IMPORTANT POINT
The court established that the rights of a mortgagee are superior to those of an unsecured creditor, and any sale of mortgaged property must adhere to the reserve price set by the DRT, as per the provisions of the Transfer of Property Act.

JUDGMENT

Somasekhar Sundaresan, J. - With the consent of the parties, writ petition is taken up for final disposal.

2. This writ petition challenges an order passed by the Debt Recovery Appellate Tribunal ('DRAT') upholding an order passed by the Debt Recovery Tribunal ('DRT'), allowing the sale of a mortgaged apartment at below the approved reserve price in an auction. For the reasons set out by us in this judgement, the orders of the DRT and the DRAT deserve to be quashed, with a direction to conduct the auction afresh in accordance with law, as declared in this judgement. The fundamental fallacy in them is that they have treated an unsecured creditor as a secured creditor and that too with priority over the secured creditors (beneficiaries of a mortgage over the secured asset).

Factual Matrix:

3. In a nutshell, the following core facts are relevant to adjudicate the petition:

(a) The Petitioner, Asset Reconstruction Company (India) Ltd. ('ARCIL'), is the beneficiary of a mortgage over Flat No. 61, 6th Floor, Basant Apartment, Navrang Basant Cooperative Society, 101, Cuffe Parade, Backbay Reclamation, Colaba, Mumbai 400 005 ('Secured Asset');

(b) The mortgage had been created on 15th May, 1998; by way of deposit of title deeds by Respondent Nos. 4 and 5; Mr. Kirit Karia and Ms. Nirupama Karia (collectively, the 'Karias'); and the promoters of Respondent No. 3, Eastern Overseas Ltd. ('EOL'); to secure borrowings by EOL from a consortium of banks led by Indian Overseas Bank ('IOB');

(c) On 28th June, 2000, upon default by EOL, the Petitioner initiated proceedings to enforce the mortgage by filing Original Application No. 2458 of 2000 ('Original Application') before the DRT under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

(d) About two months after the Original Application was filed and proceedings were underway, the Karias executed a leave and license agreement dated 20th August, 2000 ('LLA'), over the Secured Asset purporting to grant Respondent No. 6, Standard Chartered Bank ('SCB'), a bare license to use and occupy the Secured Asset as a residence for 24 months, retaining legal possession over the Secured Asset;

(e) The LLA entailed SCB placing a security deposit of Rs. 80 lakhs with the Karias, with a clause that if the security deposit was not repaid by the Karias at the expiry or termination of the LLA, then SCB would have an irrevocable license to remain in occupation of the Secured Asset until the deposit is repaid with interest at the rate of 3% per month (36% per annum);

(f) SCB was unable to occupy the Secured Asset immediately since the housing society in which the Secured Asset is situated, refused SCB entry on the premise that approval of IOB (as the mortgagee) would be necessary (although the society had approved the execution of the LLA on 22nd August, 2000). The housing society wrote to SCB on 8th September, 2000, explicitly putting SCB to notice that the Secured Asset stood mortgaged;

(g) Owing to the housing society's stance, the Karias moved the First Co-operative Court at Mumbai constituted under the Maharashtra Co-operative Societies Act, 1960, with Case No. CCI/315/2000, behind the back of IOB, complaining about the society obstructing SCB from entering the property, and obtained an interim order dated 19th September, 2000, pursuant to which, SCB was allowed to occupy the Secured Asset;

(h) The LLA was subsequently registered by the Karias and SCB on 12th December, 2000;

(i) On 29th May, 2002, in proceedings in the Original Application, the DRT appointed a receiver with a power to sell the Secured Asset;

(j) SCB moved the DRT contending that the order dated 29th May, 2002 compromised SCB's right to receive a refund of its security deposit and its right to occupy the premises until refund of the security deposit;

(k) On 3rd September, 2002, the DRT passed an order recording an explicit finding that the mortgagee had superior rights. In the same order, the DRT ruled that the Secured Asset ma