The Supreme Court of India has ruled that a financial corporation cannot be prevented from recovering public money merely because a borrower repeatedly defaults and later seeks equitable relief.
The bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh held that fairness in recovery proceedings is “not a one-way street” and that financial corporations cannot be restrained from exercising their statutory powers merely because defaulting borrowers seek further indulgence after exhausting multiple opportunities.
The bench upheld the auction sale conducted by the Bihar State Financial Corporation (BSFC) under Sections 29 and 30 of the State Financial Corporations Act, 1951, setting aside concurrent decisions of the Trial Court and the High Court of Judicature at Patna that had declared the auction illegal.
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The dispute arose from loans granted by BSFC to Ranjeet Motel for establishing an industrial unit. Initially, BSFC sanctioned ₹8.50 lakh in 1982, followed by an additional ₹3.15 lakh in 1984. The borrowers created an equitable mortgage over their land and building by depositing the original title deeds.
After persistent defaults in repayment, BSFC issued a notice under Section 29 of the State Financial Corporations Act in 1988. The borrowers challenged the action before the Patna High Court, which, in 1990, granted them another opportunity by framing a detailed repayment schedule while expressly permitting BSFC to sell the mortgaged assets if they defaulted on any instalment.
The borrowers, however, failed to comply with the repayment schedule and even their request for extension of time was rejected by the High Court in 1991, which observed that their conduct did not justify any further indulgence.
When the borrowers continued to default, BSFC again issued notices under Sections 29 and 30 of the State Financial Corporations Act in September 1994, demanding repayment within three months and warning that the mortgaged property would otherwise be sold. Despite this, the borrowers neither cleared the dues nor challenged the notice.
Consequently, BSFC published an auction notice in the Hindustan Times on March 2, 1996, inviting tenders for sale of the mortgaged property. An auction purchaser emerged successful, but before the sale was finalized, the borrowers instituted a civil suit challenging the auction and sought injunctions to restrain BSFC from transferring possession. Their requests for interim relief were rejected by the Trial Court, the High Court, and even the Supreme Court.
Significantly, BSFC still gave the borrowers another opportunity by offering them the option to retain the property if they matched the auction purchaser’s terms and paid within 21 days. The borrowers did not avail this opportunity either. Thereafter, BSFC finalized the sale, executed the sale agreement, and handed possession of the property to the auction purchaser in August 1996.
The Trial Court partly decreed the borrowers’ suit, holding that although BSFC had the statutory authority to sell the property, the auction process suffered from procedural irregularities. It observed that no proper valuation had been conducted before the auction, that the borrowers had allegedly not been served with the matching offer, and that BSFC had acted unfairly by extending payment facilities to the auction purchaser while denying similar accommodation to the borrowers. The High Court affirmed these findings in 2025, concluding that the auction was conducted unfairly and that the reserve price had not been properly determined.
Reversing both judgments, the Supreme Court held that the entire conduct of the borrowers demonstrated persistent default and repeated attempts to delay recovery through successive rounds of litigation. The Court observed that despite numerous opportunities provided over several years, including judicial directions, statutory notices, and a final matching offer from BSFC, the borrowers never made any genuine effort to clear their liabilities.
The Court emphasized that financial corporations deal with public money and are expected to recover dues so that financial assistance can be extended to other deserving borrowers. It reiterated that fairness cannot operate only in favour of defaulting borrowers while preventing statutory corporations from recovering public funds.
Rejecting the borrowers’ principal contention regarding absence of valuation, the Court held that the omission to obtain a valuation report, by itself, did not invalidate the auction in the peculiar facts of the case. It noted that the borrowers themselves had sought to retain the property by matching the auction terms and therefore could not subsequently contend that the auction process was fundamentally unfair merely because no prior valuation had been undertaken.
The Bench also rejected allegations of collusion between BSFC and the auction purchaser, observing that the correspondence relied upon by the borrowers merely reflected the purchaser’s interest in acquiring the property and did not establish fraud or any predetermined sale arrangement. It further noted that the auction purchaser had remained in possession of the property for nearly three decades and that rights crystallized through a statutory auction cannot be unsettled in the absence of proven fraud, collusion, or material illegality.
However, the Supreme Court agreed with the High Court on one limited aspect. It held that the borrowers’ civil suit was not barred either by the doctrine of res judicata or by Section 69(2) of the Partnership Act, since the validity of the auction sale had never been directly adjudicated in the earlier writ proceedings and the suit was directed against BSFC’s statutory action rather than enforcement of contractual rights.
Allowing the appeals filed by BSFC and the auction purchaser, the Supreme Court set aside the judgments of both the Patna High Court and the Trial Court, restoring the auction sale conducted under the State Financial Corporations Act. The Court held that the findings declaring the auction arbitrary, unfair, or illegal were unsustainable in law.
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