New Delhi: The Supreme Court has ruled that borrowers who repeatedly default on loans taken from government financial institutions cannot get a legally conducted auction cancelled merely by claiming that the process was not “fair.”
The Court said that while public financial institutions are expected to act fairly because they deal with public money, fairness cannot be used as a reason to stop them from recovering legitimate dues.
The case involved Ranjit Motel in Bihar. The owners had taken loans of ₹8.50 lakh and later ₹3.15 lakh from the Bihar State Financial Corporation (BSFC) to establish an industry. They mortgaged their land and building as security but later stopped repaying the loan.
BSFC issued notices under Section 29 of the State Financial Corporations Act, 1951, asking the borrowers to clear the outstanding amount. The borrowers challenged the notices before the Patna High Court, which allowed them to repay the loan in instalments and fixed a repayment schedule.
The High Court also made it clear that if they failed to pay within the prescribed time, BSFC would be free to sell the mortgaged property.
Even after getting this opportunity, the borrowers failed to repay the loan. They sought more time, but the High Court rejected their request, observing that their conduct did not justify any further relief.
BSFC then issued another notice and auctioned the mortgaged property through a public auction in 1996.
The borrowers challenged the auction, and both the Trial Court and the Patna High Court set it aside.
Although they accepted that BSFC had the legal authority to sell the property, they held that the auction was unfair because there was no independent valuation of the property, the reserve price was not properly fixed, and the auction procedure was allegedly defective.
The Supreme Court disagreed with these findings and restored the auction. It noted that the borrowers had been given several opportunities to clear their dues. They were allowed to repay in instalments, sought additional time, received fresh notices from BSFC, and were even given an opportunity to save the property after the auction process had begun.
Despite all these chances, they failed to repay the outstanding amount.
The Court reiterated that “fairness is not a one-way street.” It observed that fairness applies equally to borrowers and financial institutions. Since government financial institutions function using public money, they also have a duty to recover loans so that funds remain available for other deserving borrowers.
Therefore, repeated defaulters cannot rely on the general principle of fairness to prevent lawful recovery proceedings.
The Court further held that judicial interference in the commercial decisions of financial institutions should be limited. If the institution has acted within the law and there is no evidence of fraud, bad faith, arbitrariness, collusion, or any serious legal violation, courts should not interfere with recovery actions or cancel auction sales.
The Supreme Court acknowledged that BSFC had not obtained an independent valuation report before the auction.
However, it held that the absence of a valuation report alone could not invalidate the auction. The borrowers had not objected to the valuation during the auction process and had even expressed willingness to retain the property on the same terms as the successful bidder.
Therefore, they could not challenge the auction years later solely on that ground.
The Court also criticised the borrowers’ conduct, observing that instead of repaying the loan, they repeatedly approached different courts and filed multiple legal proceedings to delay recovery. It said the legal process cannot be used merely as a tool to postpone repayment of legitimate dues.
The borrowers had also alleged collusion between BSFC and the auction purchaser, but the Supreme Court found no evidence to support this claim.
It noted that the auction had been conducted through a public advertisement and bidding process, and the purchaser had remained in possession of the property for nearly 30 years. In the absence of proof of fraud or illegality, the auction could not be set aside after such a long period.
Accordingly, the Supreme Court set aside the judgments of the Trial Court and the Patna High Court and declared the 1996 auction to be valid. The Court held that BSFC had lawfully exercised its statutory powers and that the recovery proceedings did not suffer from any arbitrariness or legal infirmity.
While it agreed that the borrowers’ civil suit was maintainable and not barred by principles such as res judicata or Section 69(2) of the Partnership Act, it clarified that this alone could not justify cancelling an otherwise lawful auction.
The judgment makes it clear that where a government financial institution has followed the law and repeatedly given a borrower opportunities to repay, courts should not invalidate recovery proceedings or auction sales merely on technical objections or vague allegations of unfairness.
Clear proof of fraud, collusion, bad faith, arbitrariness, or a substantial legal violation is necessary before such actions can be set aside.