High Court Slams Bank’s Arbitrary Reversal of Auction Sale; Orders Compensation to Auction Purchaser

The High Court condemned the Bank’s arbitrary and unlawful reversal of a concluded auction sale and directed it to compensate the auction purchaser with interest for its illegal conduct.

The Division Bench of the Allahabad High Court comprising Justice Shekhar B. Saraf and Justice (Dr.) Yogendra Kumar Srivastava reviewed a writ petition and held that once a bank has lawfully auctioned a property and accepted earnest money from the auction purchaser, it cannot arbitrarily reverse the sale and transfer the property back to the borrower; such action is illegal, whimsical, and contrary to settled legal principles, warranting compensation to the auction purchaser.

The High Court considered an affidavit filed by the Bank’s counsel during the hearing and directed that it be placed on record. Upon hearing both sides, the Court noted that the Bank had withdrawn its earlier order dated September 24, 2024, by a fresh order passed on March 24, 2025, thereby complying with the Court’s previous directions issued on March 20, 2025.

However, the Court found that the petitioner, who was the auction purchaser of the property, had been wrongfully deprived of ownership, as the Bank had transferred the said property back to the original borrower (Respondent No. 2), despite having sold it in auction and accepted the earnest money. This action by the Bank was held to be illegal, arbitrary, whimsical, and against well-settled legal principles. The Court categorically held that the Bank, after concluding the auction and receiving earnest money, had no authority to enter into a one-time settlement with the borrower and restore the property to them.

The Bank tendered an unqualified apology through counsel and also filed a personal affidavit expressing regret. Nonetheless, the Court observed that the misconduct warranted strict consequences. Citing the Supreme Court's decision in Celir LLP v. Bafna Motors (Mumbai) Private Limited and Others, REEDLAW 2023 SC 09201, the Court held that the Bank’s actions violated the principles laid down therein and must be met with penal consequences.

Accordingly, the Court directed the Bank to compensate the auction purchaser by paying interest at 24% per annum on the earnest money amount of ₹4,64,500/-, calculated from the date of its acceptance until April 30, 2025. The Bank was instructed to produce a demand draft for the entire principal and interest amount on the next date of hearing. The matter was posted for further proceedings on April 30, 2025.

Mr. Afzal Parvej and Mr. Arif Ikbal, Advocates, represented the Petitioner.

Mr. Ajal Krishna and Mr. Anadi Krishna Narayana, Advocates, appeared for the Respondents.

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REEDLAW 2025 All 04205