The matter originated from a public auction executed under the SARFAESI Act by the Central Bank of India to recover debts from a defaulter. Shanmugavelu, the highest bidder, was deemed ...
No Acts & Articles mentioned in this case
2024 INSC 80 Page 1 of 81
RNS
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO(S). 235-236 OF 2024
THE AUTHORISED OFFICER, CENTRAL BANK OF INDIA …APPELLANT
VERSUS
SHANMUGAVELU …RESPONDENT
J U D G M E N T
J.B. PARDIWALA, J.:
For the convenience of exposition, this judgment is divided in the following
parts:-
INDEX
A. FACTUAL MATRIX ............................................................................. 3
B. IMPUGNED ORDER .......................................................................... 13
C. SUBMISSIONS OF THE APPELLANT ............................................ 17
D. SUBMISSIONS OF THE RESPONDENT ......................................... 18
E. ANALYSIS (Points for Determination) .............................................. 19
i) Legislative History and Scheme of the SARFAESI Act ..................... 20
ii) Applicability of Section(s) 73 & 74 of the 1872 Act to Forfeiture
under the SARFAESI Rules. ............................................................... 32
a. Forfeiture under the SARFAESI Rules ........................................... 44
Page 2 of 81
b. Concept of Earnest-Money & Law on Forfeiture of Earnest-Money
Deposit ............................................................................................ 49
c. Law on the principle of ‘Reading-Down’ a provision ...................... 66
iii) Whether, the forfeiture of the entire earnest-money deposit amounts
to Unjust Enrichment? ........................................................................ 73
iv) Whether Exceptional Circumstances exist to set aside the forfeiture of
the earnest money deposit? .................................................................. 77
F. CONCLUSION .................................................................................... 81
a
1. Since the issues raised in both the captioned appeals are the same, the
parties are also the same and the challenge is also to the self-same judgment and
order passed by the High Court, those were taken up for hearing analogously and
are being disposed of by this common judgment and order.
2. For the sake of convenience, the appellant shall hereinafter be referred to
as the Bank being the Secured Creditor, and the respondent shall hereinafter be
referred to as the original Auction-Purchaser.
3. These appeals are at the instance of a Nationalized Bank and are directed
against the common judgment and order dated 27.10.2021 passed by the High
Court of judicature at Madras in C.R.P No(s). 1892 & 2282 respectively of 2021
(“Impugned Order”) by which the High Court allowed the respondent’s writ
petition and held that the forfeiture of the earnest money deposit by the appellant
bank could only be to the extent of the loss suffered by it.
Page 3 of 81
A. FACTUAL MATRIX
4. It appears from the materials on record that the appellant bank herein had
sanctioned credit facilities to one ‘Best and Crompton Engineering Projects’
against a parcel of land admeasuring 10581 sq.ft. (approx.) with superstructures
situated in Survey Nos. 60 and 65/2, Block 6, Alandur village, Mambalam-
Guindy, Chennai (for short the, “Secured Asset”) as security interest in the form
of a simple mortgage in lieu of the sanctioned credit. Sometime thereafter the
said borrowers defaulted and the said loan account was classified as a non-
performing asset (“NPA”) by the appellant bank on 28.05.2013.
5. In order to recover its dues, the appellant bank took measures under the
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short, the “SARFAESI Act”), more particularly
under Section 13(4) by taking over the possession of the Secured Asset and
putting the same for sale by way of public auction.
6. Accordingly, on 24.10.2016 an e-auction notice for the sale of the Secured
Asset at a reserve price of Rs. 9,62,00,000/- came to be issued by the appellant
bank, with the following terms and conditions: -
“TERMS & CONDITIONS
1. The e-Auction is being held on “AS IS WHERE IS” and “AS IS WHAT
IS” basis and “NO COMPLAINT” condition.
2. The auction sale will be Online E-Auction/Bidding through website
https://www.bankeauctions.com on 07-12-2016 from 11.00 a.m. to 12.
Noon
Page 4 of 81
3. Intending bidders shall hold a valid Digital Signature Certificate, e-
mail address and PAN number. For details with regard to Digital
Signature Certificate please contact M/s C1 India Pvt. Ltd., E-Mail ID:
support@bankeauctions.com or shankar.ganesh@c1india.com
4. Bidders are required to go through the website
https://www.bankeauctions.com for detailed terms and conditions of
auction sale before submitting their bids and taking part in the e-
Auction sale proceedings.
5. To the best of knowledge and information of the Authorized Officer,
there is no encumbrance on property affecting the security interest.
However, the intending bidders should make their own independent
inquiries regarding the encumbrances, title of property put on auction
and claims / rights / dues affecting the property, prior to submitting
their bid. The e-Auction advertisement does not constitute and will not
be deemed to constitute any commitment or any representation of the
bank. The property is being sold with all the existing and future
encumbrances whether known or unknown to the bank. The Authorized
Officer / Secured Creditor shall not be responsible in any way for any
third party claims / rights / dues.
6. It shall be the responsibility of the bidders to inspect and satisfy
themselves about the asset and specification before submitting the bid.
The inspection of property put on auction will be permitted to interested
bidders at site on 23-11-2016 from 10.00 a.m. to 5.00 p.m.
7. The above mentioned amount should be remitted towards EMD through
RTGS/NEFT to Account No. 3227870680 of Central Bank of India,
CFB, Chennai 600008 IFSC Code CBIN0283507. Cheques or demand
draft shall not be accepted as EMD amount.
8. Prospective bidders are advised to obtain user id and password which
are mandatory for bidding in the above e-auction from M/s C1India
Pvt. Ltd., helpline 01244302020/2021/2022/2023/2024 E-mail
support@bankerauctions.com or K.N. SHRINATH-9840446485.
Passwords will be allotted only to those bidders who fulfil all the terms
and conditions of e-auction and have deposited the requisite EMD. And
for further property related query you may contact Mr. G.S. Prasad,
Chief Manager, Central Bank of India, CFB, Chennai Tel. No. 044-
42625259 Mobile 9962029300 e -mail ID:
bmchen3507@centralbank.co.in during officer hours i.e. 10 AM to 5
PM during the working days.
9. After Registration by the bidder in the Web-Portal, the intending bidder
/ purchaser is required to get the copies of the following documents
uploaded in the Web Portal before last date of submission of the bid viz.
i) Copy of the NEFT/RTGS Challan; ii) Copy of PAN Card; iii) Proof
of Identification (KYC) viz. self-attested copy of Voter ID Card / Driving
Page 5 of 81
License / Passport etc. iv) Copy of proof of address; without which the
bid is liable to be rejected.
10. The interested bidders, who have submitted their bid not below the
Reserve price through online mode before 4.00 p.m. on 05-12-2016
shall be eligible for participating in the e-bidding process. The e-
Auction of above properties would be conducted exactly on the
scheduled Date & Time as mentioned against each property by way of
inter-se bidding amongst the bidders. The bidder shall improve their
offer in multiple of the amount mentioned under the column “Bid
Increase Amount”. In case bid is placed in the last 5 minutes of the
closing time of the e-Auction, the closing time will automatically get
extended for 3 minutes (subject to maximum of unlimited extensions of
3 minutes each). The bidder who submits the highest bid amount (not
below the Reserve Price) on closure of e-Auction process shall be
declared as Successful Bidder and a communication to that effect will
be issued which shall be subject to approval by the Authorized
Officer/Secured Creditor.
11. The Earnest Money Deposit (EMD) of the successful bidder shall be
retained towards part sale consideration and the EMD of unsuccessful
bidders shall be refunded. The Earnest Money Deposit shall not bear
any interest. The successful bidder shall have to deposit 25% of the
auction price less the EMD already paid, within 24 hours of the
acceptance of bid price by the Authorized Officer and the balance 75%
of the sale price on or before 15
th
day of sale or within such extended
period as agreed upon in writing by and solely at the discretion of the
Authorized Officer. If any such extension is allowed, the amount
deposited by the successful bidder shall not carry any interest. In case
of default in payment by the highest and successful bidder, the amount
already deposited by the bidder shall be liable to be forfeited and
property shall be put to re-auction and the defaulting bidder shall have
no claim / right in respect of property/amount.
12. The authorized Officer is not bound to accept the highest offer and the
authorized officer has absolute right to accept or reject any or all
offer(s) or adjourn / postpone / cancel the e-auction without assigning
any reasons thereof. ...”
7. Pursuant to the same, the e-auction was conducted on 07.12.2016 and a
total of four bids were received wherein the respondent also participated and
submitted its bid to the tune of Rs. 12,27,00,000/-. The respondent’s bid was
Page 6 of 81
found to be the highest and was classified as H1 and accordingly, the respondent
was declared as the successful auction purchaser.
8. Pursuant to the aforesaid, the respondent on the same day deposited 25%
of the bid amount i.e., Rs. 3,06,75,000/- as the earnest money deposit upon which,
the appellant confirmed the sale of the Secured Asset in favour of the respondent
vide its letter dated 07.12.2016 which 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 said sale confirmation letter is
being reproduced below: -
“CFB/CHEN/2016-17/685
December 7, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in
our borrowal account M/s Best & Crompton Engineering Projects Limited
– E Auction of property held on 07/12/2016.
We have to inform you that in the E auction held on 07/12/2016 pursuant
to the E-auction sale notice dated 24/10/2016 issued by the Authorized
Officer. In respect of Schedule property covered in the E auction sale
notice i.e.,
Lot no. 1: Property belonging to M/s Futuretech Industries Ltd. presently
known as Candid Industries Ltd. All that piece and parcel of the immovable
property being industrial land together with the superstructure/shed
standing thereon admeasuring 10581 sq. ft. or thereabouts comprised in
survey nos. 60 part and 65/2, Block no. 6, Alandur village, Mambalam-
Guindy Taluk, sub-registration district Alandur, registration district
Page 7 of 81
Chennai South presently situated at plot no. A-19, Thiru Vi Ka Industrial
Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate East by: 80
feet Road, West by: Service Road.
You have been declared as successful bidder at the sale price of Rs.
12,27,00,000/- (Rupees Twelve Crore Twenty Seven Lac only). You are
now required to remit as per E auction Sale notice 25% of the sale price
less Earnest Money Deposit amount already remitted by you i.e., Rs.
3,06,75,000/- minus EMD remitted Rs. 96,20,000/- = Rs. 2,10,55,000/-
(Rupees Two Crore Ten Lac Fifty Five Thousand only) by RTGS/NEFT to
the same account number to which you have remitted the Earnest Money
Deposit within 24 hours of acceptance of bid.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees Nine Crore
Twenty Lac Twenty Five Thousand Only) is to be remitted by you by RTGS
to the same account number on or before 15 days from today; failing which
the sale is liable to be cancelled and the EMD will be forfeited.
Please note that the E Auction sale has been conducted strictly as per the
terms and conditions spelt out in the E Auction notice dated 24/10/2016.
Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
9. The respondent vide its email dated 19.12.2016, requested the appellant
bank for grant of extension of three-months’ time for the payment of the balance
amount on the ground that its term-loan was still under-process.
