In a landmark decision, the Supreme Court has asserted that the complete earnest money submitted by an auction purchaser can be forfeited in accordance with Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules) if the remaining amount is not deposited within the specified period.
Rejecting the Madras High Court’s perspective that the bank could only forfeit the earnest money to the extent of its actual loss, the Supreme Court deemed this view erroneous. The Court clarified that the forfeiture of 25% of the deposit under Rule 9(5) is a statutory consequence triggered by the failure to pay the balance amount, unaffected by subsequent sale prices or the extent of debt recovery.
Chief Justice D.Y. Chandrachud, along with Justices J.B. Pardiwala and Manoj Misra, emphasized that the right of a secured creditor to forfeit the earnest deposit arises not from a breach of contract but from a statutory obligation outlined in SARFAESI Rules. It declared that the principles of Sections 73 and 74 of the Indian Contract Act, limiting compensation to actual losses, do not apply to SARFAESI Act auctions.
The court stressed that SARFAESI Act, being a special legislation, overrides general contract law. It underlined the legislative intent to curb deceptive practices by borrowers and maintain discipline in auction processes.
The Court highlighted the mandatory nature of Rule 9(5), requiring successful auction purchasers to deposit 25% after confirmation of sale, with forfeiture on default of the remaining 75% within the stipulated 15 days. It justified the need for an absolute forfeiture provision to deter unscrupulous participants from manipulating auctions.
Addressing concerns about applying Sections 73 and 74 to SARFAESI cases, the Court warned of potential abuse by defaulting auction purchasers, leading to additional recovery proceedings and undermining the SARFAESI Act’s effectiveness.
Referencing its prior judgment in Authorized Officer State Bank of India v. C. Natarajan, the Court reiterated the SARFAESI Act’s primacy over the Indian Contract Act, emphasizing the specific inclusion of forfeiture provisions to address unique challenges in debt recovery.
In conclusion, the Supreme Court held that the forfeiture of the entire 25% deposit is not based on contract breach but is a statutory operation, aligning with the SARFAESI Act’s overarching objectives. The decision reinforces the Act’s specialized framework and discourages attempts to circumvent the recovery process through contractual interpretations.
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