Orissa State Financial Corporation Case: Supreme Court Rules on Loan Default and Property Auction
The Supreme Court of India has delivered a significant ruling in the case of Orissa State Financial Corporation & Anr. vs. Smt. Sukanti Mohapatra & Ors., which pertains to the auction of mortgaged property following a loan default. The decision clarifies the rights of financial institutions under the State Financial Corporations Act, 1951, and sets a precedent for handling loan recovery disputes.
Background of the Case
The dispute arose when the Orissa State Financial Corporation (OSFC) sanctioned a loan of Rs. 3,26,258.78 to respondent Prasanta Kumar Mohapatra. The loan was to be repaid in 24 monthly installments from January 31, 1997, to December 31, 1998. However, the loan remained unpaid despite several demand notices.
To secure the loan, Sukanti Mohapatra, the first respondent, mortgaged a plot of land measuring 0.20 acres in Dhenkanal, Odisha. When the borrower failed to repay, the OSFC initiated recovery proceedings under Section 29 of the State Financial Corporations Act, 1951, which allows financial institutions to seize and sell mortgaged properties to recover outstanding dues.
Loan Default and Property Seizure
The financial corporation recalled the loan on November 8, 2002, by which time the outstanding amount had ballooned to Rs. 10,91,673.07. It proceeded to seize the mortgaged property while providing opportunities to the borrowers for repayment.
One-Time Settlement (OTS) Proposals
The borrowers sought to settle their dues through multiple One-Time Settlement (OTS) proposals:
- First OTS Proposal (2003): Rejected due to failure to deposit the upfront fee.
- Second OTS Proposal (2004): Rejected as the borrower was found to have clandestinely sold the financed vehicle.
- Third OTS Proposal (2006): The OSFC offered settlement at Rs. 6,27,400 with payment deadlines, but the borrower failed to comply.
Property Auction and Legal Challenge
Due to non-payment, OSFC issued a sale notice on November 14, 2006, with an offset price of Rs. 13,15,000. The property was auctioned on November 29, 2006, and was sold to Tusar Ranjan Mishra for Rs. 13,20,000. The buyer deposited 25% of the sale price immediately and paid the balance by December 5, 2006.
The borrowers challenged the auction in the Orissa High Court, which ruled in their favor, holding that OSFC should have accepted a revised OTS proposal reducing the settlement amount from Rs. 6,27,400 to Rs. 4,27,000.
Supreme Court’s Observations
1. No Obligation to Accept Revised OTS Proposal
The Court held that the financial corporation had already provided substantial concessions under the third OTS proposal. It stated:
“Whether or not to accept a representation for reduction of the due amount was a commercial decision to be taken by the Corporation. It is not for the Court to sit in judgment over such a proposal unless there are extraordinary circumstances.”
2. Right of Financial Corporations Under Section 29
The Court reiterated that financial corporations have the right under Section 29 of the State Financial Corporations Act to seize and sell assets in case of default. It referenced past judgments, including Haryana Financial Corporation v. Jagdamba Oil Mills, which upheld the rights of financial corporations to realize dues through asset sales.
3. Sale of Property Was Lawful
The Court found that the auction process was conducted fairly and that the borrowers failed to produce a buyer who could offer a higher price. It ruled:
“The sale of the mortgaged property was conducted as a last resort, and the borrowers were given ample opportunities to settle their dues.”
4. Equitable Relief to Borrowers
Despite ruling in favor of OSFC, the Court granted the borrowers an option:
- If they pay Rs. 13,20,000 along with 18% annual interest from January 1, 2007, to July 31, 2024, the sale will be reversed.
- If payment is not made, the corporation can take police aid to ensure possession of the property is transferred to the buyer.
Final Judgment
The Supreme Court set aside the High Court’s order and ruled in favor of OSFC. It emphasized:
“The appeals are disposed of. If the borrowers fail to pay the stipulated amount by July 31, 2024, the auction purchaser shall be entitled to take possession of the property with police assistance.”
Impact of the Judgment
This ruling has several implications for financial institutions and borrowers:
- Strengthens the position of financial institutions: The judgment reaffirms their right to recover dues under Section 29 of the SFC Act.
- Clarifies OTS policies: Financial institutions are not obligated to accept revised OTS proposals beyond reasonable concessions.
- Ensures fairness in property auctions: Borrowers must act diligently and make payments on time to avoid asset seizure.
- Provides a balanced approach: The Court allowed the borrowers a final chance to reclaim their property by paying the full auction price with interest.
This judgment serves as a guiding precedent for future cases involving financial institutions and loan recovery through asset sales.
Petitioner Name: Orissa State Financial Corporation & Anr..Respondent Name: Smt. Sukanti Mohapatra & Ors..Judgment By: Justice Sanjiv Khanna, Justice Dipankar Datta.Place Of Incident: Dhenkanal, Odisha.Judgment Date: 21-03-2024.
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