10. The appellant bank vide its letter dated 20.12.2016, acceded to the request
of the respondent and granted a further extension of three-months’ time i.e., till
07.03.2017 in terms of Rule 9(4) of the Security Interest (Enforcement) Rules,
2002 (for short, the “SARFAESI Rules”). The said letter also stated that no
further extension of time shall be granted and in the event the respondent fails to
Page 8 of 81
pay the balance amount, the sale shall be cancelled and the amount already paid
shall be forfeited. The said letter is being reproduced below: -
“CFB/CHEN/2016-17/718
December 20, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in
the account M/s Best & Crompton Engineering Projects Limited – E
Auction of property held on 07/12/2016.
We may once again inform you that in the E auction held on 07/12/2016
pursuant to the E-auction sale notice dated 24/10/2016 issued by the
Authorized Officer in respect of Schedule property covered in the E auction
sale notice i.e., Property belonging to M/s Futuretech Industries Ltd.
presently known as Candid Industries Ltd. Al that piece and parcel of the
immovable property being industrial land together with the
superstructure/shed standing thereon admeasuring 10581 sq. ft. or
thereabouts comprised in survey nos. 60 part and 65/2 part, Block no. 6,
Alandur village, Mambalam-Guindy Taluk, sub-registration district
Alandur, registration district Chennai South presently situated at plot no.
A-19, Thiru Vi Ka Industrial Estate, South by: Plot no. A-18, Thiru Vi Ka
Industrial Estate East by: 80 feet Road, West by: Service Road, you have
been declared as successful bidder at the sale price of Rs. 12,27,00,000/-
(Rupees Twelve Crore Twenty Seven Lac only).
You had remitted Rs. 2,10,55,000/- (Rupees Two Crore Ten Lac Fifty Five
Thousand only) as per E auction Sale notice 25% of the sale price less
Earnest Money Deposit amount already remitted by you (i.e., Rs.
3,06,75,000/- minus Rs.96,20,000/-) on 08/12/2016 as per the bid terms.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees Nine Crore
Twenty Lac Twenty Five Thousand Only) was to be remitted by you before
15 days from the date of bid failing which the sale is liable to be cancelled
and the EMD will be forfeited.
Page 9 of 81
However, you had vide your mail dated 19/12/2016 requested to give you
three (3) months time to pay the balance 75% payment of the bid amount
and also assured that you will honour the offer in the time frame.
After carefully going through your request, the Authorized officer hereby
permit/ allow you to pay the balance amount of Rs 9,20,25,000/- (Rupees
Nine crore Twenty Lac Twenty Five Thousand Only) within 90 days from
the date of BID. Further we may also inform you that no further extension
of time will be granted and if you fail to pay the balance sale amount the
sale will be cancelled and the amount already paid will be forfeited by the
Bank.
Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
11. The respondent being unable to pay the balance amount within the
extended period sought an additional 15-days for making the balance-payment
vide its letter dated 06.03.2017.
12. However, the appellant vide its letter dated 27.03.2017 turned down the
said request for further extension and intimated the respondent that due to its
failure in remitting the balance amount within the stipulated time, the sale is
cancelled and the amount already deposited stands forfeited. The said sale
cancellation letter is being reproduced below: -
“CFB/CHEN/2016-17/919 March 27, 2017
Mr. R. Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No.-4, Readymade Garment Complex
SIDCO Industrial Estates, Guindy
Chennai-600032
Page 10 of 81
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI Act
2002 in the account M/s Best & Crompton Engineering Projects
Limited
Ref: E Auction of property held on 07/12/2016
You were declared as successful bidder at the sale price of Rs.
12,27,00,000/- (Rupees Twelve Crore Twenty Seven Lac only) in the E
auction held on 07/12/2016 pursuant to the E auction sale notice dated
24/10/2016 issued by the Authorised Officer in respect of Schedule
property covered in the E auction sale notice i.e., mortgaged property
belonging to M/s Futuretech Industries Ltd presently known as Candid
Industries Ltd.
Schedule
All that place and parcel of the immovable property being industrial
land together with the superstructure/shed standing thereon
admeasuring 10581 sq.ft. or thereabouts comprised in survey nos. 60
part and 65/2 part. Block no. 6, Alandur village, Mambalam-Guindy
Taluk, sub-registration district Alandur, registration district Chennai
South presently situated at plot no. A-19. Thiru Vi Ka Industrial Estate,
South by: Plot no. A-18, Thiru Vi Ka Industrial Estate, and East by:
80 feet Road, West by: Service Road.
You had remitted a total of Rs. 3,06,75,000 towards 25% of the sale
price on (i.e. Rs. 96,20,000 on 7-12-2016 towards EMD and Rs.
2,10,55,000 on 08/12/2016 as per the terms of the bid.
The balance sale price amount to Rs. 9,20,25,000/- (Rupees Nine
Crore Twenty Lac Twenty Five Thousand only) was to be remitted by
you before 15 days from the date of bid failing which the sale was
liable to be cancelled and the amount deposited by you had to be
forfeited. However, you had vide your mail dated 19/12/2016
requested to give you three (3) months’ time to pay the balance 75%
payment of the bid amount and also assured that you will honour the
offer in the time frame.
After carefully going through your request, the Authorized officer
permitted/allowed you to pay the balance amount of Rs.9,20,25,000/-(
Rupees Nine crore Twenty Lac Twenty Five Thousand Only) within 90
days from the date of BID vide our letter No. CFB/CHEN/2016-17/718
dated 20/12/2016. Further we also informed you that no further
extension of time will be granted and if you fail to pay the balance sale
Page 11 of 81
amount the sale will be cancelled and the amount already paid was
liable to be forfeited by the Bank.
You had again requested for extension of time for another 15 days vide
your letter dated 06/03/2017. After going through your
representation/request, we permitted you to remit the balance of Rs.
9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand
Only) by 22/03/2017 thereby giving three months time from the 15
th
day of confirmation of sale as per the Security Interests (Enforcement)
Rules, 2002.
We hereby inform you that as you have failed to remit the balance
amount of Rs. 9,20,25,000/- (Rupees Nine crore Twenty Lac Twenty
Five Thousand Only) by 22/03/2017, the amount of Rs. 3,06,75,000/-
which was already paid by you stands forfeited. This letter issued
without prejudice to the bank’s rights to bring the property for fresh
auction sale.
Thanking you
Yours sincerely,
Sd/-
AUTHORISED OFFICER”
13. Despite the aforesaid letter, the respondent on 05.04.2017 addressed one
another letter to the appellant seeking further extension of 90 days for making the
balance sale payment by enclosing a cheque of Rs.50,00,000/- to show its bona
fides. However, the appellant returned the cheque and declined the said request
vide its letter dated 06.04.2017.
14. Aggrieved by the aforesaid, the respondent filed an application being SA
No. 143 of 2018 before the Debts Recovery Tribunal-II (“DRT”) assailing the
appellant’s sale cancellation and forfeiture letters dated 27.03.2017 and
06.04.2017 respectively.
Page 12 of 81
15. During the pendency of the proceedings before the DRT as aforesaid a
fresh auction of the Secured Asset was conducted by the appellant bank on
13.03.2019, and it appears that pursuant to the same the sale was completed at an
enhanced price of Rs. 14.76 crore i.e., more than the price fetched in the previous
auction.
16. The DRT-II vide its order dated 06.05.2019 allowed the application being
SA No. 143 of 2018 and directed the appellant bank to refund the earnest money
deposited by the respondent after deducting a sum of Rs. 5,00,000/- towards the
expenditure incurred. The DRT-II in its order observed that the respondent had
requested the appellant bank to provide certain documents required for the grant
of term loan which was not provided, as a result of which the term loan was not
granted and the respondent failed to remit the balance amount. It further observed
that as the Secured Asset had been sold for an amount higher than the initial bid,
no loss was caused to the appellant.
17. The aforesaid order was challenged by the appellant before the Debt
Recovery Appellate Tribunal, Chennai (“DRAT”) by way of RA(SA) No. 119 of
2019. The DRAT vide its order dated 30.07.2021 observed that the secured
creditor was not entitled to forfeit the entire amount deposited, but partly allowed
the appeal and enhanced the forfeiture from Rs. 5 Lac to Rs. 55 Lac.
Page 13 of 81
B. IMPUGNED ORDER
18. Aggrieved with the aforesaid, both the appellant and the respondent
approached the High Court of judicature at Madras by way of C.R.P. No(s). 1892
& 2282 of 2021 respectively, assailing the order dated 30.07.2021 passed by the
DRAT, Chennai, wherein the High Court vide the impugned judgment and final
order dated 27.10.2021 allowed the respondent’s civil revision petition. The
operative portion is reproduced below: -
“19. For the reasons aforesaid, the enhancement of the quantum of
forfeiture as permitted by the Appellate Tribunal in the impugned
order of July 30, 2021 cannot be sustained and the same is set aside.
The quantum as awarded by the DRT-II, Chennai in its order of May
06, 2019 is restored and to such extent the order of the appellate
authority is set aside.”
19. The impugned judgment of the High Court is in two-parts. In other words,
the High Court allowed the respondent’s civil revision petition setting aside the
DRAT’s order on two grounds: -
(i) First, the High Court took the view 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. The High Court held that Rule 9
sub-rule (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”). The relevant observations are reproduced
below: -
Page 14 of 81
“10. Section 74 of the Contract Act, 1872 provides for
compensation for breach of contract where the penalty is
stipulated. Section 73 of the Contract Act is the general rule that
provides for compensation for loss or damage caused by breach
of contract and Section 74 is where the quantum is specified.
What Section 73 of the Contract Act mandates is that a party
who suffers as a result of a breach committed by the other party
to the contract "is entitled to receive from the party who has
broken the contract, compensation for any loss or damage
caused to him thereby, which naturally arose in the usual course
of things from such breach, or which the parties knew, when they
made the contract, to be likely to result from the breach of it.”
Any detailed discussion on such provision would be beyond the
scope of the present lis and may require many more sheets that
may be conveniently expended in the present exercise. Indeed,
Section 73 of the Contract Act is in the nature of a
jurisprudential philosophy that is accepted as a part of the law
in this country. In short, it implies that only such of the loss or
damage suffered by the party not in breach, may be recovered
from the party in breach, as a consequence of the breach. It is
possible that as a result of the breach, the party not in breach
does not suffer any adverse impact. It is also possible, as in the
present case, that as a consequence of the breach, the party not
in breach obtains a benefit, in such cases, where no loss or
damage has been occasioned to the party not in breach, such
party cannot extract any money merely on account of such
breach, as the entitlement in law to compensation is not upon
the commission of breach, but only upon any loss or damage
suffered as a consequence thereof. That is elementary.
xxx xxx xxx
12. Rule 9(5) of the said Rules of 2002 has to be seen as an
enabling provision that permits forfeiture in principle. However,
such Rule cannot be conferred an exalted status to override the
underlying ethos of Section 73 of the Contract Act. In other
words, Rule 9(5) has to yield to the principle recognised in
Section 73 of the Contract Act or it must be read down
accordingly. Thus, notwithstanding the wide words used in Rule
9(5) of the said Rules, a secured creditor may not forfeit any
more than the loss or damage suffered by such creditor as a
consequence of the failure on the part of a bidder to make
payment of the consideration or the balance consideration in
terms of the bid. It is only if such principle as embodied in
Page 15 of 81
Section 73 of the Contract Act, is read into Rule 9(5) of the said
Rules, would there be an appropriate answer to the conundrum
as to whether a colossal default of the entirety of the
consideration or the mere default of one rupee out of the
consideration would result in the identical consequence of
forfeiture as indicated in the provision.
