Guarantor - loan - liability - property - valuation - auction - responsibility of lender - Supreme Court - Guarantee

   The Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr., AIR 1969 

297
Maharashtra State Electricity Board, Bombay v. The Official Liquidator, High Court, Ernakulam & Anr., AIR 1982 SC 1497
Union Bank of India v. Manku Narayana, AIR 1987 SC 1078
State Bank of India v. Messrs. Indexport Registered & Ors., AIR
1992 SC 1740
State Bank of India v. M/s. Saksaria Sugar Mills Ltd. & Ors., AIR 1986 SC 868
Industrial Investment Bank of India Ltd. v. Biswasnath Jhunjhunwala, (2009) 9 SCC 478
United Bank of India v. Satyawati Tondon & Ors., AIR 2010 SC 3413)
Lachhman Dass v. Jagat Ram & Ors., (2007) 10 SCC 448;
Narmada Bachao Andolan v. State of Madhya Pradesh & Anr., AIR 2011 SC 1589 (

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6204 OF 2009

Ram Kishun & Ors. ...Appellants

Versus

State of U.P. & Ors. ...Respondents

J U D G M E N T

We have considered the rival submissions made by learned counsel for the parties and perused the record. There can be no dispute to the settled legal proposition of law that in view of the provisions of Section 128 of the Indian Contract Act, 1872 (hereinafter called the `Contract Act'), the liability of the guarantor/surety is co-extensive with that of the debtor. Therefore, the creditor has a right to obtain a decree against the surety and the principal debtor. The surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor for the reason that it is the business of the surety/guarantor to see whether the principal debtor has paid or not. The surety does not have a right to dictate terms to the creditor as how he should make the recovery and pursue his remedies against the principal debtor at his instance. (Vide: The Bank of Bihar Ltd. v. Dr. Damodar Prasad & Anr., AIR 1969 SC 297; Maharashtra State Electricity Board, Bombay v. The Official Liquidator, High Court, Ernakulam & Anr., AIR 1982 SC 1497; Union Bank of India v. Manku Narayana, AIR 1987 SC 1078; and State Bank of India v. Messrs. Indexport Registered & Ors., AIR 1992 SC 1740).

6. In State Bank of India v. M/s. Saksaria Sugar Mills Ltd. & Ors., AIR 1986 SC 868, this Court while considering the provisions of Section 128 of the Contract Act held that liability of a surety is immediate and is not deferred until the creditor exhausts his remedies against the principal debtor. See also: Industrial Investment Bank of India Ltd. v. Biswasnath Jhunjhunwala, (2009) 9 SCC 478; and United Bank of India v. Satyawati Tondon & Ors., AIR 2010 SC 3413).

7. Section 146 of the Contract Act provides that co-sureties are liable to contribute equally. Thus, in case there are more than one surety/guarantor, they have to share the liability equally unless the agreement of contract provides otherwise. RECOVERY OF PUBLIC DUES:

8. Undoubtedly, public money should be recovered and recovery should be made expeditiously. But It does not mean that the financial institutions which are concerned only with the recovery of their loans, may be permitted to behave like property dealers and be permitted further to dispose of the secured assets in any unreasonable or arbitrary manner in flagrant violation of statutory provisions.

9. A right to hold property is a constitutional right as well as a human right. A person cannot be deprived of his property except in accordance with the provisions of statute. (Vide: Lachhman Dass v. Jagat Ram & Ors., (2007) 10 SCC 448; and Narmada Bachao Andolan v. State of Madhya Pradesh & Anr., AIR 2011 SC 1589).
Thus, the condition precedent for taking away someone's propert or disposing of the secured assets, is that the authority must ensure compliance of the statutory provisions.

10. In case the property is disposed of by private treaty without adopting any other mode provided under the statutory rules etc., there may be a possibility of collusion/fraud and even when public auction is held, the possibility of collusion among the bidders cannot be ruled out. In The State of Orissa & Ors. v. Harinarayan Jaiswal & Ors., AIR 1972 SC 1816, this Court held that a highest bidder in public auction cannot have a right to get the property or any privilege, unless the authority confirms the auction sale, being fully satisfied that the property has fetched the appropriate price and there has been no collusion between the bidders.

