Auction Purchaser Entitled To Full Refund For Bank's Non-Disclosure Of Encumbrances: Calcutta High Court

On 12 November, the Calcutta High Court held that an auction purchaser is entitled to a full refund of the sale consideration where a bank fails to disclose pending litigation and known encumbrances in the public auction notice, in violation of Rule 8(7) of the Security Interest (Enforcement) Rules, 2002.

Justice Om Narayan Rai directed Punjab National Bank (PNB) to refund Rs. 5.53 crore to the auction purchaser, along with interest, after the Bank failed to disclose pending litigation and an existing tenancy affecting the auctioned property and deliver physical possession despite receiving the entire sale consideration. He held:

“The statutory requirement of disclosure of encumbrances and other material in the public sale notice is aimed at protecting the intending purchasers. Any violation thereof would thus operate to the severe detriment of the intending purchasers and would be a valid ground to entertain the aggrieved purchaser's claim for a full refund of the sale consideration paid by it.”

The dispute arose after Ambhi Impex Private Limited defaulted on credit facilities availed from the erstwhile Union Bank of India, now PNB.

The property mortgaged by its guarantors was put up for auction while proceedings initiated by the borrowers challenging the Bank's measures under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, were pending before the Debt Recovery Tribunal, Kolkata.

The auction purchaser emerged as the highest bidder in 2022 and paid the entire sale consideration of Rs. 5,53,22,000. The Bank issued a sale certificate on 28 February 2023.

However, the sale notice disclosed only symbolic possession and stated that no encumbrances were known to the Bank. It did not mention the pending litigation or the existing tenancy. Despite receiving the entire consideration, the Bank failed to deliver physical possession of the property.

The purchaser sought a refund through an email dated 16 January 2025, but the Bank declined the request on 27 January 2025. The purchaser subsequently approached the High Court seeking a refund with interest. Meanwhile, the borrowers' revisional challenge was dismissed on 19 May 2025.

The Court rejected the Bank's objections, observing that the undisputed violation of Rule 8(7) and its failure to disclose known encumbrances and pending litigation established material irregularity in the auction process.

It further held that the absence of a specific pleading seeking annulment of the sale would not defeat the purchaser's entitlement to a refund in the facts of the case.

Further, the Bench noted that the Bank had filed an application under Section 14 of the SARFAESI Act before the District Magistrate on 19 April 2022 but had failed to take proactive steps to secure its disposal.

Even after issuing the sale certificate in February 2023, the Bank had allowed proceedings concerning an amicable settlement with the borrowers to continue, despite having already sold the property to the auction purchaser. Therefore, Justice Rai observed:

“The Bank has thus consistently failed in its duty as a secured creditor to deliver possession of the auctioned property to the auction purchaser and this fact alone would, in the facts of the present case, entitle the auction purchaser to refund of the sale consideration.”

On the question of interest, the Court noted that the purchaser had acquired clear knowledge of the pending litigation when the borrowers' revisional application was served upon him. However, it found that he had sought a refund only on 20 February 2025.

Therefore, it restricted his entitlement to simple interest at the highest fixed deposit rate offered by the Bank, calculated from 20 February 2025 until the date of refund.

Further, the Bench directed PNB to refund the entire sale consideration along with the aforesaid interest and declared the sale certificate dated 28 February 2023 to be of no consequence. It permitted the Bank to put the secured asset up for sale afresh in accordance with law.

In the connected writ petition filed by the Bank, it directed the District Magistrate, Purba Burdwan, to dispose of the Bank's application under Section 14 of the SARFAESI Act within one month.

Accordingly, the High Court allowed the auction purchaser's claim for a refund and directed the Bank to take steps to recover possession through fresh proceedings in accordance with law.

For the Auction Purchaser: Senior Advocate Bikash Ranjan Bhattacharyya, Advocates Uday Sankar Chattopadhyay, Suman Sankar Chatterjee and Pronay Basak.

For Punjab National Bank and its Authorised Officer: Senior Advocate Saptanshu Basu, Advocates Abhishek Banerjee, Parna Roy Choudhury and Trisa Chanda.

For the Borrowers, Guarantors and Mortgagors: Advocates Siddhartha Banerjee, Debashis Karmakar, Satyam Ojha and Parikshit Lakhotia.

For the State Respondents: Advocates Tapas Kumar Chatterjee and Sailen Naskar