Case Note & Summary
The writ petition challenged the orders of the Debts Recovery Appellate Tribunal (DRAT) and the Debts Recovery Tribunal (DRT) dismissing the petitioner’s securitisation application under the SARFAESI Act. The petitioner had purchased a flat in a cooperative housing society from respondent No.2 (original owner) through a registered sale deed dated 18 November 2006. He claimed to be a bona fide purchaser for value without notice of any prior encumbrance. The flat had been mortgaged by respondent No.2 to respondent No.1 – State Bank of India (SBI) by deposit of title deeds, and SBI had initiated recovery proceedings against the original owner before the DRT, Bangalore. During the pendency of those proceedings, on 12 February 2001, the DRT, Bangalore had passed an order of injunction restraining respondent No.2 from transferring, alienating, or dealing with the property. Despite this injunction, respondent No.2 sold the flat to the petitioner in 2006. Subsequently, SBI issued a possession notice under Section 13(4) of the SARFAESI Act on 12 April 2007, seeking to enforce the security interest. The petitioner filed Securitisation Application No. 35 of 2007 before the DRT-III, Mumbai, which was dismissed on 16 April 2009. The DRT held that the sale during the subsistence of the injunction was illegal, though it also observed that SBI had not proved the equitable mortgage because it failed to produce the notification under Section 58(f) of the Transfer of Property Act for Belgaum city. The petitioner’s appeal to the DRAT, Mumbai in Appeal No. 117 of 2009 was dismissed on 16 June 2014. The DRAT confirmed the illegality of the sale and additionally held that Belgaum is a city notified under Section 58(f), thereby validating the equitable mortgage. The core legal issues before the High Court were: (1) whether the sale in violation of the injunction is void; (2) whether a subsequent purchaser can question the validity of a prior mortgage; and (3) whether SBI can proceed under Section 13(4) SARFAESI Act. The petitioner contended that the sale was valid and he had no knowledge of the prior mortgage or the injunction. He argued that the equitable mortgage was not proved since the required notification was not produced, and as a non-borrower/guarantor, he could not be subjected to SARFAESI measures. SBI countered that the sale was illegal and void because it was made during the operation of an injunction; the petitioner, as a transferee in breach, had no locus to challenge the mortgage; and the mortgage was validly created and prior in time. The Court relied on the decisions in Surjit Singh & Ors. v. Harbans Singh & Ors., AIR 1996 SC 135 and Keshrimal Jivji Shah & Anr. v. Bank of Maharashtra & Ors., 2004(3) Mh.L.J. 893, and held that an alienation in defiance of a restraint order must be treated as having not taken place at all for the court’s purposes, to uphold the rule of law and public policy. It further held that a third party purchaser who has acquired property in breach of an injunction cannot question the validity of a prior mortgage, especially when the original mortgagor has not disputed it. Since respondent No.2 (the original owner) did not challenge the mortgage, the petitioner lacked standing. The Court also noted that the DRAT had rightly found Belgaum to be notified under Section 58(f) of the Transfer of Property Act, thereby validating the equitable mortgage. Consequently, the High Court found no case for intervention under Article 227 of the Constitution and dismissed the writ petition, discharging the rule with no order as to costs.
Headnote
A) Civil Procedure - Injunction - Effect of Transfer in Breach of Restraint Order - Transfer of Property Act, 1882; Civil Procedure Code, 1908; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) - The sale of immovable property made in defiance of a subsisting injunction order restraining transfer or alienation is void and liable to be treated as non-existent for the purposes of the proceedings. The court, in the interest of public policy and rule of law, has the duty to disregard such alienations. Held, that alienation in breach of a restraint order is illegal and cannot confer any rights on the transferee (Paras 10, 11, 12). B) Mortgage Law - Equitable Mortgage - Challenge by Third Party Purchaser - Transfer of Property Act, 1882, Section 58(f) - A subsequent purchaser of a property cannot question the validity of a prior equitable mortgage created by the original owner when the owner/mortgagor himself has not disputed the mortgage. The right to question the mortgage belongs to the parties to the transaction, and a third party, especially one who purchased during a subsisting injunction, lacks locus standi. Held, petitioner, having purchased the property during operation of an injunction, has no entitlement to question the equitable mortgage when Respondent No. 2 (mortgagor) has accepted it (Paras 9, 6). C) Securitisation Law - SARFAESI Measures - Bona Fide Purchaser Defense - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Section 13(4) - A person who purchases a property during the operation of a prohibitory order of a court or tribunal cannot claim the status of a bona fide purchaser for value without notice, and such purchase does not affect the secured creditor’s right to enforce security interest under Section 13(4) of the SARFAESI Act. Held, SBI’s prior security interest prevails and its action under Section 13(4) remains unaffected (Paras 5, 6, 12). D) Evidence - Equitable Mortgage - Notification Requirement - Transfer of Property Act, 1882, Section 58(f) - An equitable mortgage by deposit of title deeds is valid only if the city or town where the deed is deposited is notified under Section 58(f) of the Transfer of Property Act. However, where the mortgagor has not disputed the mortgage, and the appellate tribunal finds that the city is duly notified, the creation of the mortgage is upheld. The initial failure by the bank to produce notification before the DRT does not invalidate the mortgage if subsequently corroborated. Held, that the DRAT rightly found Belgaum to be notified, and the mortgage in favour of SBI is valid and subsisting (Paras 6, 7).
Issue of Consideration
Whether a sale of immovable property effected during the pendency of an injunction order restraining transfer is valid; whether a subsequent purchaser can challenge a prior equitable mortgage created by the vendor when the vendor has not disputed it; and whether the secured creditor can enforce security interest under Section 13(4) of the SARFAESI Act despite such sale.
Final Decision
Writ petition dismissed; rule discharged with no order as to costs. Held that alienation of property in defiance of restraint order is void and must be treated as non-existent; petitioner cannot challenge equitable mortgage when original owner has not disputed it; SBI's prior security interest and action under Section 13(4) SARFAESI Act upheld.
Law Points
- Legal points not extracted
- alienation in defiance of court injunction is void and treated as non-existent
- third party purchaser during pendency of injunction cannot challenge prior mortgage
- equitable mortgage validity cannot be questioned by a purchaser who is not a party to the mortgage transaction
- sale transaction in violation of restraint order is illegal and confers no rights
- bank's prior security interest prevails over subsequent sale in breach of injunction