11. In Haryana Financial Corporation & Anr. v. Jagdamba Oil Mills & Anr., AIR 2002 SC 834, this Court considered this aspect and while placing reliance upon its earlier judgment in Chairman and Managing Director, SIPCOT Madras & Ors. v. Contromix Pvt. Ltd. by its Director (Finance) Seeetharaman, Madras & Anr., AIR 1995 SC 1632 held that in the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer.

12. Therefore, it becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price. Thus essential ingredients of such sale remain a correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the naccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them, as a moneyed person or a big businessman may not like to involve himself in smallsales/deals.

VALUATION & RESERVE PRICE :

13. The word `value' means intrinsic worth or cost or price for sale of a thing/property. (Vide: Union of India & Ors., v. Bombay Tyre International Ltd. & Ors., (1984) 1 SCC 467; and Gurbachan Singh & Anr. v. Shivalak Rubber Industries & Ors., AIR 1996 SC 3057).

14. In State of U.P. v. Shiv Charan Sharma & Ors., AIR 1981 SC 1722, this Court explained the meaning of "reserve price" explaining that the price with which the public auction starts and the auction bidders are not permitted to give bids below the said price, i.e. the minimum bid at auction.

15. In Anil Kumar Srivastava v. State of U.P. & Anr., AIR 2004 SC 4299, this Court considered the scope of fixing the reserve price and placing reliance on its earlier judgment in Duncans Industries Ltd. v. State of U.P. & Ors., AIR 2000 SC 355, explained that reserve price limits the authority of the auctioneer. The concept of the reserve price is not synonymous with valuation of the property. These two terms operate in different spheres. An invitation to tender is not an offer. It is an attempt to ascertain whether an offer can be obtained with a margin. The valuation is a question of fact, it should be fixed on relevant material. The difference between the `valuation' and `reserve price' is that, fixation of an upset price may be an indication of the probable price which the property may fetch from the point of view of intending bidders. Fixation of the reserve price does not preclude the claimant from adducing proof that the land had been sold for a low price.

16. In Desh Bandhu Gupta v. N. L. Anand & Rajinder Singh, (1994) 1 SCC 131, this Court held that in an auction sale and in execution of the Civil Court's decree, the Court has to apply its mind to the need for furnishing the relevant material particulars in the sale proclamation and the records must indicate that there has been application of mind and principle of natural justice had been complied with. (See also: Gajadhar Prasad & Ors. v. Babu Bhakta Ratan & Ors., AIR 1973 SC 2593; S.S. Dayananda v. K.S. Nagesh Rao & Ors., (1997) 4 SCC 451; D.S. Chohan & Anr. v. State Bank of Patiala, (1997) 10 SCC 65; and Gajraj Jain v. State of Bihar & Ors., (2004) 7 SCC 151).

17. In view of the above, it is evident that there must be an application of mind by the authority concerned while approving/accepting the report of the approved valuer and fixing the reserve price, as the failure to do so may cause substantial injury to the borrower/guarantor and that would amount to material irregularity and ultimately vitiate the subsequent proceedings.

DECISION TO SELL WHOLE OR PART OF THE SECURED ASSETS:

18. In Ambati Narasayya v. M. Subba Rao & Anr., AIR 1990 SC 119, this Court dealt with a case where in execution of a money decree for Rs.2,400/- the land was sold for Rs. 17,000/-. The Court set aside the sale observing that there is a duty cast upon the Court to sell only such property or a portion thereof as necessary to satisfy the decree. (See also: Takkaseela Pedda Subba Reddi v. Pujari Padmavathamma & Ors., AIR 1977 SC 1789 ; and S. Mariyappa (Dead) By LRs. & Ors. v. Siddappa & Anr., (2005) 10 SCC 235).

