Case at a Glance
A flat in Thaltej, Ahmedabad, mortgaged to the South Indian Bank in 1999 for a housing loan, was later attached and auctioned in 2007 by the DRT Recovery Officer for Bank of India’s dues against a firm of one of the borrowers. South Indian Bank had consented to the sale on condition that its dues be paid first from the proceeds, but the Recovery Officer, the DRT and the DRAT refused it any share, relying on Allahabad Bank v. Canara Bank. A Division Bench of the Gujarat High Court held that where mortgaged property is sold with the mortgagee’s consent, its security shifts to the sale proceeds, that the bank’s 2023 civil decree supported the mortgage, and that the DRAT had misread the case. It quashed the DRAT order and remanded the appeal for decision within six months.
The borrowers took a housing loan of ₹6.35 lakh from the South Indian Bank in February 1999 and created an equitable mortgage of Flat No. B-504, Pushparaj Towers, Thaltej, by deposit of title deeds. The bank filed a civil suit in 2002 for ₹9,00,088 and for a decree for sale of the flat. Meanwhile Bank of India, recovering dues from a proprietary concern of one of the borrowers, had the flat attached by the DRT Recovery Officer on 8 November 2005.
South Indian Bank objected in 2006 and, on 15 March 2007, filed a pursis consenting to the sale on condition that its suit amount be paid first and the balance shared. The flat was auctioned on 28 September 2007 for ₹28.50 lakh and the sale was confirmed. On 28 March 2008 the Recovery Officer rejected the bank’s claim as a third party with unadjudicated dues; the DRT dismissed its appeal in 2009 and the DRAT, Mumbai, did so on 13 November 2024. In between, on 7 November 2023, the civil court decreed the bank’s suit for ₹6,35,000 with 9% interest, but declined to order sale of the flat because it had already been sold.
The Key Question Before the Court
Can a mortgagee bank that consented to a DRT auction of the mortgaged flat claim a share of the sale proceeds, or is it barred because its dues were not adjudicated by the Tribunal?
Consent Moves the Mortgage to the Money
The tribunals had relied on paragraph 55 of Allahabad Bank v. Canara Bank, under which a claimant can share in proceeds only if it “has obtained a decree or an order of adjudication from the Tribunal.” The High Court held that this did not defeat South Indian Bank’s claim. Under Section 73(1)(b) of the Code of Civil Procedure, where property is sold free of a mortgage with the mortgagee’s consent, “the mortgagee’s security interest shifts from the physical property to the sale proceeds.” The bank’s pursis of 15 March 2007 was such consent.
The DRAT had treated the civil court’s refusal to order a sale as a rejection of the mortgage. The High Court disagreed: since the flat had already been auctioned, “there remained no occasion for the Civil Court to direct the sale.” On the contrary, “the existence of the mortgage is supported by the judgment and decree passed by the Civil Court,” which rested on the borrowers’ admissions. Bank of India had argued that the auction predated the 2023 decree and that it held a charge for its own loan. Finding that the DRAT had misappreciated the relief in the suit, the effect of the decree and Section 73, the Court did not decide priority itself but sent the matter back.
What the Court Actually Held
- Allahabad Bank v. Canara Bank is distinguishable and does not by itself defeat the mortgagee bank’s claim.
- Where mortgaged property is sold with the mortgagee’s consent, its security shifts to the sale proceeds under Section 73(1)(b) CPC.
- The civil court’s refusal to order sale of an already-sold flat does not negate the mortgage, which its decree supports.
- The DRAT order of 13 November 2024 was quashed and Appeal No. 119 of 2009 remanded, to be decided preferably within six months.
Why This Judgment Matters
- Double financing against the same flat is common; this ruling explains how a prior mortgagee can protect itself when another lender auctions the property.
- It clarifies the role of a mortgagee’s consent in execution sales.
- It pushes a dispute pending for about 18 years toward a final decision.
What Should Advocates Take Away From the Judgment?
For Banks and Lenders
- Lodge objections promptly when a mortgaged property is attached in another creditor’s recovery proceedings.
- If consenting to sale, record clearly that your security will attach to the proceeds.
- Pursue your own decree; it can support the mortgage even after the property is sold.
For Counsel
- Use Section 73(1)(b) CPC to argue that consent transfers the mortgagee’s security to sale proceeds.
- Read Allahabad Bank v. Canara Bank in context before treating it as a bar.
- Check how tribunals have read the reliefs in parallel civil suits.
Key Takeaways
- Consent to sale did not forfeit the mortgagee’s rights.
- The mortgage now attaches to the auction proceeds.
- DRAT must decide the appeal afresh.
- Six months was set as the preferable time limit.
Frequently Asked Questions
What happens to a mortgage if the property is auctioned for another creditor?
If the mortgagee consents to the sale free of the mortgage, its security interest shifts to the sale proceeds under Section 73(1)(b) CPC, as the Court held here.
Did the High Court decide which bank gets the money?
No. It quashed the DRAT order and remanded the appeal to the DRAT, Mumbai, to decide afresh in light of its observations, preferably within six months.
Why did the earlier forums reject South Indian Bank’s claim?
They relied on Allahabad Bank v. Canara Bank, holding that only a claimant with a decree or Tribunal adjudication can share in the proceeds; the High Court found that reasoning did not defeat the bank’s claim on these facts.
Conclusion
The judgment protects the position of a prior mortgagee that cooperated in a recovery sale instead of blocking it, and corrects a reading of the civil decree that would have left the mortgage unenforced.
Practical takeaway: A mortgagee facing an auction by another creditor should either object or consent expressly subject to its charge on the proceeds, and should obtain its own decree without delay.
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