Recalcitrant Defaulters Cannot Seek Same Instalment Facility As Auction Purchaser: Supreme Court Upholds BSFC Auction Sale

The Court was hearing appeals filed by Bihar State Financial Corporation and the auction purchaser against the judgment of the Patna High Court affirming the Trial Court decree, which had set aside the auction sale of mortgaged property conducted by the Corporation under Sections 29 and 30 of the State Financial Corporations Act, 1951. 

A Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh observed: “Further, we find it untenable to accept the grievance of the borrowers that BSFC acted unfairly and arbitrarily by permitting the auction purchaser to pay the auction sale consideration in instalments, while denying similar accommodation to the borrowers. It is well settled that a financial corporation is an independent, autonomous body having its own functions and obligations to discharge. As such, in the discharge of its functions, it is free to act according to its own right and take commercial decisions based on the information in its possession.

The Bench further added: “The borrowers, in the present case, are recalcitrant defaulters who had repeatedly failed to discharge their liability. Hence, they cannot claim parity with the auction purchaser. In such circumstances, the decision of BSFC not to extend similar financial accommodation to the borrowers cannot be held to be arbitrary or mala fide, but must be viewed as a commercial decision taken in the ordinary course of business to recover its dues.”

Background

The borrowers had obtained financial assistance from BSFC for setting up an industrial unit after creating an equitable mortgage over land and building. Upon default in repayment, BSFC invoked its statutory powers under the State Financial Corporations Act. The borrowers approached the High Court, where a repayment schedule was fixed, and liberty was reserved in favour of BSFC to sell the mortgaged property if the borrowers defaulted. The borrowers failed to comply, and their request for further extension was rejected, though they were permitted to approach BSFC for a possible arrangement.

After further default, BSFC issued a notice calling upon the borrowers to discharge their liability in full, failing which the mortgaged property would be sold. When the account was not regularised, BSFC invited tenders and an auction purchaser was declared successful. During this process, BSFC also offered the borrowers an opportunity to retain the mortgaged asset by matching the terms offered by the auction purchaser, but no timely acceptance or payment followed. The sale was thereafter completed, and possession was handed over to the auction purchaser.

The borrowers filed a civil suit seeking a declaration that the auction sale and delivery of possession were void. The Trial Court partly decreed the suit and set aside the auction sale, principally on grounds relating to valuation, alleged non-service of the matching offer, payment accommodation granted to the auction purchaser and the manner of delivery of possession. The High Court affirmed the decree, holding that the sale process was unfair and contrary to law. BSFC and the auction purchaser approached the Supreme Court.

Court’s Observations

The Court examined Section 29 of the Act and noted that it confers upon a financial corporation the right to sell assets of an industrial concern and realise property pledged, mortgaged, hypothecated or assigned to it where the industrial concern defaults in repayment or fails to comply with its obligations.

Referring to Haryana Financial Corpn. v. Jagdamba Oil Mills (2002), the Court observed that financial corporations deal with public money and that regular repayment is necessary for them to function effectively. It reiterated that while a corporation is expected to act fairly, the borrower also has a corresponding duty to repay instalments in time unless prevented by insurmountable difficulties.

The Court also referred to U.P. Financial Corpn. v. Gem Cap (India) (1993), S.J.S. Business Enterprises (P) Ltd. v. State of Bihar (2004), Karnataka State Industrial Investment & Development Corpn. Ltd. v. Cavalet India Ltd. (2005), and Punjab Financial Corpn. v. Surya Auto Industries (2010), and reiterated that courts cannot sit as appellate authorities over commercial decisions of financial corporations. The scope of interference is confined to cases of statutory violation or action that is arbitrary, unreasonable or unfair.

The Bench observed: “Keeping in view the above exposition of law pertaining to Section 29 of the SFC Act, we find it difficult to sustain the findings returned by the Courts below, holding that the auction sale conducted by BSFC was unfair, unreasonable, or arbitrary. This Court has consistently held that fairness is not a one-way street. Whether the action taken by a financial corporation was bona fide and reasonable or not would depend on the surrounding circumstances.”

The Court then considered the borrowers’ conduct and found that they had repeatedly failed to discharge their obligation despite several opportunities. It noted that even after the High Court had fixed a repayment schedule, the borrowers failed to adhere to it and deposited only a fraction of the required amount. Their subsequent request for an extension was also rejected, as their conduct was found not to warrant further indulgence.

