What should you do if the bank demands payment for an illegal property?

We bought a flat in 2014 with a DHFL Bank loan, assuming it was legal since a reputed bank approved it, including legal check fees. Later, we discovered that the flat was illegally built without municipal permission, and the same flat was sold to multiple buyers by the builder, including another individual who registered as the owner with the electric board. We stopped paying the EMI. DHFL later closed, and the loan was transferred to Piramal Bank, which is now harassing us for payment, despite us not having possession of the flat or receiving a refund. DHFL had previously filed a cheque bounce case, but dropped it later. Piramal is demanding an e-mandate, charging ₹500 + GST until we comply, and is requesting documents such as a possession letter and share certificate