The Kerala High Court has reaffirmed that a State Financial Corporation, when enforcing security under the State Financial Corporations Act, acts as a trustee of the mortgaged property and must ensure a fair, transparent, and competitive auction process to secure the best possible price. The Court set aside a sale confirmed in favor of nominees of a bidder, holding that the Corporation’s conduct - particularly its financing of the purchaser - violated its statutory obligation to act with fairness and reasonableness.
Background & Facts
The Dispute
The petitioner, M/s Pearl Hill Builders and Developers, availed a loan of Rs. 4.89 crores from the Kerala Financial Corporation (KFC) in 2014, secured by a mortgage of 16.21 Ares of land in Kasaba Village, Kozhikode District. The market value of the property at the time of litigation was estimated at approximately Rs. 30 crores. After repeated defaults in repayment, the loan was declared a Non-Performing Asset in 2014. Following prior litigation and interim relief, KFC took possession of the property on 15.01.2019 and initiated recovery proceedings under Section 29 of the State Financial Corporations Act (SFC Act).
Key Facts
The property was valued by an approved valuer on 16.11.2020 at Rs. 11,32,30,000, later revised upward to Rs. 9,15,42,000 via Exhibit R4(d) dated 02.12.2020.
A notice under Section 29 of the SFC Act was issued to the petitioner on 17.12.2020, demanding payment of outstanding dues; no response was received.
Sale notice was published on KFC’s website on 18.01.2021 and in two newspapers on 23.01.2021.
An e-auction was conducted on 12.03.2021, with only two bidders: Respondent 11 (highest bidder at Rs. 9.18 crores) and Respondent 12.
Respondent 11 paid Rs. 46 lakhs as EMD on 12.03.2021 and Rs. 183.50 lakhs (25% of sale consideration) on 20.03.2021 - eight days after the 7-day deadline.
Respondent 11 requested KFC to execute the sale deed in favor of a partnership firm comprising Respondents 7 to 10, who were his nominees.
Respondent 9, a partner in the firm, is the son of Respondent 12, the unsuccessful bidder.
On 30.03.2021, KFC sanctioned a term loan of Rs. 5 crores to the partnership firm (Respondents 7 - 10), which was adjusted against the sale consideration in the sale deed dated 13.04.2021.
The sale deed was executed despite the balance 75% payment not being made within the 30-day window under the auction terms.
Procedural History
15.01.2019: KFC took possession of the mortgaged property.
16.11.2020: Reserve price fixed at Rs. 11,32,30,000.
02.12.2020: Reserve price revised to Rs. 9,15,42,000.
17.12.2020: Section 29 notice issued to petitioner.
18.01.2021 & 23.01.2021: Sale notices published online and in newspapers.
12.03.2021: E-auction conducted; Respondent 11 declared highest bidder.
20.03.2021: 25% payment made by Respondent 11 (delayed by one day).
30.03.2021: KFC sanctioned Rs. 5 crore loan to Respondents 7 - 10.
13.04.2021: Sale deed executed in favor of Respondents 7 - 10.
12.11.2024: Single Judge of Kerala High Court dismissed W.P.(C) No. 8708 of 2021.
29.06.2026: Division Bench delivered judgment in W.A. No. 340 of 2026.
The Parties' Positions
Petitioner (Pearl Hill Builders): Contended that the auction process was grossly irregular, the reserve price was inadequately determined, and the sale to nominees of the bidder - coupled with KFC’s financing of the purchaser - constituted collusion, breach of trustee duty, and arbitrariness under Section 29 of the SFC Act.
Respondents (KFC and Purchasers): Argued that the auction was conducted in accordance with internal guidelines, the sale was confirmed in good faith, and the loan to Respondents 7 - 10 was permissible under Circular No. KFC/CIR 81/CR 47/2020-21 dated 23.03.2021. They further contended that the rights of a bona fide purchaser must be protected.
Relief Sought
The petitioner sought quashing of the sale deed dated 13.04.2021, setting aside the order of the Single Judge dated 12.11.2024, and direction for a fresh auction of the property with strict adherence to statutory and procedural norms.
The Legal Issue
The central question was whether a State Financial Corporation, acting as a trustee under Section 29 of the SFC Act, violates its statutory duty to secure the best price for mortgaged property by financing the auction purchaser and confirming sale in favor of nominees of the bidder, where the nominee is closely related to the unsuccessful bidder and payment obligations are materially breached.