The Court further noted that when BSFC issued notice under Sections 29 and 30 of the Act, the borrowers neither challenged the legality of that notice nor complied with its terms. Even after the auction process commenced, BSFC gave them a further opportunity to retain the mortgaged asset by matching the terms of the tender, but they did not act upon that offer.

The Bench held: “The aforesaid circumstances, when viewed cumulatively, leave little room for doubt that BSFC did not act unreasonably or in an unfair manner. On the contrary, the record reveals that several opportunities were afforded to the borrowers to discharge their liability and retain the mortgaged assets. It was only when the borrowers repeatedly defaulted in discharging their obligation that BSFC proceeded to sell the mortgaged property, in exercise of its power under Section 29 of the SFC Act. The fairness required of a financial corporation cannot be carried to the extent of disabling it from recovering what is due to it. As rightly held in Jagdamba Oil Mills (supra), while not insisting upon the borrower to honour the commitments undertaken by him, the Corporation alone cannot be shackled hand and foot, in the name of fairness.”

On the question of valuation, the Supreme Court disagreed with the Courts below that the absence of a valuation report, by itself, vitiated the auction sale. It noted that the sale terms had clearly stated that the auction consideration would be equivalent to the balance outstanding amount. The Court further found that the borrowers themselves had sought to retain the property on the same terms offered to the auction purchaser, and therefore could not later contend that the same terms had caused them prejudice.

The Court observed that the fairness of the auction could not be examined in isolation from the conduct of the borrowers. It found that they had remained in persistent default despite repeated reminders and opportunities, and that BSFC was forced into repeated litigation while attempting to recover its dues. The Court held that the action taken by BSFC was in accordance with the statutory scheme and could not be categorised as arbitrary or unreasonable.

Rejecting the grievance regarding the instalment facility granted to the auction purchaser, the Court held that the borrowers could not claim parity with the auction purchaser because they had repeatedly defaulted and failed to discharge their liability. The decision not to extend similar accommodation to them was treated as a commercial decision taken by BSFC in the ordinary course of business to recover its dues.

The Supreme Court also found that the borrowers’ conduct disclosed a consistent attempt to delay recovery proceedings by initiating successive rounds of litigation. Referring to Orissa State Financial Corpn. v. Hotel Jogendra (1996), the Court held that such conduct disentitled them from equitable relief.

The Bench highlighted: “Public money is meant to be recycled to all the needy entrepreneurs. The dilatory tactics defeat the public policy, and the court process becomes an instrument of abuse. The court would protect only honest and sincere litigants.”

The Court further held that once an auction is confirmed, courts must ordinarily refrain from setting it aside unless a material irregularity, fraud or collusion is established. It referred to Celir LLP v. Sumati Prasad Bafna (2024), Valji Khimji and Co. v. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. (2008), Ram Kishun v. State of U.P. (2012), and PHR Invent Educational Society v. UCO Bank (2024), and held that the borrowers had failed to establish any fraud or collusion between BSFC and the auction purchaser.

The Bench observed: “The correspondences, …relied upon by the borrowers, exchanged between the auction purchaser and BSFC prior to the publication of the advertisement of the auction sale, do not establish any fraud or collusion. At best, the said letters merely indicate that the auction purchaser was interested in buying the suit property, well, that's about all. Pursuant to a public advertisement, the auction purchasers submitted their bids. The transaction is not cloaked in secrecy. In fact, there were two borrowers who participated in the private negotiations. Mere suspicion, in the absence of any cogent material, cannot lead to any inference of collusion.”

The Supreme Court also rejected the appellants’ submission that the suit itself was barred by res judicata or by Section 69(2) of the Partnership Act, 1932. It held that the validity of the auction sale was not directly and substantially in issue in the earlier writ proceedings and that the suit was directed against statutory action taken by BSFC, not the enforcement of a contractual right against a third party. To that limited extent, the Court affirmed the findings of the Courts below.

Conclusion

The Supreme Court held that the Courts below erred in setting aside the auction sale conducted by BSFC under Sections 29 and 30 of the State Financial Corporations Act. It held that the findings that the sale was vitiated on account of unfairness, arbitrariness or illegality could not be sustained in law.

The appeals were accordingly allowed. The judgment of the High Court and the decree of the Trial Court were set aside to the extent indicated by the Supreme Court.

Pending applications, if any, were directed to be disposed of.

Cause Title: Bihar State Financial Corporation & Anr. v. Bhushan Singh & Ors. (Neutral Citation: 2026 INSC 673)

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