Borrowers Cannot Challenge Auction Sale After Repeated Defaults; Financial Corporation Entitled to Recover Public Money Under State Financial Corporations Act
Case Name: Bihar State Financial Corporation & Anr. v. Bhushan Singh & Ors.
Date of Judgment: 09 July 2026
Citation: 2026 INSC 673 | Civil Appeal arising out of SLP (C) Nos. 16552-53 of 2025 and connected appeal
Bench: Hon’ble Mr. Justice Sanjay Karol
Held: The Supreme Court held that a borrower who repeatedly defaults in repayment despite being granted multiple opportunities cannot subsequently challenge the auction sale of the mortgaged property unless the action of the Financial Corporation is shown to be arbitrary, mala fide or in violation of statutory provisions. The Court reiterated that fairness under Section 29 of the State Financial Corporations Act, 1951 is not a one-way street, and courts should not interfere with recovery proceedings merely because the borrower has failed to honour contractual obligations.
Summary: The appeals arose from the auction of a mortgaged hotel property by the Bihar State Financial Corporation (BSFC) after the borrowers persistently defaulted in repayment of loans sanctioned for establishing an industrial unit. Despite repeated notices, several opportunities granted by the High Court to clear the outstanding dues, and even a final opportunity by BSFC to retain the property by matching the auction terms, the borrowers failed to regularise their account. Consequently, BSFC exercised its powers under Sections 29 and 30 of the State Financial Corporations Act, 1951 and sold the mortgaged property through auction.
The Trial Court partly decreed the borrowers’ suit and set aside the auction sale on the ground that the Corporation had not conducted the auction fairly, while the Patna High Court affirmed the decision. Challenging these findings, BSFC and the auction purchaser contended before the Supreme Court that the borrowers were habitual defaulters who had misused the judicial process by filing repeated proceedings only to delay recovery.
Allowing the appeals, the Supreme Court observed that State Financial Corporations deal with public funds and are required to balance fairness towards borrowers with their statutory duty to recover public money. The Court held that borrowers who repeatedly fail to comply with repayment schedules cannot invoke equity to defeat recovery proceedings. It reiterated that judicial review of action under Section 29 of the State Financial Corporations Act is limited to cases involving statutory violations or arbitrary and unreasonable action by the Financial Corporation, and courts cannot substitute their commercial wisdom for that of the statutory authority.
The Court found that BSFC had provided the borrowers with several opportunities to repay the loan before proceeding with the auction and that the borrowers had consistently failed to honour their commitments. It held that the findings of the courts below setting aside the auction sale were unsustainable in law and contrary to the settled principles governing recovery proceedings by Financial Corporations.
Decision: The Supreme Court allowed the appeals, set aside the judgments of the Trial Court and the Patna High Court, and upheld the auction sale conducted by the Bihar State Financial Corporation. The Court reaffirmed that recovery proceedings undertaken under Section 29 of the State Financial Corporations Act cannot be interfered with in the absence of arbitrariness, mala fides or statutory violation.