Supreme Court on Contempt of Court, Res Judicata & SARFAESI Sales

Introduction

This article critically examines a significant Supreme Court judgment dealing with contempt of court proceedings arising from the alleged willful disobedience of a previous Supreme Court order. The ruling delves into crucial aspects of judicial finality, the “Henderson Principle” (constructive res judicata), and the implications of post-judgment actions, particularly in the context of SARFAESI Act sales and the transfer of secured assets. The judgment underscores the imperative of upholding judicial authority and preventing the abuse of legal processes.

1. Factual Background and Procedural History

The case originated from contempt petitions filed under Section 2(B) of the Contempt of Court Act, 1971, read with Articles 129 and 142(2) of the Constitution. The petitioner, a successful auction purchaser , sought to initiate contempt proceedings against the respondents (original borrower, subsequent transferee, and the bank) for alleged willful disobedience of the Supreme Court’s final judgment and order dated September 21, 2023. This earlier judgment had set aside a High Court order that permitted the borrower to redeem a mortgage after the publication of a sale notice under the SARFAESI Rules.

The factual matrix leading to the initial Supreme Court decision is complex:

• The original borrower had availed credit facilities from Union Bank of India (the Bank), securing it with a mortgage over a property.
• Upon the borrower’s default, the account was declared a Non-Performing Asset (NPA) , and the Bank issued demand and possession notices under the SARFAESI Act.
• The Bank attempted to auction the secured asset multiple times (eight failed auctions).
• During the 9th auction, the petitioner emerged as the highest bidder with a bid of Rs. 105.05 crore, depositing the earnest money.
• Before the sale certificate was issued, the borrower filed an application before the Debt Recovery Tribunal (DRT) to redeem the mortgage.
• While the DRT’s order was reserved, the borrower filed a writ petition in the High Court, seeking to redeem the mortgage, despite not challenging the legality of the 9th auction.

The High Court allowed the borrower to redeem the mortgage, overturning the bank’s objection (who later agreed to accept a higher redemption amount).

Aggrieved by the High Court’s order, the petitioner appealed to the Supreme Court.

During the pendency of this appeal, and without any interim stay, the borrower paid the redemption amount to the Bank. The Bank issued a ‘No Dues Certificate’ and a Release Deed, and the borrower subsequently assigned the leasehold rights to a third party (the “Subsequent Transferee”) on the same day.

The Supreme Court, in its judgment on September 21, 2023, set aside the High Court’s order, holding that the High Court erred in permitting redemption after the sale notice publication. The Supreme Court directed the petitioner to pay the remaining amount, and the Bank to issue the sale certificate to the petitioner and refund the amount paid by the borrower.

Subsequent Developments and Alleged Contemptuous Acts:

• The borrower filed a review petition against the Supreme Court’s September 21, 2023, judgment.
• The petitioner paid the remaining amount, and the Bank issued the sale certificate.
• However, issues arose regarding the handover of physical possession and original title deeds, with the Bank stating helplessness due to the non-cooperation of the borrower and subsequent transferee.
• The borrower filed applications to amend pleadings in the DRT to challenge the 9th auction and seek its setting aside.
• The subsequent transferee filed a civil suit seeking declaration of ownership and possession, alleging attempts of forceful possession by the petitioner.
• A District Magistrate order under Section 14 of SARFAESI Act allowed the Bank to take physical possession. The borrower then filed another Securitization Application to stay this notice, despite previously claiming no role in handing over possession.
• A Civil Court issued a status quo order in the subsequent transferee’s suit.
• The DRT refused to stay the possession notice, noting the borrower’s deplorable conduct in claiming rights after the Supreme Court’s decision.

2. Identification of Legal Issues

The Supreme Court framed several key issues for determination in the contempt petitions:

• Abuse of Process of Court and Collateral Challenge: Whether the actions of the respondents constituted an abuse of process or a collateral challenge to the Supreme Court’s final judgment, especially in light of the “Henderson Principle”.
• Applicability of Lis Pendens: Whether the doctrine of lis pendens applied to the transfer of the secured asset, especially given the lack of registration as required by state amendments to Section 52 of the Transfer of Property Act (TPA).
• Contempt of Court: Whether the respondents had committed civil contempt by their willful disobedience of the Supreme Court’s judgment.
• Setting Aside SARFAESI Sale: Under what circumstances a sale of property under the SARFAESI Act, after its confirmation, may be set aside.

