Kerala HC: Financial Corporations Must Act as Trustees of Mortgaged Assets

The Kerala High Court has underscored the statutory obligation of state financial institutions to act as trustees while disposing of secured assets, emphasizing that the objective is to secure the best possible price rather than merely completing a sale. In a significant ruling, the Court set aside the sale of a mortgaged property by the Kerala Financial Corporation, finding the process marred by procedural irregularities and a lack of transparency.

A Division Bench comprising Dr. Justice A.K. Jayasankaran Nambiar and Justice Preeta A.K. heard the appeal challenging a Single Judge's decision that had initially upheld the auction sale. The case arose from a dispute over the recovery of a loan availed by a firm engaged in building and development, where the property in question was sold via e-auction following a default.

Breach of Statutory Duty and Fiduciary Responsibility

The Court observed that under Section 29 of the State Financial Corporations Act, 1951, a Financial Corporation is effectively a trustee of the debtor's property. Relying on the principles laid down in Mahesh Chandra v. Regional Manager, U.P. Finanacial Corporation and Others ( "(1993) 2 SCC 279": 1992 CaseBase(SC) 219), the Bench noted that the power to transfer property must be exercised with caution, honesty, and fairness.

The Court, in its reasoning, observed: "The Corporation or its officers or servants as trustee are bound to exercise their power in good faith in selling or dealing with the property of the debtor as an ordinary prudent man would exercise in the management of his own affairs to preserve and protect his own estate. Therefore, the acts of the officer or servant of the corporation should be reasonable, just and fair which must meet the eye and the offer accepted must be competitive and every attempt should be made to secure as maximum price as possible to liquidate the liabilities incurred by the industrial concern or the debtor under the Act."

Irregularities in the E-Auction Process

Financing the Auction Purchaser

The Bench expressed deep concern over the Corporation's decision to provide a loan to the nominees of the successful bidder to facilitate the purchase of the same property it was duty-bound to sell for the highest value. This action was found to be in conflict with the Corporation's role as a trustee. The Court noted that financing a purchaser who lacks the independent means to pay the bid price compromises the integrity of the auction. Furthermore, the Court highlighted that the Corporation flouted its own circular by sanctioning the loan to entities who were not the original successful bidders and allowing payments beyond the stipulated timelines.

Suspicious Bidder Relationships

The Court also pointed out a clear anomaly where the only two bidders in the e-auction were related; the son of the unsuccessful bidder was a partner in the firm that eventually purchased the property. Such circumstances, according to the Court, indicated a breach of the obligation to display fairness and suggested the formation of a cartel.

Final Directions of the Court

Setting aside the findings of the Single Judge, the Court held that the sale was legally infirm and failed to meet the standards required under the State Financial Corporations Act, 1951 and the Constitution of India, 1950. The Court has the following directions:

"The respondent Corporation shall proceed to obtain a fresh valuation report in relation to the property and fix the reserve price therefor prior to holding a fresh auction sale within a period of six months from the date of receipt of a copy of this judgment."

Background:

The appellant firm had availed a loan of Rs.4.89 crores from the Kerala Financial Corporation, which was declared a Non-Performing Asset in 2014. The Corporation took possession of 16.21 Ares of property in Kozhikode in 2019 and initiated e-auction proceedings in early 2021. The property was sold for Rs.9.18 crores, but the appellant contended that the market value was substantially higher. The appellant challenged the sale on grounds of inadequate valuation, improper notice, and collusion between bidders. While the Single Judge dismissed the petition, the Division Bench found that the Corporation's conduct, specifically financing the purchaser and ignoring its own internal guidelines vitiated the sale process.

Case Details:
Case No.: W.A.NO.340 OF 2026
NeutralCitation: 2026:KER:46315
Case Title: M/S.PEARL HILL BUILDERS AND DEVELOPERS v. UNION OF INDIA & OTHERS
Appearances:
For the Petitioner(s): Sri.Lakshmi Narayan R.(SR.), Sri.N.Raynold Fernandez
For the Respondent(s): Smt.R.Asalatha Varma, CGC; Sri.M.R.Arun Kumar, Senior Govt. Pleader; Sri.George Poonthottam (SR.); Smt.Nisha George; Smt.Dhanya P. Ashokan (SR.); Sri.M.R.Venugopal, SC, KFC; Sri.S.Sreekumar; Sri.S. Muhammad Alikhan; Smt.Anjana S. Raj; Smt.Gayathri Venugopal; Smt.A. A. Akhila Sree Parvathy

Source: 2026 CaseBase(KER) 362