This article is written by Debaditya Mitra, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.
Auctions are a process where goods (usually assets like properties or similar high value items or even items like paintings, antiques and radio spectrum) are put up for auction. There are several types of auctions and such auctions are held by both Government as well as Private Auctioneers.
Some auctions also take place that are held by Courts. In India, Courts cannot directly put up properties for auction. As such, only when required by courts to attach properties under the procedural laws of the country, courts can attach such properties after which, according to law, if it deems fit, may put up such property for sale and direct the allocation of the sale proceeds accordingly. It should also be noted that public auction of properties by Courts do not necessarily require attachment of property.
The aim of this article is to understand the policy of Courts for selling assets and the provisions of Law that guide the same. The rest of this Article shall try to clarify and crystalize the same by going in depth of the provisions and by taking reference of relevant case laws.
From where does it start?
When a Court passes a decree in favour of a party to a suit, then such decree requires it to be executed. Under the Code of Civil Procedure Code, 1908 (hereinafter referred to as the “Code”), Execution of Decrees is covered under Part II of the Code.
Section 51(b) of the Code empowers Courts to sell (whether by attaching or without attaching) any Property. Therefore, when a Court passes a decree and the execution of such decree necessitates the public auctioning of a Property, such auction shall be done in accordance with Order XXI Rule 66 of the Code.
How auctions take place by the Courts in India?
In India, Courts do not auction properties directly. The process of auctions by Courts in India is governed by the Code of Civil Procedure, 1908.
When a Court passes a decree where a property is to be sold at public auction, Order XXI Rule 66 of the Code of Civil Procedure, 1908 lays down the procedure to be followed therein.
The first step in this procedure is that the Court shall have to notify the Judgment Debtor and the Decree Holder that it will issue a proclamation informing them about the intended sale of the Property. The particulars that need to be mentioned specifically are listed from Sub-Rule 2(a) to Sub-Rule 2(e) of Order XXI Rule 66.
Sub-Rule 2 of Rule 66 has a provision that states that if a notice has already been issued to the Judgment Debtor under Rule 54 of this Order, then it will not be required to notify the Judgment Debtor once again under this Rule. It is further provided that if either of the parties to the suit have their own estimates as to the value of the Property to be auctioned, then such estimates may be included within the proclamation but the Court shall not be bound to declare its own estimate as to the value of the Property to be auctioned.
Sub-Rule 3 states that under this Rule, whatever orders may be passed shall be accompanied by a statement, both signed and verified, in the manner prescribed for the same.
Sub-Rule 4 empowers the Court issuing proclamation to summon any person it deems fit for producing any documents related to the Property to be auctioned. The Court is also empowered under this Rule to examine such a person who has been summoned.
An Illustration for Clarification
Mr. A, a businessman owning a jute factory at Mumbai, had taken a sum of Rs. 4 lakhs as loan from Mr. B and kept the factory as a surety. On the event of not being able to pay the sum of money along with the accrued interest, Mr. B moved the Court for against Mr. A, filing a suit for the recovery of the money alongwith interest pendente lite.
The Court inquired into the matter and ordered Mr. A to pay back the sum of money, in failure of which, his Factory would be attached by the Court for auction. Unable to pay back the money, the Court serves a notice to the Judgment Debtor (Mr. A) who, thereafter, does not appear before the Court. The Court then passes an Order of Proclamation and Sale in accordance with Rule 66 Order XXI of the Code.
In case, the Judgment Debtor has any offer to make, he shall have to make it before the passing of the order of proclamation after a notice has been served upon him. Also, he shall have to give an estimate of the value of the property which is being auctioned. Similarly, the Decree Holder shall have to give an estimate of the value of the property. Such estimates shall be included within the Order of Proclamation and Sale.
Some more rules
There are some more provisions under Order XXI of the Code that deal with auctioning of Properties by Courts.
Mode of Proclamation: Rule 67 describes the modes in which the proclamation under Rule 66 may be made. The modes practices herein are as under:
- The First mode is that proclamations shall be made in accordance with Sub-Rule 2 of Rule 54.
- By publishing such proclamations in the Official Gazette or in newspapers or in both. It also states that the costs incurred while making such publication of proclamation shall be considered to be ‘Costs of Sale’.
- Sub-Rule 3 states that when a property is divided into lots, the Courts shall not be bound to issue separate proclamations for each lot but rather issue a single proclamation for the entire property.
This is subject to a condition that if in case, the Court is of the opinion that a proper proclamation cannot be issued for the entire Property as a whole, then the Court may issue different proclamations.
Period of Gap before Auction: Rule 68 provides that in case of immovable properties, from the date of proclamation, there shall be a time period of fifteen days before the actual same through auction is made. In case of movable properties, there shall be a time period of seven days.
