Legally Speaking: How Do Property Auctions Work?

A sudden increase in the number of property auctions has made us acutely conscious of one thing ─ you run the risk of losing a dearly held asset in case you fail to meet your financial commitments. One would by all means like to avoid facing the predicament in which the likes of Vijay Mallya and Subroto Roy Sahara find themselves. Keeping that in mind, we list here some recent court ruling that will help you understand laws related to property auctions.

A bank can issue a notice to the borrower about its intention to sell a mortgaged property and issue a public notice about the proposed auction simultaneously.

According to the previous understanding, a bank had to wait for 30 days before it issued a public notice to auction a property. Only 30 after sending a notice to the defaulting borrower, a financial institution could inform the public about the proposed auction. The Supreme Court (SC) has now ruled that a lender can simultaneously issue notices to the defaulting party and the public for the proposed auction under the Security Interest (Enforcement) Rules. Setting aside an order by the Andhra Pradesh High Court (HC), the apex court ruled that banks can issue notice to the borrower about their intention to sell a mortgaged property and issue a public notice in the media about the proposed auction simultaneously. Earlier, giving its verdict in the Canara Bank versus Amarender Reddy case, the HC had held that separate notices with a gap of 30 days had to be issued to the borrower and the public about the e-auction.

Lenders, borrowers have to move debt recovery tribunals for claims, not courts

After the arrival of state-specific real estate regulatory authority (RERA), buyers have a single platform to raise issues. As RERA will be responsible for addressing real estate related issues, other legal bodies may refuse to entertain sector specific complaints. Something similar happened when a lumber company in Gujarat approached the high court to file a petition against his lender. In the Om Shiv Lumbers versus Corporation Bank case, the Gujarat HC refused to entertain petitions by borrowers against creditors, saying there are alternative remedies available to the two parties, referring to the Debt Recovery Tribunal (DRT). In its petition, the lumber company had alleged that the e-auction of its property held by the bank was illegal. It also challenged the bank's move to declare its loan as a non-performing asset.

Authorities cannot adopt extreme measure to claim dues

In case a property owner fails to pay his due to government bodies, the later have the legal right to sell off his immovable property to recover losses. However, the task has to be performed in a specific manner. Authorities cannot resort to extreme measure ─ something the Kerala government opted for ─ while recovering dues, the apex court has held.

Earlier, the Kerala government auctioned the property of one Sooraj Kumar to itself for only Re 1 in a full-and-final settlement of dues. Kumar approached the SC, challenging the legality of the auction proceedings. Kumar alleged that the state went ahead with the auction without enquiring about the market value of the property. Giving its verdict, the SC has ruled that if Kumar is able to pay the dues according to the arrangement suggested by the apex court, the auction will stand cancelled, and he would be able to claim to the property again.

Banks can buy an auctioned property

Typically, banks issue a notice to public informing them of property auctions. Now, can a bank buy a property it has put on auction itself if the asset fails to find a taker? The SC is of the view that it can.

Setting aside an order of the Madras HC, which had ruled that the sale of two properties of a defaulting borrower was illegal, the SC has ruled that there is no bar on banks participating in a public auction if there are no bidders. This, the apex court said, was not in violation of the provisions of the income tax laws. In the ICICI Bank versus Aburubam & Co case, the bank bought the properties of the company after it failed to sell them off through an auction.

Auction buyer saved from tax dues

You buy a property in an auction. Now, will you be liable to pay the outstanding taxes of the previous owner? Certainly not, the Bombay High Court has ruled recently. A similar stance has been taken by the apex court in its precious judgments.

Giving its verdict in the Sonoma Management Partners versus Bank of Maharashtra case, the HC said that the buyer of an auctioned property cannot be burdened with sales tax arrears of the defaulting company.

In this case, Sonoma Management Partners had bought a property, which was previously held by Weiler International Electronics in a bank auction for Rs 11 crore. At the time of registration, it was found that the defaulting company owned the state Sales Tax Department Rs 28 crore. The tax department and the bank asked the current owner to clear the dues as it bought the property on an “as-is-where-is” basis.  The HC ruled that the buyer company had no knowledge of the liability, and was not liable to clear the dues.