3. Arguments of the Parties

Submissions of the Successful Auction Purchaser (Petitioner):

• The petitioner argued that the respondents’ actions, including filing multiple proceedings in different forums with prayers contrary to the Supreme Court’s decision, constituted contempt.
• It was submitted that the borrower and subsequent transferee’s immediate entry into the Assignment Agreement after redeeming the mortgage was intended to undermine the Supreme Court’s authority.
• The petitioner contended that once the Supreme Court set aside the High Court’s order, all actions taken pursuant to that order, including the redemption and subsequent transfer, became null and void. The petitioner also asserted that the sale certificate issuance to them by the Bank necessarily entailed the borrower’s duty to return possession and title deeds to the Bank for handover to the petitioner.
• The petitioner sought orders for the reversal of all steps taken pursuant to the impugned High Court judgment, cancellation of registered documents, handover of title documents, and issuance of the sale certificate in their favor.

Submissions of the Borrower (Respondent No. 1):

• The borrower contended that the auction terms stipulated that the sale was “as is where is,” “as is what is,” and “whatever there is,” and “subject to outcome of S.A. No. 46 of 2022 pending before the DRT”. Therefore, any sale certificate issued would be subject to these terms.
• The borrower argued that the petitioner, being aware of these terms, could not claim absolute ownership or demand physical possession.
• The borrower also argued that their right of redemption under the amended Section 13(8) of the SARFAESI Act does not get extinguished upon issuance of the notice of sale.

Submissions of the Subsequent Transferee (Respondent Nos. 2 & 4):

• The subsequent transferee argued that the Assignment Agreement was a lawful transaction made pursuant to the High Court’s order.
• They submitted that the mere filing of an appeal does not operate as a stay or suspension of the order appealed against, and therefore, they had acquired a clear title to the property.
• It was also argued that once the mortgage was redeemed and the Release Deed executed, the bank relinquished its charge and had no authority to transfer any interest to the petitioner.

Submissions of the Bank (Respondent No. 3):

• The Bank initially accepted the borrower’s redemption offer before the High Court, as it was higher than the auction bid.
• Post the Supreme Court’s judgment, the Bank faced difficulties in obtaining possession and title deeds due to non-cooperation from the borrower and subsequent transferee.
• The Bank informed that, as per auction terms, it was only obliged to provide symbolic possession, which had already been delivered. It further assured that it was exploring all options for handing over original title deeds and had filed a Section 14 SARFAESI application for physical possession.

4. Court’s Analysis and Reasoning

The Supreme Court’s analysis was exhaustive, focusing on the concepts of abuse of process, lis pendens, and civil contempt.

Concept of Abuse of Process and Collateral Challenge (“Henderson Principle”): The Court extensively discussed the “Henderson Principle,” which dictates that parties are required to bring forward their whole case in litigation. This principle, an extension of res judicata (constructive res judicata), prevents parties from relitigating issues that “might and ought to have been” raised in earlier proceedings. The Court emphasized that this principle promotes finality in litigation and prevents unjust harassment. The Court clarified that while it’s not a rigid rule, a broad, merits-based judgment is required to determine if a party is misusing or abusing the court process. It also noted that allowing pleas abandoned in earlier proceedings to be resurrected in later cases would undermine judgment finality and incentivize strategic behavior.

Applying this principle, the Court found the borrower’s actions of initiating new proceedings (like challenging the auction’s validity in DRT, despite not doing so in the High Court) to be an abuse of process and a collateral attack on the Supreme Court’s earlier judgment.

Applicability of Lis Pendens: The Court explained that the doctrine of lis pendens (enshrined in Section 52 of the TPA) prevents the transfer of suit property during the pendency of litigation. The core idea is that if alienation were permitted during litigation, it would defeat the course of justice. A transferee during lis pendens is bound by the litigation’s outcome, even without notice. The Court noted that while some state amendments require registration of lis pendens notices for the benefit of third parties, the absence of such registration does not automatically validate a transfer that otherwise violates the doctrine. To hold otherwise would undermine the doctrine’s purpose, which is based on equity, good conscience, and public policy. The Court implied that the assignment of leasehold rights to the subsequent transferee, occurring during the pendency of the appeal before the Supreme Court, fell foul of lis pendens.