13. In any event, notwithstanding the reference to Section 35 of
the Act of 2002, the apparent overriding effect of the provisions
of the Act of 2002 has to be tempered in the light of Section 37
of the Act. Though Section 37 of the Act refers to several statutes
by name, the residual limb of such provision recognises "or any
other law for the time being in force", which would embrace the
Contract Act within its fold. It is completely unacceptable that
by virtue of the delegated legislation as in the Rules of 2002, the
fundamental principle envisaged in the Contract Act would get
diluted or altogether disregarded.”
(Emphasis supplied)
(ii) Secondly, the High Court was of the view that the forfeiture of the entire
earnest money deposit by the appellant amounts to unjust enrichment
which is not permissible. It observed that under the SARFAESI Act, a
secured creditor is not entitled to obtain any amount more than the debt due
to it, and as such any forfeiture under the SARFAESI Act ought to be
assessed by computing damages on the basis of evidence. The relevant
observations are reproduced below: -
“18. It was completely open to the appellate authority to enhance
the quantum as awarded by the DRT. However, such exercise
could have been undertaken by inviting evidence in such regard.
The appellate authority purported to enhance the quantum from
Rs 5 lakh to Rs 55 lakh without indicating any or cogent grounds
for such enhancement. Though an element of guesstimation is
permitted while assessing damages, when an initial authority has
indicated a ballpark figure, any tinkering with such figure at the
appellate stage would require material in support thereof, which
Page 16 of 81
is completely lacking in the judgment and order impugned dated
July 30, 2021 passed by the appellate authority in the present
case.
xxx xxx xxx
20. Before parting, there is another aspect that has to be referred
to for the completeness of the discussion. The purpose of the Act
of 2002 is to ensure speedy recovery of the debt due to secured
creditors covered by such statute. Towards such end, the
provisions of the said Act and the Rules made thereunder give
primacy to the secured creditor in initially assessing the quantum
of debt due and in proceeding against the securities furnished for
realising such debt due. However, no secured creditor, not even
by embracing the provisions of the said Act of 2002, can unjustly
enrich itself or obtain any more by way of resorting to any of the
measures contemplated under Section 13(4) of the Act or
otherwise than the debt that is due to it and the costs that may
have been incurred in course of trying to recover the debt due. In
a sense, if the forfeiture provision in Rule 9(5) of the said Rules
is ready to imply what the secured creditor in this case seeks to,
it may result in a secured creditor unjustly enriching itself, which
is not permissible.”
(Emphasis supplied)
20. The plain reading of the aforesaid findings recorded by the High Court lays
down three propositions of law as follows:
(1) Rule 9(5) of the SARFAESI Rules is merely an enabling provision that
permits forfeiture in principle. It cannot override the underlying ethos of
Section 73 of the 1872 Act. It should yield to the principle recognised in
Section 73 of the 1872 Act or must be read down accordingly.
(2) By virtue of the delegated legislation as in the SARFAESI Rules, the
fundamental principle envisaged in the 1872 Act should not be permitted
to be diluted or altogether disregarded.
Page 17 of 81
(3) Rule 9(5) of the SARFAESI Rules if not read along with the principle
recognised in Section 73 of the 1872 Act, the same may result in a
secured creditor unjustly enriching itself which is not permissible.
21. In view of the aforesaid, the Bank being aggrieved with the impugned order
passed by the High Court is here before this Court with the present appeals.
C. SUBMISSIONS OF THE APPELLANT
22. Mr. Dhruv Mehta, the learned Senior Counsel appearing for the appellants
submitted that the issue framed by the High Court in its Impugned Judgment is
wholly alien to the sale conducted under the SARFAESI Rules, more particularly
Rule 9.
23. It was submitted that the High Court was not correct in reading down Rule
9(5) and holding that the same must yield to the principles recognized in Section
73 of the 1872 Act, notwithstanding the wide words used in Rule 9(5) of
SARFAESI Rules.
24. It was further submitted that the High Court failed to appreciate that the
auction sale under consideration 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.
Page 18 of 81
25. Mr. Mehta placed strong reliance on a recent decision of this Court in
Authorized Officer State Bank of India v. C. Natarajan reported in 2023 SCC
Online SC 510, wherein whilst dealing with a similar issue, it was held that Rule
9 which is part of a special enactment will have precedence over Sections 73 and
74 respectively of the 1872 Act which is a general provision.
26. It was further submitted that Rule 9(5) of the SARFAESI Rules, ought to
be interpreted strictly because often the borrowers use subversive methods to
hinder the auction process which may lead to erosion of the secured asset’s value
in light of reauctions.
27. In the last, Mr. Mehta submitted that clause 11 of the e-auction notice dated
24.10.2016 explicitly provided that the failure of the auction purchaser in paying
the balance amount would result in forfeiture of the earnest-money deposit.
28. In such circumstances referred to above, the learned Senior Counsel prayed
that there being merit in his appeals, the same be allowed and the impugned
judgment and order of the High Court be set aside.
D. SUBMISSIONS OF THE RESPONDENT
29. Dr. S. Muralidhar, the learned Senior Counsel appearing for the respondent
on the other hand vehemently submitted that no error not to speak of any error
of law could be said to have been committed by the High Court in passing the
impugned judgment and order.
Page 19 of 81
30. It was submitted that Section 35 of the SARFAESI Act only gives the Act
an overriding effect over other laws, and is not applicable to the SARFAESI
Rules made under it. Therefore Rule 9(5) of SARFASI Rules is only an enabling
provision and cannot override the statutory provisions of the 1872 Act.
31. It was submitted that the High Court committed no error in holding that the
appellant bank could not have forfeited the amount deposited by a third party
being the auction purchaser without any real damage or loss being caused to it.
32. It was further submitted that under the SARFAESI Rules, the authorized
officer is left with an unguided power of forfeiture. Such unguided power
conferred on a delegated authority like the authorized officer in a bank is opposed
to public policy and would result in unjust enrichment. Therefore, the said Rule
9(5) is liable to be struck down as unconstitutional being opposed to public policy
and principles of fair play and unreasonableness.
33. In such circumstances referred to above, it was prayed on behalf of the
respondent that there being no merit in the appeals, the same may be dismissed.
E. ANALYSIS (Points for Determination)
34. Having heard the learned counsel appearing for the parties and having gone
through the materials on record, the following questions fall for our
consideration: -
Page 20 of 81
I. Whether, the underlying principle of Section(s) 73 & 74 respectively of the
1872 Act is 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?
i) Legislative History and Scheme of the SARFAESI Act
35. Till early 1990s, the civil suits were being filed for recovery of the dues of
banks and financial institutions under the Act 1882 and the Code of Civil
Procedure, 1908 (“CPC”). Due to various difficulties the banks and financial
institutions had to face in recovering loans and enforcement of securities, the
Parliament enacted the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (for short, the “RDBFI Act”).
36. On account of lack of infrastructure and manpower, the regular civil courts
were not in a position to cope up with the speed in the adjudication of recovery
Page 21 of 81
cases. In the light of recommendations of the Tiwari Committee the special
tribunals came to be set up under the provisions of the RDBFI Act referred to
above for the recovery of huge accumulated NPA of the Bank loans.
37. On the continuing rise in number of Non-Performing Assets (NPA) at
banks and other financial institutions in India; a poor rate of loan recovery and
the failure of the existing legislation in redressing the difficulties of recovery by
banks; the Narasimham Committee I & II and Andyarujina Committee were
constituted by the Government for examining and suggesting banking reforms in
India. These Committees in their reports observed that one out of every five
borrower was a defaulter, and that due to the long and tedious process of existing
frame work of law and the overburdening of existing forums including the
specialised tribunals under the 1993 Act, any attempt of recovery with the
assistance of court/tribunal often rendered the secured asset nearly worthless due
to the long delays. In this background the Committees thus, proposed new laws
for securitisation in order to permit banks and financial institutions to hold
securities and sell them in a timely manner without the involvement of the courts.
38. On the recommendations of the Narasimham Committee and Andyarujina
Committee, the SARFAESI Act was enacted to empower the banks and financial
institutions to take possession of the securities and to sell them without
intervention of the court.
Page 22 of 81
39. The statement of objects and reasons for which the Act has been enacted
reads as under: -
“STATEMENT OF OBJECTS AND REASONS
The financial sector has been one of the key drivers in India's efforts
to achieve success in rapidly developing its economy. While the
banking industry in India is progressively complying with the
international prudential norms and accounting practices there are
certain areas in which the banking and financial sector do not have a
level playing field as compared to other participants in the financial
markets in the world. There is no legal provision for facilitating
securitisation of financial assets of banks and financial institutions.
Further, unlike international banks, the banks and financial
institutions in India do not have power to take possession of securities
and sell them. Our existing legal framework relating to commercial
transactions has not kept pace with the changing commercial
practices and financial sector reforms. This has resulted in slow pace
of recovery of defaulting loans and mounting levels of non-performing
assets of banks and financial institutions. Narasimham Committee I
and II and Andhyarujina Committee constituted by the Central
Government for the purpose of examining banking sector reforms
have considered the need for changes in the legal system in respect of
these areas. These Committees, inter alia, have suggested enactment
of a new legislation for securitisation and empowering banks and
financial institutions to take possession of the securities and to sell
them without the intervention of the court. Acting on these
suggestions, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Ordinance, 2002 was
promulgated on the 21st June, 2002 to regulate securitisation and
reconstruction of financial assets and enforcement of security interest
and for matters connected therewith or incidental thereto. The
provisions of the Ordinance would enable banks and financial
institutions to realise long-term assets, manage problem of liquidity,
asset liability mismatches and improve recovery by exercising powers
to take possession of securities, sell them and reduce nonperforming
assets by adopting measures for recovery or reconstruction."
40. This Court in Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.
reported in (2004) 4 SCC 311, examined the history and legislative backdrop that
ultimately led to the enactment of the SARFAESI Act as under: -
Page 23 of 81
“34. Some facts which need to be taken note of are that the banks
and the financial institutions have heavily financed the petitioners
and other industries. It is also a fact that a large sum of amount
remains unrecovered. Normal process of recovery of debts through
courts is lengthy and time taken is not suited for recovery of such
dues. For financial assistance rendered to the industries by the
financial institutions, financial liquidity is essential failing which
there is a blockade of large sums of amounts creating circumstances
which retard the economic progress followed by a large number of
other consequential ill effects. Considering all these circumstances,
the Recovery of Debts Due to Banks and Financial Institutions Act
was enacted in 1993 but as the figures show it also did not bring the
desired results. Though it is submitted on behalf of the petitioners
that it so happened due to inaction on the part of the Governments
in creating Debts Recovery Tribunals and appointing presiding
officers, for a long time. Even after leaving that margin, it is to be
noted that things in the spheres concerned are desired to move faster.
