Bank’s Right To Forfeit Entire Earnest Money Deposited By An Auction Purchaser On Failure To Deposit The Remaining Amount Within The Stipulated Time Period – The Authorised, Officer Central Bank Of India V. Shanmugavelu

Summary:

The petition concerns an appeal filed by a Nationalised Bank challenging a judgement by the Madras High Court regarding the forfeiture of earnest money deposit by the bank. The background involves the bank’s actions to recover dues from Best and Crompton Engineering Projects, leading to an auction of a secured asset. The successful auction purchaser failed to pay the balance amount within the stipulated time, resulting in the bank cancelling the sale and forfeiting the earnest money deposit. The High Court held that forfeiture should only be to the extent of the loss suffered by the bank, citing Section 73 of the Contract Act.

However, the Supreme Court set aside this judgement, holding that Rule 9(5) of the SARFAESI Rules allows for the entire earnest money deposit to be forfeited. The Court analysed whether Section 73 of the Contract Act applies to forfeiture under the SARFAESI Rules, concluding that it does not. It emphasized the legislative intent behind Rule 9(5) and the overriding effect of the SARFAESI Act. Additionally, the Court examined the concept of unjust enrichment and whether exceptional circumstances warranted setting aside the forfeiture. Ultimately, the Supreme Court upheld the bank’s right to forfeit the entire earnest money deposit, Rejecting the High Court’s interpretation.

Facts Of The Case:

The Central Bank of India extended credit facilities to ‘Best and Crompton Engineering Projects secured against a parcel of land with superstructures through a simple mortgage.The borrowers defaulted on the loan, leading to the classification of the loan account as a non-performing asset (NPA).In line with the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the bank took possession of the secured asset and decided to sell it through a public auction.An e-auction notice was issued by the bank, and during the auction, the respondent participated and emerged as the successful bidder.

The respondent deposited 25% of the bid amount as earnest money on the same day as the auction, and the bank confirmed the sale, stipulating that failure to pay the balance amount within the specified time would result in the cancellation of the sale and forfeiture of the earnest money. Despite a request for an extension, the respondent fails to pay the amount balance within the stipulated time, leading the bank to cancel the sale and forfeit the earnest money.

Issue:

The primary issue in this case revolves around the forfeiture of the earnest money deposit by the bank. Specifically, the issue concerns whether the bank has the right to forfeit the entire earnest money deposit made by an auction purchaser, as per Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules), upon failure to deposit the remaining amount within the stipulated period, or if the forfeiture should only be to the extent of the loss suffered by the bank, as argued by the respondent and upheld by the Madras High Court.

Judgement:

The Supreme Court, in its judgement, upheld the bank’s right to forfeit the entire earnest money deposit made by the auction purchaser. It set aside the ruling of the Madras High Court, which had held that forfeiture should only be to the extent of the loss suffered by the bank.

The Court reasoned that Rule 9(5) of the SARFAESI Rules allows for the forfeiture of the entire earnest money deposit in case of failure to deposit the remaining amount within the stipulated period. It emphasized that the SARFAESI Act is a special legislation with an overriding effect on general law, and therefore, the principles of unjust enrichment and Section 73 of the Contract Act do not apply in this context.

The judgement highlighted the legislative intent behind the SARFAESI Act and Rule 9(5), emphasizing their role in providing a statutory mechanism for the recovery of debts in a time-bound manner. The judgement highlighted the legislative intent behind the SARFAESI Act and Rule 9(5), emphasizing their role in providing a statutory mechanism for the recovery of debts in a time-bound manner. Consequently, the court ruled that the banker was within its right to forfeit the entire earnest money deposit as provided for rule 9(5) of the SARFAESI rules.

Analysis:

The analysis of the Supreme Court’s judgement revolves around the interpretation of Rule 9(5) of the SARFAESI Rules, emphasizing its language and intent to permit the forfeiture of the entire earnest money deposit in case of default. The Court upheld the SARFAESI Act’s special status, overriding general law principles like unjust enrichment. It underscored the legislative intent to expedite debt recovery, rejecting attempts to read down Rule 9(5). Moreover, while equity is acknowledged, it cannot override clear statutory provisions, thereby affirming the statutory consequence of forfeiture, even if perceived as harsh, to serve the broader objective of resolving bad debts promptly.