The Gujarat High Court on 26 October held that a mortgagee bank that consents to the sale of a mortgaged property in recovery proceedings can claim a share in the sale proceeds under Section 73 of the Code of Civil Procedure (CPC), even if the property has already been sold.
A Bench comprising Justices A.S. Supehia and Nisha M. Thakore set aside an order of the Debts Recovery Appellate Tribunal (DRAT), Mumbai, which had rejected South Indian Bank's claim to the auction proceeds of a property mortgaged in its favour. The judges held:
“Thus, when such a sale takes place with the mortgagee's consent, the mortgagee's security interest shifts from the physical property to the sale proceeds.”
South Indian Bank had sanctioned a housing loan of Rs. 6.35 lakh to Laljibhai M. Patel and Parvatiben L. Patel in 1999 to purchase a flat in Ahmedabad. The borrowers created an equitable mortgage in favour of the bank by depositing the original title deeds and executing a Memorandum of Deposit of Title Deeds.
After the borrowers defaulted, the bank filed a civil suit seeking recovery of Rs. 9 lakh with interest and a decree for the sale of the mortgaged property.
Meanwhile, Bank of India initiated recovery proceedings against Shree Plastics, a proprietary concern of Parvatiben L. Patel. During the proceedings, the Recovery Officer attached several properties, including the flat mortgaged to South Indian Bank.
South Indian Bank objected to the attachment on the ground that it held a prior mortgage over the property. It subsequently consented to the auction, subject to its claim in the pending civil suit being paid on priority from the sale proceeds and the remaining amount being shared equally between the two banks.
The property was auctioned in 2007 for Rs. 28.50 lakh. However, the Recovery Officer rejected South Indian Bank's claim to the proceeds on the ground that its dues had not yet been adjudicated. The Debts Recovery Tribunal (DRT), Ahmedabad, subsequently dismissed the bank's appeal.
During the pendency of its appeal before the DRAT, South Indian Bank obtained a money decree from the Small Causes Court, Ahmedabad, directing the borrowers to jointly and severally pay Rs. 6.35 lakh with interest at 9%.
Despite being informed of the decree, the DRAT dismissed the bank's appeal. South Indian Bank then approached the High Court, arguing that the DRAT had wrongly rejected its claim on the ground that it had not obtained a decree enforcing the mortgage. The bank contended that the subsequent money decree entitled it to claim a share in the auction proceeds under Section 73 CPC.
The High Court observed that Section 73(1)(b) CPC protects a mortgagee's interest in the sale proceeds where a mortgaged property is sold free from the mortgage with the mortgagee's consent. It noted that South Indian Bank had consented to the auction through a pursis dated 15 March 2007, subject to its claim being paid from the sale proceeds.
It also observed that the existence of the mortgage was supported by the civil court's judgment, which recorded that the borrowers had voluntarily executed the mortgage documents in favour of South Indian Bank.
Further, the Bench held that the DRAT had erred in treating the civil court's refusal to direct the sale of the mortgaged property as a failure by the bank to establish its mortgage rights. It explained that the property had already been sold in the recovery proceedings, leaving no occasion for the civil court to order its sale. It said:
“The authorities failed to appreciate that the petitioner-Bank had a valid mortgage over the property in question. The existence of the mortgage is supported by the judgment and decree passed by the Civil Court, wherein the borrowers specifically admitted having executed the mortgage documents in favour of the petitioner-Bank. The said admission formed part of the factual basis on which the Civil Court adjudicated the claim of the petitioner-Bank.”
Accordingly, the High Court allowed the petition, quashed the DRAT's order and remanded the matter for fresh consideration. Given that the dispute had remained pending for over 18 years, the Bench directed the DRAT to preferably dispose of the appeal within six months.
For South Indian Bank: Jainish P. Shah
For the Respondent: Anand B. Gogia