In the present-day global economy it may be difficult to stick to old
and conventional methods of financing and recovery of dues. Hence,
in our view, it cannot be said that a step taken towards securitisation
of the debts and to evolve means for faster recovery of NPAs was not
called for or that it was superimposition of undesired law since one
legislation was already operating in the field, namely, the Recovery
of Debts Due to Banks and Financial Institutions Act. It is also to be
noted that the idea has not erupted abruptly to resort to such a
legislation. It appears that a thought was given to the problems and
the Narasimham Committee was constituted which recommended for
such a legislation keeping in view the changing times and economic
situation whereafter yet another Expert Committee was constituted,
then alone the impugned law was enacted. Liquidity of finances and
flow of money is essential for any healthy and growth-oriented
economy. But certainly, what must be kept in mind is that the law
should not be in derogation of the rights which are guaranteed to the
people under the Constitution. The procedure should also be fair,
reasonable and valid, though it may vary looking to the different
situations needed to be tackled and object sought to be achieved.
xxx xxx xxx
36. In its Second Report, the Narasimham Committee observed that
NPAs in 1992 were uncomfortably high for most of the public sector
banks. In Chapter VIII of the Second Report the Narasimham
Committee deals about legal and legislative framework and
observed:
Page 24 of 81
“8.1. A legal framework that clearly defines the rights and
liabilities of parties to contracts and provides for speedy
resolution of disputes is a sine qua non for efficient trade and
commerce, especially for financial intermediation. In our system,
the evolution of the legal framework has not kept pace with
changing commercial practice and with the financial sector
reforms. As a result, the economy has not been able to reap the
full benefits of the reforms process. As an illustration, we could
look at the scheme of mortgage in the Transfer of Property Act,
which is critical to the work of financial intermediaries….”
One of the measures recommended in the circumstances was to vest
the financial institutions through special statutes, the power of sale
of the assets without intervention of the court and for reconstruction
of assets. It is thus to be seen that the question of non-recoverable or
delayed recovery of debts advanced by the banks or financial
institutions has been attracting attention and the matter was
considered in depth by the Committees specially constituted
consisting of the experts in the field. In the prevalent situation where
the amounts of dues are huge and hope of early recovery is less, it
cannot be said that a more effective legislation for the purpose was
uncalled for or that it could not be resorted to. It is again to be noted
that after the Report of the Narasimham Committee, yet another
Committee was constituted headed by Mr Andhyarujina for bringing
about the needed steps within the legal framework. We are therefore,
unable to find much substance in the submission made on behalf of
the petitioners that while the Recovery of Debts Due to Banks and
Financial Institutions Act was in operation it was uncalled for to
have yet another legislation for the recovery of the mounting dues.
Considering the totality of circumstances and the financial climate
world over, if it was thought as a matter of policy to have yet speedier
legal method to recover the dues, such a policy decision cannot be
faulted with nor is it a matter to be gone into by the courts to test the
legitimacy of such a measure relating to financial policy.”
41. In this regard, reference may be made to the following observations of this
Court in the case of United Bank of India v. Satyawati Tondon & Ors. reported
in (2010) 8 SCC 110. The relevant paras are being reproduced hereunder:
“1. … With a view to give impetus to the industrial development of
the country, the Central and State Governments encouraged the
Page 25 of 81
banks and other financial institutions to formulate liberal policies
for grant of loans and other financial facilities to those who wanted
to set up new industrial units or expand the existing units. Many
hundred thousand took advantage of easy financing by the banks
and other financial institutions but a large number of them did not
repay the amount of loan, etc. Not only this, they instituted frivolous
cases and succeeded in persuading the civil courts to pass orders of
injunction against the steps taken by banks and financial institutions
to recover their dues. Due to lack of adequate infrastructure and
non-availability of manpower, the regular courts could not
accomplish the task of expeditiously adjudicating the cases
instituted by banks and other financial institutions for recovery of
their dues. As a result, several hundred crores of public money got
blocked in unproductive ventures.
2. In order to redeem the situation, the Government of India
constituted a committee under the Chairmanship of Shri T. Tiwari
to examine the legal and other difficulties faced by banks and
financial institutions in the recovery of their dues and suggest
remedial measures. The Tiwari Committee noted that the existing
procedure for recovery was very cumbersome and suggested that
special tribunals be set up for recovery of the dues of banks and
financial institutions by following a summary procedure. The Tiwari
Committee also prepared a draft of the proposed legislation which
contained a provision for disposal of cases in three months and
conferment of power upon the Recovery Officer for expeditious
execution of orders made by adjudicating bodies.”
42. Section 13 of the SARFAESI Act contains the provisions relating to the
enforcement of the security interest and the manner in which the same may be
done by the secured creditor without the intervention of the court or ribunal in
accordance with its provisions.
43. Rules 8 and 9 respectively of the SARFAESI Rules prescribe the procedure
and formalities to be followed for the sale of immovable secured asset as per
Section 13 of the SARFAESI Act. In the present lis, we are concerned with
Page 26 of 81
Rule 9 more particularly sub-rule (5) of the SARFAESI Rules which provides for
forfeiture of 25% of the deposit made under sub-rule (3) in the event the
successful auction purchaser fails to pay the balance amount within the stipulated
time period under sub-rule (4). The said Rule reads as under: -
“9. Time of sale, issue of sale certificate and delivery of
possession, etc.–(1) No sale of immovable property under these
rules, in first instance shall take place before the expiry of thirty
days from the date on which the public notice of sale is published
in newspapers as referred to in the proviso to sub-rule (6) of rule
8 or notice of sale has been served to the borrower:
Provided further that if sale of immovable property by any one of
the methods specified by sub-rule (5) of rule 8 fails and sale is
required to be conducted again, the authorised officer shall serve,
affix and publish notice of sale of not less than fifteen days to the
borrower, for any subsequent sale.
(2) The sale shall be confirmed in favour of the purchaser who has
offered the highest sale price in his bid or tender or quotation or
offer to the authorised officer and shall be subject to confirmation
by the secured creditor:
Provided that no sale under this rule shall be confirmed, if the
amount offered by sale price is less than the reserve price, specified
under sub-rule (5) of rule 8:
Provided further that if the authorised officer fails to obtain a price
higher than the reserve price, he may, with the consent of the
borrower and the secured creditor effect the sale at such price.
(3) On every sale of immovable property, the purchaser shall
immediately, i.e. on the same day or not later than next working
day, as the case may be, pay a deposit of twenty five per cent. of
the amount of the sale price, which is inclusive of earnest money
deposited, if any, to the authorised officer conducting the sale and
in default of such deposit, the property shall be sold again;
Page 27 of 81
(4) The balance amount of purchase price payable shall be paid by
the purchaser to the authorised officer on or before the fifteenth
day of confirmation of sale of the immovable property or such
extended period as may be agreed upon in writing between the
purchaser and the secured creditor, in any case not exceeding three
months.
(5) In default of payment within the period mentioned in sub-rule
(4), the deposit shall be forfeited to the secured creditor and the
property shall be resold and the defaulting purchaser shall forfeit
all claim to the property or to any part of the sum for which it may
be subsequently sold.
(6) On confirmation of sale by the secured creditor and if the terms
of payment have been complied with, the authorised officer
exercising the power of sale shall issue a certificate of sale of the
immovable property in favour of the purchaser in the Form given
in Appendix V to these rules.
(7) Where the immovable property sold is subject to any
encumbrances, the authorised officer may, if he thinks fit, allow the
purchaser to deposit with him the money required to discharge the
encumbrances and any interest due thereon together with such
additional amount that may be sufficient to meet the contingencies
or further cost, expenses and interest as may be determined by him.
Provided that if after meeting the cost of removing encumbrances
and contingencies there is any surplus available out of money
deposited by the purchaser such surplus shall be paid to the
purchaser within fifteen days, from date of finalisation of the sale.
(8) On such deposit of money for discharge of the encumbrances,
the authorised officer shall issue or cause the purchaser to issue
notices to the persons interested in or entitled to the money
deposited with him and take steps to make, the payment
accordingly.
(9) The authorised officer shall deliver the property to the
purchaser free from encumbrances known to the secured creditor
on deposit of money as specified in sub-rule (7) above.
(10) The certificate of sale issued under sub-rule (6) shall
specifically mention that whether the purchaser has purchased the
Page 28 of 81
immovable secured asset free from any encumbrances known to the
secured creditor or not.”
44. Section 35 of the SARFAESI Act contains the overriding clause and
provides that the Act shall override any other law which is inconsistent with its
provisions, and reads as under: -
“35. The provisions of this Act to override other laws.–The
provisions of this Act shall have effect, notwithstanding anything
inconsistent therewith contained in any other law for the time being
in force or any instrument having effect by virtue of any such law.”
45. Section 37 of the SARFAESI Act provides that the provisions of the
SARFAESI Act shall be in addition to the Acts mentioned in or and any other
law for the time being in force and that the other laws shall also be applicable
alongside the SARFAESI Act, and reads as under: -
“37. Application of other laws not barred.–The provisions of this Act
or the rules made thereunder shall be in addition to, and not in
derogation of, the Companies Act, 1956 (1 of 1956), the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and
Exchange Board of India Act, 1992 (15 of 1992), the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)
or any other law for the time being in force.”
46. This Court in Madras Petrochem Ltd. & Anr. v. Board for Industrial and
Financial Reconstruction & Ors. reported in (2016) 4 SCC 1, recapitulated the
object behind the enactment of the SARFAESI Act and in that context examined
the purpose of Sections 13, 35 and 37 respectively of the SARFAESI Act with
the following observations given as under: -
“16. It is important at this stage to refer to the genesis of these
three legislations. Each of them deals with different aspects of
Page 29 of 81
recovery of debts due to banks and financial institutions. Two of
them refer to creditors' interests and how best to deal with recovery
of outstanding loans and advances made by them on the one hand,
whereas the Sick Industrial Companies (Special Provisions) Act,
1985, on the other hand, deals with certain debtors which are sick
industrial companies [i.e. companies running industries named in
the Schedule to the Industries (Development and Regulation) Act,
1951] and whether such “debtors” having become “sick”, are to
be rehabilitated. The question, therefore, is whether the public
interest in recovering debts due to banks and financial institutions
is to give way to the public interest in rehabilitation of sick
industrial companies, regard being had to the present economic
scenario in the country, as reflected in parliamentary legislation.
xxx xxx xxx
19. While this Act had worked for a period of about 7 years, the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993 was brought into force, pursuant to various committee
reports. The Statement of Objects and Reasons for this Act reads
as follows:
Statement of Objects and Reasons of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993
“1. Banks and financial institutions at present experience
considerable difficulties in recovering loans and enforcement
of securities charged with them. The existing procedure for
recovery of debts due to the banks and financial institutions
has blocked a significant portion of their funds in
unproductive assets, the value of which deteriorates with the
passage of time. The Committee on the Financial System
headed by Shri M. Narasimham has considered the setting up
of the Special Tribunals with special powers for adjudication
of such matters and speedy recovery as critical to the
successful implementation of the financial sector reforms. An
urgent need was, therefore, felt to work out a suitable
mechanism through which the dues to the banks and financial
institutions could be realised without delay. In 1981, a
Committee under the Chairmanship of Shri T. Tiwari had
examined the legal and other difficulties faced by banks and
financial institutions and suggested remedial measures
including changes in law. The Tiwari Committee had also
suggested setting up of Special Tribunals for recovery of dues
Page 30 of 81
of the banks and financial institutions by following a summary
procedure. The setting up of Special Tribunals will not only
fulfil a long-felt need, but also will be an important step in the
implementation of the Report of Narasimham Committee.