Few more rules
There are a few more rules regarding auctions by Courts:
- The purchaser of the Property auctioned may be held liable for any lots of deficiency arising in the office of the said Property; where there same will have to be certified to the Court by the auctioneer. (Rule 71)
- Another rule is that the Decree-Holder cannot bid for the property without the permission of the Court. There are two situations explaining this rule in Rule 72:
- When the Decree-Holder bids with the permission of the Court: In this case, the amount of Decree and the value of the bid/purchase made by the Decree-Holder will be adjusted towards each other.
- When the Decree-Hobe bids without the permission of the Court: In this case, the amount, to the tune of which other parties and the Judgment Debtor were affected, shall be paid by the Decree-Holder.
- Rule 77: The purchaser of the property shall have to pay the amount demanded at the auction either at the timer of sale or at the time decided by the auctioneer but if the purchaser failed to do so then the property will be re-sold. Also, the auctioneer is supposed to give a receipt of the purchase.
This rule also states that if a co-owner of the Property bids, then such bidding will be considered as bidding by the co-owner.
Policy relating to Specific Items
- Shares: In cases, when the Property to be auctioned are Shares, the Court is empowered by Rule 76 to authorise a broker and sell such share instead of auctioning it.
- Negotiable Instruments: Negotiable Instruments receive the same treatment as Shares in this case.
- Moveable Property: In cases where the Property is moveable and such property is already in possession of the Court’s Officers, then such Property is delivered to the purchaser.
In case their Property is in possession of some other person, then such person will be instructed by the Court to abstain from selling the Property to someone and will direct the person to sell it only to the purchaser.
What Common Law says
There have been various cases relating to this auctioning of properties by Courts and so many cases have emerged therefrom. The ratio of the most salient and recent cases are follows:
- Unni Madhavan Nair vs. Sreenaranyana Investement [W.P.(C).NO.31756 OF 2008 (E)]: In this case, the Sub Court of Palakkad at Kerala had passed an order of Proclamation under Order XXI Rule 66 of the Code of Civil Procedure, 1908, ordering for the proclamation and selling of the property concerned in the case at Rs. 7 Lakhs.
Thereafter, the Judgment Debtor filed a Writ Petition in the High Court at Kerala on the ground that the execution court had not followed the mandate laid under Order XXI Rule 66 of the CPC.
The Kerala High Court found out that the execution court had not applied its mind in while passing the order. It stated that “At any rate, the order of settling the proclamation for sale should reflect that the court has applied its mind to the matters necessarily to be gone into and then it was settled.”
Thereafter, the Kerala High Court stated that courts ought to exercise their minds and should give an estimate of the property while passing any order of proclamation. The High Court also directed the execution court to proceed under Order XXI Rule 66 of CPC, after hearing both the sides, and thereafter, execute the decree in accordance with the provisions of law.
- Desh Bandhu Gupta vs. N.L. Anand and Rajinder Singh [1994 SCC (1) 131]: In this case, the appellant judgment debtor was a tenant who had not paid the rent and the owner of the property attempted to evict him but was unsuccessful. Thereafter, the Petitioner (Owner) moved the High Court at Delhi and an order of proclamation and sale was passed.
The Judgment Debtor was not given an opportunity to appear nor did the court make any estimate of its own of the valuation of the Property and even overlooked the fact that the appellant had already paid a sum of money to the Rent Control.
Thereafter, the Supreme Court stated that the Court was supposed to apply its mind to the instant case and enter into the facts of the case and make its own estimate. Also, it had not informed or called the Judgment Debtor for appearance before itself which was gross non-compliance with Order XXI Rule 66. Also, the proclamation order made lacked the specified contents of points (a) to (d) of Sub-Rule 2.
The Supreme Court of India directed in this case that the appellant withdrew a sum of Rs. 7780.33 and deposited the same towards the decree amount.
- Bahadur Chand vs. Madan Lal Etc. [ESA-8-2009 (O&M)]: In this case, the Court auctioning the disputed property had complied with all the rules of Order XXI and therefore, there was no fault on the part of the Court. The Judgment Debtor filed an appeal in the Supreme Court which was first dismissed and thereafter filed this second appeal in the Supreme Court.
The Supreme Court noted that there was irregularity or fault in the procedure followed by the Courts but in fact, the Judgment debtor, who was ready to pay the double amount for which the property attached was auctioned, had not appeared before the lower courts before the auction actually took place for such offer and therefore in accordance with Order XXI, the order of proclamation and sale was without any defects.
The Apex Court also noted that the Judgment Debtor should have offered the sum of money right before the auction was made. As such, the appeal by the Judgment Debtor was dismissed.
It can be concluded that the courts have enormous power to auction properties in disputes. Each aspect of execution of decrees has been thoroughly covered under Order XXI of the Code. Also, each and every aspect of auction has been covered in detail in this Order and specific directions have been laid so as to avoid confusion.
Other types of auctions that are done may be done by Banks, the Debt Recovery Tribunal and under the SARFAESI Act. Auctions done under directions of Courts are covered in the Code of Civil Procedure, 1908.
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