In a recent case before the Supreme Court, [CIVIL APPEAL NO(S). 235-236 OF 2024: The Authorised Officer, Central Bank Of India V/s Shanmugavelu dated 2nd February 2024] the Court held that in the event the auction purchaser is unable to remit the balance consideration, the Bank is entitled to forfeit the entire earnest money deposit.
Brief facts of the case :
In order to recover its dues from a non-performing asset (“NPA”), the Appellant bank took possession of the secured asset under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2 002 (for short, the “SARFAESI Act”), more particularly under Section 13(4) and put up the same for sale by way of public auction.
The Respondent who was declared the successful auction purchaser, deposited the earnest money. The Appellant confirmed the sale and inter-alia stipulated that in the event of default in payment of the balance amount, the sale shall be liable to be cancelled and the earnest money would be forfeited.
The Respondent/Auction purchaser was unable to raise the balance consideration even after being granted 90 days extension of time. The Appellant/Bank refused further extension and cancelled the sale.
The Respondent filed an Application before the Debt Recovery Tribunal [DRT] assailing the refusal for extension of time and sale cancellation.
Meanwhile, during the pendency of the proceedings before the DRT, the Bank held a fresh auction and sold the property.
The DRT directed the Appellant/ Bank to refund the deposit money to the Respondent after deducting some amount towards the expenses incurred.
The Appellant/ Bank appealed against the order of the DRT before the Debt Recovery Appellate Tribunal [DRAT] who observed that the Bank could not forfeit the entire amount deposited, but enhanced the amount the Bank could deduct from the earnest money and ordered the Bank to refund the rest.
Both the Parties appealed against the order of the DRAT.
The High Court set aside the order of the DRAT and held that the forfeiture of an amount or deposit by a secured creditor under the SARFAESI Rules cannot be more than the loss or damage suffered by it and the forfeiture of the entire earnest money deposit by the appellant amounts to ‘unjust enrichment’. The High Court held that Rule 9 (5) of the SARFAESI Rules which provides for forfeiture cannot override the underlying ethos of Section 73 of the Indian Contract Act, 1872 (for short, “the 1872 Act”).
Being aggrieved by the impugned order, the Appellant/ Bank filed an Appeal before the Supreme Court.
Submissions of the parties:
The Appellants submitted that the provisions of Rule 9 [5] SARFAESI Rules could not be read down to yield to the principles recognized in Section 73 of the 1872 Act. It was further submitted that the auction sale was a statutory sale conducted by the appellant in accordance with the SARFAESI Rules and as Section 35 of the SARFAESI Act gives an overriding effect, this would not be a case of breach of contract which would attract principles underlying Section 73 of the 1872 Act.
The provisions of 9(5) of the SARFAESI Rules, should be interpreted strictly and in any event, the auction notice provided that the failure in paying the balance amount would result in forfeiture of the earnest-money deposit.
The Respondents submitted that Section 35 of the SARFAESI Act only provides for an overriding effect over other laws but the same does not apply to SARFAESI Rules. Rule 9(5) of SARFASI Rules is only an enabling provision and cannot override the statutory provisions of the 1872 Act and in any event, Rule 9(5) was liable to be struck down as unconstitutional and being opposed to public policy and principles of fair play and unreasonableness as it authorises bank officer with an unguided power of forfeiture. It was argued that such unguided power is opposed to public policy and would result in ‘unjust enrichment’.
Based on the submissions of the parties, the Court considered the case on the following 3 points:
I. Whether, the underlying principles of Section(s) 73 & 74 respectively of the 1872 Act are applicable to forfeiture of earnest-money deposit under Rule 9(5) of the SARFAESI Rules? In other words, whether the forfeiture of the earnest-money deposit under Rule 9(5) of the SARFAESI Rules can be only to the extent of loss or damages incurred by the Bank?
II. Whether, the forfeiture of the entire amount towards the earnest-money deposit under Rule 9(5) of the Rules amounts to unjust enrichment? In other words, whether the quantum of forfeiture under the SARFAESI Rule is limited to the extent of debt owed?
III. Whether a case of exceptionable circumstances could be said to have been made out by the respondent to set aside the order of forfeiture of the earnest money deposit?
Findings of the Court :
I. Whether, the underlying principles of Section(s) 73 & 74 respectively of the 1872 Act are applicable to forfeiture of earnest-money deposit under Rule 9(5) of the SARFAESI Rules? In other words, whether the forfeiture of the earnest-money deposit under Rule 9(5) of the SARFAESI Rules can be only to the extent of loss or damages incurred by the Bank?