Whereas on 30-9-1990 more than fifteen lakhs of cases filed
by the public sector banks and about 304 cases filed by the
financial institutions were pending in various courts, recovery
of debts involved more than Rs 5622 crores in dues of public
sector banks and about Rs 391 crores of dues of the financial
institutions. The locking up of such huge amount of public
money in litigation prevents proper utilisation and recycling
of the funds for the development of the country.
2. The Bill seeks to provide for the establishment of Tribunals
and Appellate Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions.
Notes on clauses explain in detail the provisions of the Bill.”
20. The Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 took away the jurisdiction of the courts and vested this
jurisdiction in tribunals established by the Act so as to ensure
speedy recovery of debts due to the banks and financial institutions
mentioned therein. This Act also included one appeal to the
Appellate Tribunal, and transfer of all suits or other proceedings
pending before any court to tribunals set up under the Act. The Act
contained a non obstante clause in Section 34 stating that its
provisions will have effect notwithstanding anything inconsistent
contained in any other law for the time being in force or in any
instrument having effect by virtue of any other law. In the year
2000, this Act was amended so as to incorporate a new sub-section
(2) in Section 34 together with a saving provision in sub-section
(1). It is of some interest to note that this Act was to be in addition
to and not in derogation of various Financial Corporation Acts and
the Sick Industrial Companies (Special Provisions) Act, 1985.
Clearly, therefore, the object of the 2000 Amendment to the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993 was to make the Sick Industrial Companies (Special
Provisions) Act, 1985 prevail over it.
21. Regard being had to the poor working of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993, the
Securitisation and Reconstruction of Financial Assets and
Page 31 of 81
Enforcement of Security Interest Act, 2002 was brought into force
in the year 2002. …
22. This 2002 Act was brought into force as a result of two
committee reports which opined that recovery of debts due to banks
and financial institutions was not moving as speedily as expected,
and that, therefore, certain other measures would have to be put in
place in order that these banks and financial institutions would
better be able to recover debts owing to them.
xxx xxx xxx
24. The “pivotal” provision, namely, Section 13 of the said Act
makes it clear that banks and financial institutions would now no
longer have to wait for a tribunal judgment under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 to be able
to recover debts owing to them. They could, by following the
procedure laid down in Section 13, take direct action against the
debtors by taking possession of secured assets and selling them;
they could also take over the management of the business of the
borrower. They could also appoint any person to manage the
secured assets possession of which has been taken over by them,
and could require, at any time by notice in writing to any person
who has acquired any of the secured assets from the borrower and
from whom any money is due or may become due from the
borrower, to pay the secured creditor so much of the money as is
sufficient to pay the secured debt.
25. In order to further the objects of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, the Act contains a non obstante clause in Section
35 and also contains various Acts in Section 37 which are to be in
addition to and not in derogation of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. Three of these Acts, namely, the Companies Act,
1956, the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992, relate to
securities generally, whereas the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 relates to recovery of debts
due to banks and financial institutions. Significantly, under Section
41 of this Act, three Acts are, by the Schedule to this Act, amended.
We are concerned with the third of such Acts, namely, the Sick
Industrial Companies (Special Provisions) Act, 1985, in Section
Page 32 of 81
15(1) of which two provisos have been added. It is the correct
interpretation of the second of these provisos on which the fate of
these appeals ultimately hangs.”
(Emphasis supplied)
ii) Applicability of Section(s) 73 & 74 of the 1872 Act to Forfeiture under
the SARFAESI Rules.
47. Before we proceed to answer the first question formulated by us in para 34
of this judgment, we must look into the principles underlying Section 73 of the
1872 Act.
48. Section 73 of the 1872 Act deals with the compensation for loss or damage
caused by breach of contract. The same is extracted below:
“73. Compensation for loss or damage caused by breach of
contract. — When a contract has been broken, the party who suffers
by such breach is entitled to receive, from the party who has broken
the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from
such breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect
loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those
created by contract. — When an obligation resembling those
created by contract has been incurred and has not been discharged,
any person injured by the failure to discharge it is entitled to receive
the same compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.
Explanation. In estimating the loss or damage arising from a breach
of contract, the means which existed of remedying the inconvenience
caused by the non-performance of the contract must be taken into
account.”
Page 33 of 81
49. The principles underlying Section 73 of the 1872 Act are well settled. The
classic case dealing with remoteness of damages is Hadley & Anr. v. Baxendale
& Ors. reported in (1843-60) ALL E.R. Rep. 461, wherein it was observed:
“Where two parties have made a contract which one of them has
broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly
and reasonably be considered as either arising naturally, i.e.,
according to the usual course of things, from such breach of
contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties at the time they made the
contract as the probable result of the breach of it. If special
circumstances under which the contract was actually made were
communicated by the plaintiffs to the defendants, and thus known
to both parties, the damages resulting from the breach of such a
contract which they would reasonably contemplate would be the
amount of injury which would ordinarily follow from a breach of
contract under these special circumstances so known and
communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the
contract, he, at the most, could only be supposed to have had in
his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any
special circumstances, from such a breach of contract. For, had
the circumstances been known, the parties might have provided for
the breach of contract by special terms as to the damages in that
case; and of this advantage it would be very unjust to deprive
them.”
50. The above principles were explained and clarified by the Court of Appeal
in Victoria Laundry (Windsor) Ltd v. Newman Industrial Ltd., [1949] 2 K.B.
528 as under:
“(1.) It is well settled that the governing purpose of damages is to
put the party whose rights have been violated in the same position,
so far as money can do so, as if his rights had been observed: …
Page 34 of 81
(2.) In cases of breach of contract the aggrieved party is only
entitled to recover such part of the loss actually resulting as was
at the time of the contract reasonably foreseeable as liable to
result from the breach.
(3.) What was at that time reasonably so foreseeable depends on
the knowledge then possessed by the parties or, at all events, by
the party who later commits the breach.
(4.) For this purpose, knowledge “possessed” is of two kinds; one
imputed, the other actual. Everyone, as a reasonable person, is
taken to know the “ordinary course of things” and consequently
what loss is liable to result from a breach of contract in that
ordinary course. This is the subject matter of the “first rule” in
Hadley v. Baxendale 9 Exch. 341. But to this knowledge, which a
contract-breaker is assumed to possess whether he actually
possesses it or not, there may have to be added in a particular case
knowledge which he actually possesses, of special circumstances
outside the “ordinary course of things,” of such a kind that a
breach in those special circumstances would be liable to cause
more loss. Such a case attracts the operation of the “second rule”
so as to make additional loss also recoverable.
(5.) In order to make the contract-breaker liable under either rule
it is not necessary that he should actually have asked himself what
loss is liable to result from a breach. As has often been pointed
out, parties at the time of contracting contemplate not the breach
of the contract, but its performance. It suffices that, if he had
considered the question, he would as a reasonable man have
concluded that the loss in question was liable to result ….
(6.) Nor, finally, to make a particular loss recoverable, need it be
proved that upon a given state of knowledge the defendant could,
as a reasonable man, foresee that a breach must necessarily result
in that loss. It is enough if he could foresee it was likely so to result.
It is indeed enough, to borrow from the language of Lord du Parcq
in the same case, at page 158, if the loss (or some factor without
which it would not have occurred) is a “serious possibility” or a
“real danger.” …”
51. The above principles apply to grant of compensation under Section 73 of
the 1872 Act. This is clear from the decision of this Court in Karsandas H.
Thacker v. M/s. The Saran Engineering Co. Ltd. reported in AIR 1965 SC 1981.
Page 35 of 81
The Court held that when a party commits breach of contract, the other party is
entitled to receive compensation for any loss by the damage caused to him which
naturally arose in the usual course of business from such breach or which the
parties knew when they made the contract to be likely to result from the breach
of it. Remote and indirect loss or damage sustained by reason of the breach will
not entitle the party complaining breach, to any compensation. Referring to the
facts of the case and Illustration (k) to Section 73 of the 1872 Act, the Court held:
"13. …On account of the non-delivery of scrap iron, he could have
purchased the scrap iron from the market at the same controlled
price and similar incidental charges. This means that he did not
stand to pay a higher price than what he was to pay to the
respondent and therefore he could not have suffered any loss on
account of the breach of contract by the respondent. The actual loss,
which, according to the appellant, he suffered on account of the
breach of contract by the respondent was the result of his
contracting to sell 200 tons of scrap iron for export to the Export
Corporation. It may be assumed that, as stated, the market price of
scrap iron for export on January 30, 1953, was the price paid by the
Export Corporation for the purchase of scrap iron that day. As the
parties did not know and could not have known when the contract
was made in July 1952 that the scrap iron would be ultimately sold
by the appellant to the Export Corporation, the parties could not
have known of the likelihood of the loss actually suffered by the
appellant, according to him, on account of the failure of the
respondent to fulfil the contract.
14. Illustration (k) to S. 73 of the Contract Act is apt for the purpose
of this case. According to that illustration, the person committing
breach of contract has to pay to the other party the difference
between the contract price of the articles agreed to be sold and the
sum paid by the other party for purchasing another article on
account of the default of the first party, but the first party has not to
pay the compensation which the second party had to pay to third
parties as he had not been told at the time of the contract that the
second party was making the purchase of the article for delivery to
such third parties."
Page 36 of 81
52. Damages can be awarded only for the loss directly suffered on account of
the breach and not for any remote or indirect loss sustained by reason of the
breach of contract. The general rule is that where two parties enter into a contract
and one of them commits breach, the other party will be entitled to receive as
damages in respect of such breach of contract, such sum as may fairly and
reasonably be considered arising naturally, that is according to the usual course
of things, from such breach of contract itself or such as may reasonably be
supposed to have been in the contemplation of both parties at the time they made
the contract, as the probable result of the breach of it. If any special circumstances
about the dependency of the performance of other contract(s) by the party
complaining of the breach, on the performance of the contract in dispute by the
party in breach, had been communicated to the party in breach, and thus known
to both parties at the time of entering into the contract, then the damages for the
breach of the contract in dispute, may include the compensation for the loss
suffered in regard to such other dependent contracts. But, on the other hand, if the
special circumstances were not made known to the party breaking the contract,
the party breaking the contract, at the most, could only be supposed to have had
in its contemplation the amount of injury which would arise generally and directly
and not any remote or unknown loss or damage.
