene unless the corporation’s action is mala fide, arbitrary, or in violation of statutory provisions.
- Commercial Decisions Are Not Justiciable: Financial corporations are autonomous bodies entitled to take commercial decisions based on their assessment of borrowers’ creditworthiness. Courts will not substitute their judgment for that of the corporation unless there is a clear violation of law.
Auction Sales Are Final Unless Vitiated by Fraud or Material Irregularity
- Finality of Auction Sales: Once an auction sale is confirmed, it should not be lightly set aside. Borrowers challenging such sales must establish fraud, collusion, or material irregularity, not merely procedural lapses.
- Long Possession Crystallizes Rights: Where an auction purchaser has been in possession for a significant period (e.g., nearly three decades), Courts will be reluctant to unsettle crystallized rights in the absence of compelling evidence of illegality.
Borrowers’ Conduct Disentitles Equitable Relief
- Persistent Default: Borrowers who persistently default and resort to successive litigation to delay recovery will be viewed as abusing the process of law. Such conduct disentitles them to equitable relief, including setting aside auction sales.
- No Parity with Bona Fide Purchasers: Defaulting borrowers cannot claim parity with bona fide auction purchasers who comply with auction terms. Financial corporations are entitled to prioritize recovery over accommodating defaulters.