Whether any Contempt was Committed: The Court meticulously defined “civil contempt” as willful disobedience to any judgment, decree, direction, or order of a court, or willful breach of an undertaking. The Court stressed that contempt power should be exercised sparingly but is a duty to uphold the dignity and majesty of law. Crucially, the Court held that contempt jurisdiction extends beyond direct disobedience of explicit orders. Deliberate conduct aimed at frustrating court proceedings or circumventing eventual decisions can amount to contempt, even in the absence of specific prohibitory orders. Such actions strike at the heart of the judicial process, undermining its authority and obstructing justice. The Court found that the respondents’ actions, including not handing over possession and title deeds after the Supreme Court’s judgment, and the borrower and subsequent transferee continuing to pursue litigation inconsistent with the Supreme Court’s order, amounted to willful disobedience and an attempt to frustrate the judgment. The Court emphasized that parties are duty-bound to obey both the letter and spirit of a court order, and cannot adopt a myopic or self-serving interpretation.

Circumstances for Setting Aside SARFAESI Sale: While the main focus was on contempt, the Court reiterated the principle that once a sale is confirmed by the court (or authorized officer under SARFAESI), the sale becomes absolute, and title vests in the auction purchaser. The sale certificate is merely evidence of this title. The Court reinforced that such sales are generally not set aside except in cases of fraud, inadequate pricing, or underbidding. The previous Supreme Court judgment (September 21, 2023) had already validated the petitioner’s auction purchase, and the subsequent actions were seen as attempts to circumvent this finality.

5. Final Conclusion and Holding

The Supreme Court held that the actions of the respondents constituted contempt of court and an abuse of process. The Court underscored the principle that judgments, once final, must be respected and complied with, both in letter and spirit. Attempts to relitigate settled issues or circumvent a court’s decision through new proceedings are an abuse of process and can attract contempt action.

The specific directions for compliance were aimed at restoring the position as dictated by the Supreme Court’s September 21, 2023, judgment, ensuring the petitioner’s right as the successful auction purchaser was enforced. The Court did not explicitly mention penalties for contempt in the provided snippets, but the overall tenor indicates a strong disapproval of the contemnors’ conduct.

The judgment reinforces several critical legal principles:

• The “Henderson Principle” prevents parties from raising issues that “might and ought to have been” raised in prior litigation.
• The doctrine of lis pendens makes transfers during litigation subject to the outcome of that litigation, regardless of notice or registration, to prevent the defeat of judicial proceedings.
• Civil contempt encompasses not only direct disobedience of explicit orders but also any deliberate conduct aimed at frustrating court proceedings or circumventing its eventual decision.
• The finality of confirmed SARFAESI sales is paramount, and attempts to undermine such sales after judicial affirmation will not be tolerated.

FAQs:

1. What does “abuse of process of court” mean in legal terms?

“Abuse of process of court” refers to the misuse of legal procedures for an improper purpose, such as initiating multiple lawsuits over issues that have already been, or should have been, decided in prior litigation, often to harass or gain an unfair advantage.

2. What is the “Henderson Principle” and how does it relate to legal disputes?

The “Henderson Principle” is a legal doctrine stating that parties in litigation must bring forward their entire case at once, and they generally cannot reopen issues in subsequent proceedings that could have been, or should have been, raised and decided in the earlier case. It is closely related to the concept of constructive res judicata.

3. How does the doctrine of lis pendens affect property transfers?

The doctrine of lis pendens (meaning “suit pending”) prevents the transfer of property that is the subject of ongoing litigation. Any transfer made during the pendency of a suit is subject to the outcome of that suit, meaning the transferee is bound by the court’s final decision, even if unaware of the litigation.

4. When can actions be considered “civil contempt of court”?

Civil contempt of court occurs when there is willful disobedience of a court’s judgment, order, or direction, or a deliberate breach of an undertaking given to the court. This can include actions that frustrate judicial proceedings or circumvent a court’s decision, even without a specific prohibitory order.

5. What are the implications of a confirmed SARFAESI auction sale on property title?

Once a property sale under the SARFAESI Act is confirmed by the authorized officer, the sale becomes absolute, and the title vests in the auction purchaser. The sale certificate issued afterward is merely evidence of this title, and generally, such a sale cannot be set aside unless there are specific grounds like fraud or significant irregularities.

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