53. What would be a ‘penalty’ under Section 74 of the 1872 Act was explained
by this Court in K. P. Subbarama Sastri and others v. K. S. Raghavan & Ors.
reported in (1987) 2 SCC 424 as under:
Page 37 of 81
“5. …The question whether a particular stipulation in a
contractual agreement is in the nature of a penalty has to be
determined by the court against the background of various relevant
factors, such as the character of the transaction and its special
nature, if any, the relative situation of the parties, the rights and
obligations accruing from such a transaction under the general law
and the intention of the parties in incorporating in the contract the
particular stipulation which is contended to be penal in nature. If
on such a comprehensive consideration, the court finds that the real
purpose for which the stipulation was incorporated in the contract
was that by reason of its burdensome or oppressive character it
may operate in terrorem over the promiser so as to drive him to
fulfil the contract, then the provision will be held to be one by way
of penalty."
54. The SARFAESI Rules, more particularly Rule 9 was first examined by this
Court in Rakesh Birani (Dead) through LRs v. Prem Narain Sehgal & Anr.
reported in (2018) 5 SCC 543, wherein the entire auction process under Rule 9
was explained. The relevant observations read as under: -
“8. In order to comprehend the rival submissions, it is necessary
to ponder as to intendment of Rule 9 of the 2002 Rules which deals
with the time of sale, issues of sale certificate and delivery of
possession, etc. Public notice of sale is to be published in the
newspaper and only after thirty days thereafter, the sale of
immovable property can take place. Under Rule 9(2) of the 2002
Rules, the sale is required to be confirmed in favour of the
purchaser who has offered the highest sale price to the authorised
officer and shall be subject to confirmation by the secured
creditor. The proviso makes it clear that sale under the said Rule
would be confirmed if the amount offered and the whole price is
not less than the reserved price as specified in Rule 9(5). It is
apparent that Rule 9(1) does not deal with the confirmation by the
authorised officer. It only provides confirmation by the secured
creditor.
9. Rule 9(3) makes it clear that on every sale of immovable
property, the purchaser on the same day or not later than next
working day, has to make a deposit of twenty-five per cent of the
Page 38 of 81
amount of the sale price, which is inclusive of earnest money
deposited if any. Rule 9(4) makes it clear that balance amount of
the purchase price payable shall be paid by the purchaser to the
authorised officer on or before the fifteenth day of “confirmation
of sale of the immovable property” or such extended period as may
be agreed upon in writing between the purchaser and the secured
creditor. Thus, Rule 9(2) makes it clear that after confirmation by
the secured creditor the amount has to be deposited. Rule 9(3) also
makes it clear that period of fifteen days has to be computed from
the date of confirmation.”
55. This Court in Rakesh Birani (supra) while interpreting Rule 9(5) of the
SARFAESI Rules made the following pertinent observations: -
a. That, the liability of a successful auction purchaser to deposit the requisite
amount begins from the date when the sale is confirmed by the secured
creditor and communicated to the auction purchaser, wherein 25% of the
amount has to be deposited as earnest money no later than the next working
day from the date of confirmation and the balance amount within 15 days from
the said date.
b. That for forfeiture of the 25% earnest money deposit of the auction purchaser,
twin conditions have to be satisfied being (i) First, that the sale must have
been confirmed by the secured creditor and (ii) second, there is a default in
payment of the balance 75% of the amount.
c. Once the afore-stated conditions are satisfied i.e., the auction purchaser after
confirmation of sale fails to deposit the balance amount within the stipulated
time, the secured creditor is required to forfeit the original auction purchaser’s
earnest money deposit and the secured assets have to be resold.
Page 39 of 81
d. The relevant observations are being reproduced below: -
“10. In this case, confirmation has been made and communicated
on 27-2- 2013 and within fifteen days thereof i.e. on 13-3-2018,
the amount of twenty-five per cent had been deposited. Thereafter,
sale certificate has been issued under Rule 9(6). Rule 9(5) also
makes it clear that in default of payment within the period
mentioned in Rule 9(4), the deposit shall be forfeited. There cannot
be any forfeiture of the amount of 25% in deposit until and unless
the sale is confirmed by the secured creditor and there is a default
of payment of 75% of the amount. The interpretation made by the
High Court thus cannot be accepted.
11. If we read the provisions otherwise then we find even before
the confirmation of sale within fifteen days, the amount would be
forfeited by the authorised officer who may decide not to confirm
the sale that would be a result not contemplated in Rules 9(2), 9(4)
and 9(5) which fortify our conclusion that it is only after the
confirmation is made under Rule 9(4) that amount has to be
deposited and on failure to deposit the amount, twenty-five per
cent amount has to be forfeited and property has to be resold….”
(Emphasis supplied)
56. In Agarwal Tracom Private Limited v. Punjab National Bank & Ors.
reported in (2018) 1 SCC 626, this Court held that the act of forfeiture of the
earnest money deposit by the secured creditor is a measure under Section 13(4)
of the SARFAESI Act and thus, challengeable before the DRT under Section 17
of the SARFAESI Act. The relevant observations are reproduced below: -
“28. We also notice that Rule 9(5) confers express power on the
secured creditor to forfeit the deposit made by the auction-
purchaser in case the auction-purchaser commits any default in
paying instalment of sale money to the secured creditor. Such
action taken by the secured creditor is, in our opinion, a part of
the measures specified in Section 13(4) and, therefore, it is
regarded as a measure taken Under Section 13(4) read with Rule
9(5)….”
(Emphasis supplied)
Page 40 of 81
57. It appears that the High Court whilst passing the impugned order was of
the view that the legislature had provided for forfeiture under the SARFAESI
Rules as a relief to the secured creditor for the breach of obligation by the auction
purchaser. Thus, it was of the view that Section 73 of the 1872 Act will be
applicable to forfeiture under Rule 9(5) of the SARFAESI Rules and any
forfeiture will only be allowed to the extent of the loss or damage suffered by the
secured creditor.
58. This Court in C. Natarajan (supra) whilst dealing with a similar issue
pertaining to the applicability of Section(s) 73 and 74 of the 1872 Act on
forfeiture under Rule 9(5) of the SARFAESI Rules, answered the same in a
negative. The said decision is in two parts: -
a) It held that as the SARFAESI Act is a special enactment with overriding
effect over other laws by virtue of Section(s) 35 and 37, the 1872 Act more
particularly Section(s) 73 and 74 will not be applicable to Rule 9(5) of the
SARFAESI Rules especially since the rules framed under a statute become
part of the statute.
“20. In terms of the Indian Contract Act, 1872 (for brevity
“Contract Act”, hereafter), a person can withdraw his offer before
acceptance. However, once a party expresses willingness to enter
into a contractual relationship subject to terms and conditions and
makes an offer which is accepted but thereafter commits a breach
of contract, he does so at his own risk and peril and naturally has
to suffer the consequences. We are not oblivious of the terms of
section 73 and section 74 of the Contract Act, being part of
Page 41 of 81
Chapter VI thereof titled “Of the Consequence of Breach of
Contract”. These sections, providing for compensation for breach
of contract and for liquidated damages, have remained on the
statute book for generations and permit the party suffering the
breach to recover such quantum of loss or damage from the party
in breach. However, with changing times, the minds of people are
also changing. The judiciary, keeping itself abreast of the changes
that are bound to occur in an evolving society, must interpret new
laws that are brought in operation to suit the situation
appropriately. In the current era of globalization, the entire
philosophy of society, mainly on the economic front is making
rapid strides towards changes. Unscrupulous people have been
inventing newer modes and mechanisms for defrauding and
looting the nation. It is in such a scenario that provisions of
enactments, particularly those provisions which have a direct
bearing on the economy of the nation, must receive such
interpretation so that it not only fosters economic growth but is
also in tune with the intention of the law-makers in introducing a
provision such as sub-rule (5) of rule 9, which though harsh in its
operation, is intended to suppress the mischief and advance the
remedy. If indeed section 73 and section 74, which are part of the
general law of contract, were sufficient to cater to the remedy, the
need to make sub-rule (5) of rule 9 as part of the Rules might not
have arisen. Additionally, insertion of sub-rule (5) with such
specificity regarding forfeiture must not have been thought of only
for reiterating what is already there. It was visualized by the law
makers that there was a need to arrest cases of deceptive
manipulation of prices at the instance of unscrupulous borrowers
by thwarting sale processes and this was the trigger for insertion
of such a provision with wide words conferring extensive powers
of forfeiture. The purpose of such insertion must have also been
aimed at instilling a sense of discipline in the intending purchasers
while they proceed to participate in the auction-sale process. At
the cost of repetition, it must not be forgotten that the SARFAESI
Act was enacted because the general laws were not found to be
workable and efficient enough to ensure liquidity of finances and
flow of money essential for any healthy and growth-oriented
economy. The decision of this Court in Mardia
Chemicals v. Union of India [(2004) 4 SCC 311], while outlawing
only a part of the SARFAESI Act and upholding the rest, has
traced the history of this legislation and the objects that
Parliament had in mind in sufficient detail. Apart from the law laid
down in such decision, these are the other relevant considerations
Page 42 of 81
which ought to be borne in mind while examining a challenge to a
forfeiture order.
21. There is one other aspect which is, more often than not, glossed
over. In terms of sub-rule (5) of rule 9, generally, forfeiture would
be followed by an exercise to resell the immovable property. On
the date an order of forfeiture is in contemplation of the authorized
officer of the secured creditor for breach committed by the bidder,
factually, the position is quite uncertain for the former in that there
is neither any guarantee of his receiving bids pursuant to a future
sale, much to the satisfaction of the secured creditor, nor is there
any gauge to measure the likely loss to be suffered by it (secured
creditor) if no bidders were interested to purchase the immovable
property. Since the extent of loss cannot be immediately foreseen
or calculated, such officers may not have any option but to order
forfeiture of the amount deposited by the defaulting bidder in an
attempt to recover as much money as possible so as to reduce the
secured debt. That the immovable property is later sold at the same
price or at a price higher than the one which was offered by the
party suffering the forfeiture is not an eventuality that occurs in
each and every case. Sections 73 and 74 of the Contract Act would
not, therefore, be sufficient to take care of the interest of the
secured creditor in such a case and that also seems to be another
reason for bringing in the provision for forfeiture in rule 9.
Ordinarily, therefore, validity of an order of forfeiture must be
judged considering the circumstances that were prevailing on the
date it was made and not based on supervening events.
