Supreme Court Clarifies Contempt Jurisdiction and Lis Pendens Doctrine in Property Disputes

Posted On - 6 January, 2025 • By - Garima Singh

Introduction:

The Supreme Court of India, in the case of Celir LLP v. Ms. Sumati Prasad Bafna and Others, provided a significant ruling on the interplay between contempt jurisdiction and the doctrine of lis pendens under Section 52 of the Transfer of Property Act, 1882. The judgment clarifies the authority of courts to declare a sale transaction void if it violates court directions, even though such transactions are not inherently invalid under the doctrine of lis pendens. The bench, comprising Justices JB Pardiwala and Manoj Misra, adjudicated the matter while addressing a contempt petition filed by Celir LLP, the auction purchaser of a disputed property.

Background:

The case arose from the sale of a property finalized under the SARFAESI Act, following the Supreme Court’s directive to the bank to issue a sale certificate to Celir LLP. However, during the pendency of litigation, the borrower executed an assignment deed, transferring the same property to a third party. Celir LLP subsequently filed a contempt petition, asserting that this transfer contravened the Court’s order and obstructed the enforcement of the sale. In response, the borrower alleged non-compliance by Celir LLP in taking possession of the property and sought to annul the assignment deed.

  1. Application of the Doctrine of Lis Pendens: The borrower argued that Section 52 of the Transfer of Property Act does not render a transfer during litigation void. The Supreme Court clarified that while the doctrine of lis pendens does not automatically void such transfers, it subjects them to the outcome of the litigation. Citing M/s Siddamsetty Infra Projects Pvt. Ltd. v. Katta Sujatha Reddy & Ors., the Court emphasized that lis pendens, rooted in equity and public policy, ensures that ongoing litigation is not undermined by subsequent transactions.
  2. Role of Contempt Jurisdiction: The Court addressed whether a transaction violating judicial directions can be reversed under contempt jurisdiction. It held that contempt jurisdiction empowers courts to annul actions intended to frustrate or circumvent judicial orders. The borrower’s transfer of the property, despite the Court’s directive, was deemed an attempt to subvert the judicial process, amounting to contempt.

Maharashtra Amendment and Its Implications

The Court also examined the amendment to Section 52 in Maharashtra, which mandates the registration of a notice of pendency to invoke lis pendens. While this amendment enhances third-party protection, the Court clarified that the absence of such a notice does not grant an absolute right to subsequent purchasers. In the case at hand, the transferee’s awareness of the ongoing proceedings further invalidated the transfer. The Court’s interpretation ensures that procedural formalities do not defeat the purpose of lis pendens.

Court’s Findings

The Supreme Court observed that transfers during litigation, while not void under Section 52, can be reversed if they violate judicial directions. It noted that contempt jurisdiction extends beyond blatant disobedience to include actions that undermine judicial authority or hinder the implementation of orders. Nevertheless, the Court refrained from holding the borrower or the transferee guilty of contempt, allowing them an opportunity to comply with its judgment. It declared the assignment deed invalid and directed authorities to enforce the original sale order.

Judicial Guidelines on Setting Aside Confirmed Sales Under the SARFAESI Act

The Supreme Court also provided clarity on the limited grounds for setting aside confirmed sales under the SARFAESI Act. The Act, enacted to facilitate the swift recovery of secured debts, empowers financial institutions to enforce security interests without judicial intervention. Auctions conducted under this framework play a pivotal role in debt recovery.

The Court emphasized the importance of finality in confirmed sales, particularly those conducted through public auctions. It observed that procedural irregularities alone do not warrant invalidation unless they are fundamental and compromise the integrity of the process. Examples of such fundamental errors include:

  1. Fraud
  2. Collusion
  3. Inadequate pricing
  4. Underbidding

Minor procedural deviations or technical lapses do not invalidate a sale unless they result in grave injustice or substantial prejudice. The Court stressed that challenges to auctions must be rooted in serious flaws rather than peripheral procedural lapses. This approach ensures the stability and reliability of the auction process.

In its judgment, the Court referred to its earlier decision in V.S. Palanivel v. P. Sriram, which held that auctions could be set aside only in cases involving fraud, collusion, or severe procedural irregularities. The Court noted the potential domino effect of overturning confirmed sales, which could undermine the SARFAESI framework and discourage participation in auctions.

The Court advised judicial restraint when dealing with post-confirmation challenges. It clarified that issues that could have been raised prior to confirmation should not be entertained afterward unless the procedural irregularities caused significant injury or prevented a party from exercising their rights. This approach discourages frivolous challenges and ensures the efficiency of the recovery process.

Case Analysis

In the case before the Court, the challenge to the auction proceedings was based on the alleged non-compliance with the statutory requirement of maintaining a 15-day gap between the notice of sale and the auction notice. However, the Court found no evidence that this procedural lapse had prejudiced the borrower. The borrower neither claimed that the lack of notice prevented them from exercising their rights nor identified any other substantive flaw in the auction process. 

Consequently, the Court upheld the validity of the auction and rejected the challenge. This judgment reinforces the principle that confirmed sales should not be lightly set aside. It aims to strike a balance between procedural compliance and the broader objectives of the SARFAESI Act. By discouraging frivolous challenges, the Court seeks to preserve the integrity of the auction process and ensure timely debt recovery.

Practical Implications

The SARFAESI Act’s effectiveness hinges on the reliability and efficiency of the auction process. Challenges to auctions often create delays and legal uncertainties, undermining the recovery mechanism. The Supreme Court’s rulings provide a roadmap for addressing such challenges while maintaining the finality of confirmed sales. Key takeaways include:

  1. Finality as a Priority: The Court’s emphasis on finality ensures that the auction process remains robust and dependable, encouraging greater participation from potential buyers.
  2. Discouraging Frivolous Challenges: The rulings highlight the importance of raising concerns about procedural irregularities at the earliest opportunity, preventing undue disruption to the auction process.
  3. Judicial Discretion and Procedural Compliance: The Court’s balanced approach acknowledges the need for procedural rigor while allowing judicial discretion to address genuine grievances.
  4. Impact on Market Stability: Overturning confirmed sales can create uncertainty in the market for secured assets, deterring potential buyers. By limiting post-confirmation challenges, the Court promotes stability and confidence in the auction process.

Conclusion

The Supreme Court’s judgments in Celir LLP v. Ms. Sumati Prasad Bafna and Others and related cases provide valuable clarity on the interplay between contempt jurisdiction, the doctrine of lis pendens, and the SARFAESI Act. These rulings reinforce the importance of respecting judicial directions and maintaining the finality of confirmed sales. By striking a balance between procedural compliance and practical considerations, the Court’s decisions uphold the principles of fairness, efficiency, and stability in property auctions. This jurisprudence strengthens the framework for secured asset recoveries, ensuring that the SARFAESI Act remains an effective tool for debt resolution while safeguarding the rule of law.

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com