Arguments Presented
For the Petitioner
The petitioner relied on Mahesh Chandra v. Regional Manager, U.P. Financial Corporation and recent Supreme Court judgments in Om Sakthi Sekar v. V. Sukumar and M.R. Vasumathi v. The Authorized Officer & Ors. to argue that a Financial Corporation must act as a prudent trustee, ensuring competitive bidding and transparency. The sale to nominees, coupled with the Corporation’s advance of a Rs. 5 crore loan to the nominees, created a clear conflict of interest and undermined the auction’s integrity. The delay in payment, non-compliance with the Circular’s eligibility criteria, and familial nexus between the successful bidder and the nominee constituted material irregularities rendering the sale void.
For the Respondent
The respondents contended that the sale was conducted in accordance with KFC’s internal Circular dated 23.03.2021, which permitted financing of purchasers. They argued that the loan was a commercial decision to facilitate asset realization and that the sale deed was executed only after the adjustment of the loan amount. They further relied on the principle that confirmed auction sales should not be disturbed absent fraud or collusion, citing Rajiv Kumar Jindal v. BCI Staff Welfare Association.
The Court's Analysis
The Court began by affirming that Section 29 of the SFC Act confers wide powers on Financial Corporations, but these powers are not absolute. The Corporation, upon taking possession of the mortgaged property, stands in the shoes of a trustee under the law, bound by the duty to act fairly, reasonably, and in the best interest of the debtor. The Court emphasized that the object of the sale is not merely to recover dues, but to realize the maximum possible value of the asset.
"The trustee or a receiver is, therefore, duty bound to protect and preserve the property in his possession and the standard of conduct expected of him, in dealing with the property or sale thereof, is as a prudent owner would exercise in dealing with his own property or estate."
The Court found that the Corporation’s actions breached this duty on multiple grounds. First, the payment of 25% of the sale consideration was made by Respondent 11 on the eighth day, not by the "party in whose favour the sale was decided" as required under Clause 6 of the auction notice. Second, the sale deed was executed in favor of Respondents 7 - 10, who were not the bidders, and were not eligible promoters under the Corporation’s own Circular, which required the loan recipient to be the party issued the sale confirmation letter - Respondent 11.
Crucially, the Corporation advanced a Rs. 5 crore loan to Respondents 7 - 10, which was adjusted against the sale consideration on 13.04.2021 - beyond the 30-day window. The Court observed:
"We are at a loss to understand how... it can have a scheme to finance an auction purchaser with a loan granted to him against the security of the very same property."
The familial link between Respondent 9 (nominee) and Respondent 12 (unsuccessful bidder) further raised suspicions of collusion. The Court held that such conduct, even without proof of mala fides, rendered the transaction unreasonable and arbitrary under Mahesh Chandra. The Circular, even if valid, was not followed in letter or spirit.
The Court distinguished Om Sakthi Sekar and Vasumathi, noting that while courts generally uphold confirmed sales, they intervene where the process is legally infirm. Here, the process was not merely flawed - it was structurally compromised by the Corporation’s own actions.
The Verdict
The writ appeal was allowed. The Court set aside the judgment of the Single Judge dated 12.11.2024 and the sale deed dated 13.04.2021 in favor of Respondents 7 - 10. The Kerala Financial Corporation is directed to obtain a fresh valuation report and fix a new reserve price, and conduct a fresh auction of the property within six months from the date of receipt of this judgment. No costs were awarded.
What This Means For Similar Cases
Trustee Duty Overrides Commercial Convenience
Financial Corporations cannot justify irregular sales by citing internal circulars if they contravene statutory trustee obligations under Section 29 of the SFC Act.
Financing the purchaser of a mortgaged asset creates an inherent conflict of interest and must be avoided unless the purchaser is the original bidder and payment is fully compliant.
Courts will not defer to commercial expediency when the auction process lacks transparency or fairness.
Nominees and Familial Links Trigger Scrutiny
Sale to nominees of the bidder, especially where the nominee has a familial relationship with an unsuccessful bidder, raises a presumption of collusion.
Practitioners must now challenge such sales on grounds of procedural arbitrariness, even in the absence of direct evidence of fraud.
The burden shifts to the Financial Corporation to prove the absence of collusion and full compliance with auction terms.
Strict Adherence to Auction Timelines Is Non-Negotiable
Failure to pay 25% within 7 days or 75% within 30 days invalidates the bid, regardless of subsequent adjustments.
Any adjustment of loan amounts against sale consideration must occur before execution of the sale deed and within the stipulated timelines.
Delayed payments, even by a single day, constitute material breaches that vitiate the sale.