22. Does sub-rule (5) of rule 9, which is part of a delegated
legislation, i.e., the Rules, have the effect of diluting section 73 and
section 74 of the Contract Act? We have considered it necessary
to advert to this question as it is one of general importance and
are of the considered opinion that the answer must be in the
negative. While the Contract Act embodies the general law of
contract, the SARFAESI Act is a special enactment, inter alia, for
enforcement of security interest without intervention of court. Rule
9(5) providing for forfeiture is part of the Rules, which have
validly been framed in exercise of statutory power conferred by
section 38 of the SARFAESI Act. Law is well settled that rules,
when validly framed, become part of the statute. Apart from the
presumption as to constitutionality of a statute, the contesting
respondent did not mount any challenge to sub-rule (5) of rule 9
Page 43 of 81
of the Rules. The applicability and enforcement of sub-rule (5) of
rule 9 on its terms, therefore, has to be secured in appropriate
cases.”
(Emphasis supplied)
b) That if Rule 9(5) is interpreted in light of Section(s) 73 and 74 of the 1872
Act, then the very auction process could be set at naught by a mischievous
or devious borrower by ‘gaming’ the auction through sham bids.
“18. Having regard to the terms of rule 9, the notice for auction
constitutes the ‘invitation to offer’; the bids submitted by the
bidders constitute the ‘offer’ and upon confirmation of sale in
favour of the highest bidder under sub-rule (2) of rule 9, the
contract comes into existence. Once the contract comes into
existence, the bidder is bound to honour the terms of the statute
under which the auction is conducted and suffer consequences for
breach, if any, as stipulated. Rule 9(5) legislatively lays down a
penal consequence. ‘Forfeiture’ referred to in sub-rule (5) of rule
9, in the setting of the SARFAESI Act and the Rules, has to be
construed as denoting a penalty that the defaulting bidder must
suffer should he fail to make payment of the entire sale price within
the period allowed to him by the authorized officer of a secured
creditor.
19. Though it is true that the power conferred by sub-rule (5) of
rule 9 of the Rules ought not to be exercised indiscriminately
without having due regard to all relevant facts and circumstances,
yet, the said sub-rule ought also not be read in a manner so as to
render its existence only on paper. Drawing from our experience
on the Bench, it can safely be observed that in many a case the
borrowers themselves, seeking to frustrate auction sales, use their
own henchmen as intending purchasers to participate in the
auction but thereafter they do not choose to carry forward the
transactions citing issues which are hardly tenable. This leads to
auctions being aborted and issuance of fresh notices. Repetition of
such a process of participation-withdrawal for a couple of times
or more has the undesirable effect of rigging of the valuation of
the immovable property. In such cases, the only perceivable loss
suffered by a secured creditor would seem to be the extent of
expenses incurred by it in putting up the immovable property for
Page 44 of 81
sale. However, what does generally escape notice in the process is
that it is the mischievous borrower who steals a march over the
secured creditor by managing to have a highly valuable property
purchased by one of its henchmen for a song, thus getting such
property freed from the clutches of mortgage and by diluting the
security cover which the secured creditor had for its loan
exposure. Bearing in mind such stark reality, sub-rule (5) of rule
9 cannot but be interpreted pragmatically to serve twin purposes
— first, to facilitate due enforcement of security interest by the
secured creditor (one of the objects of the SARFAESI Act); and
second, to prohibit wrong doers from being benefitted by a liberal
construction thereof.”
(Emphasis supplied)
a. Forfeiture under the SARFAESI Rules:
59. We, first come to the aspect of applicability of Section 73 of the 1872 Act
vis-à-vis the SARFAESI Act, more particularly Rule 9(5) of the SARFAESI
Rules. In Madras Petrochem (supra) this Court made a pertinent observation that
Sections 35 and 37 respectively of the SARFAESI Act form a unique scheme of
overriding provisions, however the scope and ambit of Section 37 is restricted
only to the securities law. The relevant portion is reproduced as under: -
“39. This is what then brings us to the doctrine of harmonious
construction, which is one of the paramount doctrines that is applied
in interpreting all statutes. Since neither Section 35 nor Section 37
of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 is subject to the other, we
think it is necessary to interpret the expression “or any other law for
the time being in force” in Section 37. If a literal meaning is given
to the said expression, Section 35 will become completely otiose as
all other laws will then be in addition to and not in derogation of the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. Obviously this could not
have been the parliamentary intendment, after providing in Section
35 that the Securitisation and Reconstruction of Financial Assets
Page 45 of 81
and Enforcement of Security Interest Act, 2002 will prevail over all
other laws that are inconsistent therewith. A middle ground has,
therefore, necessarily to be taken. According to us, the two
apparently conflicting sections can best be harmonised by giving
meaning to both. This can only be done by limiting the scope of the
expression “or any other law for the time being in force” contained
in Section 37. This expression will, therefore, have to be held to
mean other laws having relation to the securities market only, as the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
is the only other special law, apart from the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, dealing with recovery of debts due to banks and
financial institutions. On this interpretation also, the Sick Industrial
Companies (Special Provisions) Act, 1985 will not be included for
the obvious reason that its primary objective is to rehabilitate sick
industrial companies and not to deal with the securities market.”
(Emphasis supplied)
60. The aforesaid view came to be reaffirmed by this Court in another decision
in Celir LLP. v. Bafna Motors (Mumbai) Pvt. Ltd. & Ors. reported in 2023 SCC
OnLine SC 1209, wherein it was held that only those laws which have been either
enumerated in Section 37 of the SARFAESI Act or which occupy and deal with
the same field as the SARFAESI Act will be applicable in addition to the
SARFAESI Act. The relevant observations are being reproduced below: -
“72. Thus, it appears from a combined reading of the decisions
rendered by this Court in Madras Petrochem (supra) and M.D.
Frozen Foods Exports (supra) that this Court has consistently
construed that only those laws which have either been enumerated
in Section 37 SARFAESI Act or similar to it would be applicable
in addition to the SARFAESI Act i.e., laws which deal with
securities or occupy the same field as the SARFAESI Act. Thus,
even on this aspect, we are of the view that the Act, 1882 would
not be applicable in addition to the SARFAESI Act. Suffice to say,
that in view of the above discussion, the statutory right of
redemption under the Act, 1882 will not be applicable to the
Page 46 of 81
SARFAESI Act at least in view of the amended Section 13(8) and
any right of redemption of a borrower must be found within the
SARFAESI Act in terms of the amended Section 13(8).”
(Emphasis supplied)
61. The legislature through Rule 9(5) of the SARFAESI Rules, has made a
conscious departure from the general law by statutorily providing for the
forfeiture of earnest-money deposit of the successful auction purchaser for its
failure in depositing the balance consideration within the statutory period. No
doubt, the forfeiture is a result of a breach of obligation, but the consequence of
forfeiture in such case is taking place not because of the breach but because of
operation of the statutory provision providing for forfeiture that is attracted as a
result of the breach.
62. If the consequence of forfeiture was purely a matter of breach of contract,
then there would have been no occasion for the legislature to specifically provide
for forfeiture through the statutory provisions, and it would have simpliciter
relegated the consequences of such breach to already existing general law under
Section(s) 73 and 74 of the 1872 Act. [See C. Natarajan (supra) at Para 20]
63. However, the legislature has consciously provided for only one
consequence in the event of failure of the successful auction purchaser in
depositing the balance amount i.e., forfeiture and has not provided for imposition
of any other stipulation by the secured creditor in the event of a breach. This has
been done, keeping in mind the larger object of the SARFAESI Act, which is to
Page 47 of 81
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.
64. If Section(s) 73 and 74 respectively of the 1872 Act are interpreted so as
to be made applicable to a breach in payment of balance amount by the successful
auction purchaser, it would lead to a chilling effect in the following ways: -
(i) First, it would be quite preposterous to suggest that in an auction which
is a process meant for recovery of debt due to default of the borrower,
the balance amount if not paid by the successful auction purchaser,
another recovery proceeding would have to be initiated by the secured
creditor in terms of Section(s) 73 and 74 of the 1872 Act to recoup the
loss and expenditure occasioned to it by the defaulting successful
auction purchaser.
(ii) Secondly, such an interpretation would allow unscrupulous borrowers
being hands-in-glove with the auction purchasers 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. [See; C. Natarajan (supra) at Para 19]
Page 48 of 81
65. Thus, such an interpretation would completely defeat the very purpose and
object of the SARFAESI Act and would reduce the measures provided under
Section 13 of the SARFAESI Act to a farce and thereby undermine the country’s
economic interest.
66. At this stage, we may also answer the submission of the respondent 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. However, we are not impressed with such
submission. First, there was no challenge to the constitutional validity of Rule 9
sub-rule (5) of the SARFAESI Rules. Secondly, even as per Agarwal Tracom
(supra) it is always open for a person aggrieved by an order of forfeiture under
the SARFAESI Rules to challenge the same before the DRT under Section 17 of
the SARFAESI Act.
67. As regards the contention that the SARFAESI Rules being a delegated
legislation cannot override the substantive provisions of a statutory enactment
more particularly Section(s) 73 & 74 of the 1872 Act, the same was negatived by
this Court in C. Natarajan (supra) with the following observations: -
“22. .... We have considered it necessary to advert to this question
as it is one of general importance and are of the considered opinion
that the answer must be in the negative. While the Contract Act
embodies the general law of contract, the SARFAESI Act is a
special enactment, inter alia, for enforcement of security interest
without intervention of court. Rule 9(5) providing for forfeiture is
Page 49 of 81
part of the Rules, which have validly been framed in exercise of
statutory power conferred by section 38 of the SARFAESI Act. Law
is well settled that rules, when validly framed, become part of the
statute. …”
68. What can be discerned from the above is that the SARFAESI Act is a
special legislation with an overriding effect on the general law, and only those
legislations which are either specifically mentioned in Section 37 or deal with
securitization will apply in addition to the SARFAESI Act. Being so, the
underlying principle envisaged under Section(s) 73 & 74 of the 1872 Act which
is a general law will have no application, when it comes to the SARFAESI Act
more particularly the forfeiture of earnest-money deposit which has been
statutorily provided under Rule 9(5) of the SARFAESI Rules as a consequence
of the auction purchaser’s failure to deposit the balance amount.
b. Concept of Earnest-Money & Law on Forfeiture of Earnest-Money
Deposit:
69. This aforesaid aspect may be looked at from another angle. Section(s) 73
and 74 of the 1872 Act deal with the consequences and compensation for a breach
of contract. It enables a suffering party to recover such quantum of loss or
liquidated damages from a party in breach so as to make good the loss incurred
by it and be put in the same position prior to its losses.
70. At this juncture, it would be apposite to refer to the meaning of ‘forfeiture’.
The word forfeiture is derived from the French word ‘forfaiture’ which means
Page 50 of 81
the loss of property by violation of his own duty. The Black’s Law Dictionary
defines ‘forfeiture’ as follows [See: Henry Campbell Black on “Black’s Law
Dictionary”, 1968, 4
th
Edition]: -
“the loss of a right, privilege, or property because of a crime, breach of
obligation, or neglect of duty.”