19. Thus, in view of the above, it is evident that law requires a proper valuation report, its acceptance by the authority concerned by application of mind and then fixing the reserve price accordingly and acceptance of the auction bid taking into consideration that there was no possibility of collusion of the bidders. The authority is duty bound to decide as to whether sale of part of the property would meet the outstanding demand. Valuation is a question of fact and valuation of the property is required to be determined fairly and reasonably.
SETTING ASIDEASIDE AUCTION SALE AFTER CONFIRMATION:

20. In Navalkha & Sons v. Sri Ramanya Das & Ors., AIR 1970 SC 2037, this Court while dealing with the confirmation of sale by Court, held that there must be a proper valuation report, which should be communicated to the judgment debtor and he should file his own valuation report and the sale should be conducted in accordance with law. After confirmation of sale, there should be issuance of sale certificate. Court cannot interfere unless it is found that some material irregularity in the conduct of sale has been committed. The Court further held that it should not be a forced sale. A valuer's report should be as good as the actual offer and the variation should be within limit. Such estimate should be done carefully. The Court further held that unless the Court is satisfied about the adequacy of the price the act of confirmation of the sale would not be a proper exercise of judicial discretion. (See also: M/s. Kayjay Industries (P) Ltd. v. M/s. Asnew Drums (P) Ltd. & Ors., AIR 1974 SC 1331; Union Bank of India v. Official Liquidator High Court of Calcutta & Ors., AIR 2000 SC 3642; B. Arvind Kumar v. Govt. of India & Ors., (2007) 5 SCC 745; and M/s. Transcore v. Union of India & Anr., AIR 2007 SC 712).

21. In Divya Manufacturing Co. (P) Ltd. & Anr. v. Union Bank of India & Ors., AIR 2000 SC 2346, this Court held that a confirmed sale can be set aside on the ground of material irregularity or fraud. The court does not become functus officio after the sale is confirmed. In Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. & Ors., (2008) 9 SCC 299, the Court held that auction sale should be set aside only if there is a fundamental error in the procedure of auction e.g. not giving wide publication or on evidence that property could have fetched more value or there is somebody to offer substantially increased amount and not only a little over the auction price. Involvement of any kind of fraud would vitiate the auction sale.

22. In FCS Software Solutions Ltd. v. La Medical Devices Ltd. & Ors., (2008) 10 SCC 440, this Court considered a case where after confirmation of auction sale it was found that valuation of movable and immovable properties, fixation of reserve price, inventory of Plant and Machineries had not been made in proclamation of sale, nor disclosed at time of sale notice. Therefore, in such a fact-situation, the sale was set aside after its confirmation.

23. In view of the above, the law can be summarised to the effect that the recovery of the public dues must be made strictly in accordance with the procedure prescribed by law. The liability of a surety is co-extensive with that of principal debtor. In case there are more than one surety the liability is to be divided equally among the sureties for unpaid amount of loan. Once the sale has been confirmed it cannot be set aside unless a fundamental procedural error has occurred or sale certificate had been obtained by mis-representation or fraud.

24. Learned counsel for the parties are not in a position to point out the specific rules under which the recovery was to be made. Thus, the aforesaid legal principles have been considered on general principles of law as argued by them. The instant case is required to be examined in the light of the aforesaid settled legal propositions. Admittedly, the father of the appellants stood guarantor when Ganga Prasad took loan from the bank. Though there are some documents to show that there were two guarantors but who was the other guarantor is not evident from the record, nor such a plea had ever been taken by the appellants before the courts below. As the appellants had inherited the estate of the guarantor, they are liable to meet the liability of unpaid amount. The appellants' land admeasuring 1 bigha and 10 biswas was sold for Rs.25,000/-. It cannot be held, even by any stretch of imagination, that the land had been sold at a cheaper rate, for the reasons, that the land belonging to Ganga Prasad (principal debtor) measuring 3 bighas and 2 biswas in the same village in a close proximity of time had been sold for a sum of Rs.6,000/- only. More so, elder brother of the appellant no.1 Ram Swaroop had participated in the auction and given the bid of Rs.20,000/- for the land in dispute. In view of the above, the submission made by Shri Garg that property worth Rs.2,00,000/- had been sold at a throw away price of Rs.25,000/- is not worth acceptance.