The Court observed that the Rule 9(5) of the SARFAESI Rules, makes a conscious departure from the general law by statutorily providing for the forfeiture of entire earnest-money deposit of the successful auction purchaser if he fails to deposit the balance consideration within the statutory period. It was to facilitate recovery of debt in a time-bound manner by giving teeth to the measures enumerated within Section 13 of the SARFAESI Act, more particularly sale of the secured asset in the event the borrower fails to repay the debt. The Court opined that any other interpretation could encourage the unscrupulous borrowers to use subversive methods to participate in an auction only to not pay the balance amount at the very end and escape relatively unscathed under the guise of Section(s) 73 and 74 of the 1872 Act, thereby gaming the entire auction process and leaving any possibility of recoveries under the SARFAESI Act at naught. It could also lead to a preposterous scenario that another recovery proceeding would have to be initiated in terms of Section(s) 73 and 74 of the 1872 Act to recoup the loss and expenditure occasioned by the defaulting successful auction purchaser, which would make a farce of the SARFAESI Act.
II. Whether, the forfeiture of the entire amount towards the earnest-money deposit under Rule 9(5) of the Rules amounts to unjust enrichment? In other words, whether the quantum of forfeiture under the SARFAESI Rule is limited to the extent of debt owed?
With regards to the submission that the authorised officer under Rule 9(5) of the SARFAESI Rules has been conferred with unguided and unfettered power of forfeiture and as such the said rule is liable to be struck down, the Court observed that there was no challenge to the constitutional validity of Rule 9 sub-rule (5) of the SARFAESI Rules and any person aggrieved by an order of forfeiture under the SARFAESI Rules could challenge the same before the DRT under Section 17 of the SARFAESI Act.
The Court relied upon the order of the Supreme Court in Kailash Nath Associates v. Delhi Development Authority & Anr. reported in (2015) 4 SCC 136, wherein it was held that Section 74 of the 1872 Act will be applicable to cases of forfeiture of earnest-money deposit, however, where such forfeiture takes place under the terms and conditions of a public auction, Section 74 will have no application.
The Court reiterated that the concept of ‘Unjust Enrichment’ is a by-product of the doctrine of equity and it is an equally well settled cannon of law that equity always follows the law. In other words, equity cannot supplant the law, equity has to follow the law if the law is clear and unambiguous.
The Court observed that in the Impugned Order, the Rule 9(5) of the SARFAESI Rules, was ‘read down’ because it deemed a plain reading of the provision to be ‘harsh’. However, the Court was of the opinion that harshness of a provision is no reason to read down the same, if its plain meaning is unambiguous and perfectly valid. The Court opined that the doctrine of unjust enrichment is based on equity and refers to the inequitable retention of a benefit and equity has to follow the law if the law is clear and unambiguous.
The consequence of forfeiture of 25% of the deposit under Rule 9(5) of the SARFAESI Rules is a legal consequence that has been statutorily provided in the event of default in payment of the balance amount and equity cannot substitute or dilute the statutory consequence of forfeiture of 25% of deposit under Rule 9(5) of the SARFAESI Rules and the Court has no option but to implement the law.
III. Whether a case of exceptionable circumstances could be said to have been made out by the respondent to set aside the order of forfeiture of the earnest money deposit?
The Court observed that after the earnest-money deposit is forfeited, the courts should ordinarily refrain from interfering unless the existence of very rare and exceptional circumstances are shown and where it is proved that extraneous conditions exist that might have prevented the successful auction purchaser from depositing the balance amount, through no fault of his and in such cases the earnest-money deposited by such innocent successful auction purchaser could certainly be asked to be refunded.
However, in the present case, the court observed that the respondent was granted an extension to make the balance payment and was specifically reminded that no further extension would be granted. The auction notice inviting bids along with the correspondence between the appellant bank and the respondent also unambiguously spelt out the consequences of not paying the balance amount within the specified period.
Hence, the Court concluded that the respondent had willingly participated in the auction and offered his bid fully knowing the reserve price of the Secured Asset and the consequences of its failure in depositing the balance amount.
The Court allowed the Appeal of the Bank and set aside the impugned judgment
and order passed by the High Court.
This judgement is the latest of the landmark judgements being passed in recent times which provide clarity to different provisions of the SARFAESI Act. The Judiciary walks the fine line between the rights of the Borrowers and the powers of the Lenders and at the same time stay true to the intention of the Legislature. The Act is still evolving and it is important to observe the direction it takes.