“something (especially money or property) lost or confiscated by this
process; a penalty”
“a destruction or deprivation of some estate or right because of the
failure to perform some obligation or condition contained in a contract”
71. This Court in R.S. Joshi, Sales Tax Officer, Gujarat & Ors. v. Ajit Mills
Limited & Anr. reported in (1977) 4 SCC 98, while explaining the true purport
and meaning of the term ‘forfeiture’ observed that whether a forfeiture clause is
penal in nature must be decided in the specific setting of a statute. The relevant
observations read as under: -
“18. Coming to 'forfeiture', what is the true character of a 'forfeiture'
? Is it punitive in infliction, or merely another form of exaction of
money by one from another? If it is penal, it falls within implied
powers. If it is an act of mere transference of money from the dealer
to the State, then it falls outside the legislative entry. Such is the
essence of the decisions which we will presently consider. There was
a contention that the expression 'forfeiture' did not denote a penalty.
This, perhaps, may have to be decided in the specific setting of a
statute. But, speaking generally and having in mind the object of
Section 37 read with Section 46, we are inclined to the view that
forfeiture has a punitive impact. Black's Legal Dictionary states that
'to forfeit' is 'to lose, or lose the right to, by some error, fault, offence
or crime' 'to incur a penalty.' 'Forfeiture', as judicially annotated, is
'a punishment annexed by law to some illegal act or negligence. . . .';
'something imposed as a punishment for an offence or delinquency.'
The word, in this sense, is frequently associated with the word
'penalty', According to Black's Legal Dictionary.
Page 51 of 81
The terms 'fine', 'forfeiture' and 'penalty', are often used loosely and
even confusedly; but when a discrimination is made, the word
'penalty' is found to be generic in its character, including both fine
and forfeiture. A 'fine' is a pecuniary penalty and is commonly
(perhaps always) to be collected by suit in some form. A 'forfeiture'
is a penalty by which one loses his rights and interest in his property.
More explicitly, the U. S. Supreme Court has explained the concept
of 'forfeiture' in the context of statutory construction. Chief Justice
Taney, in the State of Maryland v. The Baltimore & Ohio RR Co. 11
L ED. 714, 712 observed:
And a provision, as in this case, that the party shall forfeit a
particular sum, in case he does not perform an act required by
law, has always, in the construction of statutes, been regarded
not as a contract with the delinquent party, but as the
punishment for an offence. Undoubtedly, in the case of
individuals, the word forfeit is construed to be the language of
contract, because contract is the only mode in which one
person can become liable to pay a penalty to another for
breach of duty, or the failure to perform an obligation. In
legislative proceedings, however, the construction is
otherwise and a forfeiture is always to be regarded as a
punishment inflicted for a violation of some duty enjoined
upon the party by law; and such, very clearly, is the meaning
of the word in the act in question
19. The same connotation has been imparted by our Court too. A
Bench has held: Bankura Municipality v. Lalji Raja and Sons, 1953
Cri LJ 1101:
According to the dictionary meaning of the word 'forfeiture'
the loss or the deprivation of goods has got to be in
consequence of a crime, offence or breach of engagement or
has to be by way of penalty of the transgression or a
punishment for an offence. Unless the loss or deprivation of
the goods is by way of a penalty or punishment for a crime,
offence or breach of engagement it would not come within the
definition of forfeiture
This word 'forfeiture' must bear the same meaning of a penalty for
breach of a prohibitory direction. The fact that there is arithmetical
identity, assuming it to be so, between the figures of the illegal
Page 52 of 81
collections made by the dealers and the amounts forfeited to the State
cannot create a conceptual confusion that what is provided is not
punishment but a transference of funds. If this view be correct, and
we hold so, the legislature, by inflicting the forfeiture, does not go
outside the crease when it hits out against the dealer and deprives
him, by the penalty of the law, of the amount illegally gathered from
the customers….”
(Emphasis supplied)
72. The privy council in Kunwar Chiranjit Singh v. Har Swarup reported in
(1926) 23 LW 172, while dealing with the concept of earnest money, had
observed as follows: -
“Earnest money is part of the purchase price when the transaction
goes forward: it is forfeited when the transaction falls through, by
reason of the fault or failure of the vendee.”
(Emphasis supplied)
73. The above referred decision of the Privy Council has been referred to and
relied upon by the High Court of Bombay in the case of Dinanath Damodar Kale
v. Malvi Mody Ranchhoddas and Co. reported in AIR 1930 Bom 213. The Court
observed as under: -
“Turning to the law in England we have a series of decisions
showing that a deposit by way of earnest in a contract for the sale
of land is distinguishable from a penalty for breach of the contract.
The cases cited to us by the appellant's counsel are all cases in
which either an instalment of the price or a part payment was by
the terms of the contract to be forfeited on breach by the purchaser.
If any authority be needed to show what the law in England is, it
may be found in the passage in Halsbury, Vol. 25, p. 398, para 681,
which was cited to us by respondents' counsel. There it is clearly
laid down that there is a distinction between a deposit and a
penalty. This distinction was referred to by the majority of the
Bench in the case of Bishan Chand v. Radha Kishan Das [(1897)
19 All. 489 = (1897) A.W.N. 123], where it was stated that a deposit
is a payment actually made or advanced and therefore Ss. 73 and
Page 53 of 81
74 of the Contract Act, have no application in such a case and are
not intended to apply to it. These sections show what is the
compensation to the seller, who is not responsible for the breach.
They contemplate a case in which he is seeking to recover
compensation for the breach. They do not contemplate a case in
which a sum of money has been paid by way of earnest. Nor is the
Contract Act necessarily exhaustive: see P. R. & Co. v.
Bhagwandas [(1909) 34 Bom. 192, = 2 I.C. 475 = 11 Bom. L.R.
335].
Furthermore, it is to be noted that in this particular contract there
was a specific condition of the sale by auction that the deposit was
to be forfeited in case of default by the purchaser and we think that
such a clause is not unreasonable and must be given effect to. Our
own High Court rules regarding the sale by the Sheriff's office (R.
391) specifically allow a deposit to be forfeited and the mere fact
that the word "may" is used in that Rule cannot be taken to mean
that only such sum out of the deposit can be forfeited as the Court
may think proper as damages following the failure of the buyer to
complete the sale.”
(Emphasis supplied)
74. Subsequently, a 5-Judge Bench of this Court in its decision in Fateh
Chand v. Balkishan Dass reported in AIR 1963 SC 1405, held that a forfeiture
clause in an ordinary contract would fall within the meaning of the words “any
other stipulation by way of penalty” of Section 74 of the 1872 Act, and thus only
a reasonable amount can be forfeited. The relevant observations are reproduced
below: -
“(10) Section 74 of the Indian Contract Act deals with the measure
of damages in two classes of cases (i) where the contract names a
sum to be paid in case of breach and (ii) where the contract
contains any other stipulation by way of penalty. We are in the
present case not concerned to decide whether a covenant of
forfeiture of deposit for due performance of a contract falls within
the first class. The measure of damages in the case of breach of a
Page 54 of 81
stipulation by way of penalty is by S. 74 reasonable compensation
not exceeding the penalty stipulated for. In assessing damages the
Court has, subject to the limit of the penalty stipulated, jurisdiction
to award such compensation as it deems reasonable having regard
to all the circumstances of the case. Jurisdiction of the Court to
award compensation in case of breach of contract is unqualified
except as to the maximum stipulated; but compensation has to be
reasonable, and that imposes upon the Court duty to award
compensation according to settled principles. The section
undoubtedly says that the aggrieved party is entitled to receive
compensation from the party who has broken the contract, whether
or not actual damage or loss is proved to have been caused by the
breach. Thereby it merely dispenses with proof of "actual loss or
damages"; it does not justify the award of compensation when in
consequence of the breach no legal injury at all has resulted,
because compensation for breach of contract can be awarded to
make good loss or damage which naturally arose in the usual
course of things, or which the parties knew when they made the
contract, to be likely to result from the breach.
(11) Before turning to the question about the compensation which
may be awarded to the plaintiff, it is necessary to consider whether
S. 74 applies to stipulations for forfeiture of amounts deposited or
paid under the contract. It was urged that the section deals in terms
with the right to receive from the party who has broken the contract
reasonable compensation and not the right to forfeit what has
already been received by the party aggrieved. There is however no
warrant for the assumption made by some of the High Courts in
India, that S. 74 applies only to cases where the aggrieved party is
seeking to receive some amount on breach of contract and not to
cases where upon breach of contract an amount received under the
contract is sought to be forfeited. In our judgment the expression
"the contract contains any other stipulation by way of penalty"
comprehensively applies to every covenant involving a penalty
whether it is for payment on breach of contract of money or delivery
of property in future, or for forfeiture of right to money or other
property already delivered. Duty not to enforce the penalty clause
but only to award reasonable compensation is statutorily imposed
upon Courts by S. 74. In all cases, therefore, where there is a
stipulation in the nature of penalty for forfeiture of an amount
deposited pursuant to the terms of contract which expressly
provides for forfeiture, the court has jurisdiction to award such sum
Page 55 of 81
only as it considers reasonable, but not exceeding the amount
specified in the contract as liable to forfeiture. We may briefly refer
to certain illustrative cases decided by the High Courts in India
which have expressed a different view.
xxx xxx xxx
(14) … The words "to be paid" which appear in the first condition
do not qualify the second condition relating to stipulation by way
of penalty. The expression "if the contract contains any other
stipulation by way of penalty" widens the operation of the section
so as to make it applicable to all stipulations by way of penalty,
whether the stipulation is to pay an amount of money, or is of
another character, as, for example, providing for forfeiture of
money already paid. There is nothing in the expression which
implies that the stipulation must be one for rendering something
after the contract is broken. There is no ground for holding that
the expression "contract contains any other stipulation by way of
penalty" is limited to cases of stipulation in the nature of an
agreement to pay money or deliver property on breach and does
not comprehend covenants under which amounts paid or property
delivered under the contract, which by the terms of the contract
expressly or by clear implication are liable to be forfeited.
(15) Section 74 declares the law as to liability upon breach of
contract where compensation is by agreement of the parties pre-
determined, or where there is a stipulation by way of penalty. But
the application of the enactment is not restricted to cases where
the aggrieved party claims relief as a plaintiff. The section does
not confer a special benefit upon any party; it merely declares the
law that notwithstanding any term in the contract pre-determining
damages or providing for forfeiture of any property by way of
penalty, the Court will award to the party aggrieved only
reasonable compensation not exceeding the amount named or
penalty stipulated. The jurisdiction of the Court is not determined
by the accidental circumstance of the party in default being a
plaintiff or a defendant in a suit. Use of the expression "to receive
from the party who has broken the contract" does not predicate
that the jurisdiction of the Court to adjust amounts which have
been paid by the party in default cannot be exercised in dealing
with the claim of the party complaining of breach of contract. The
court has to adjudge in every case reasonable compensation to
Page 56 of 81
which the plaintiff is entitled from the defendant on breach of the
contract. Such compensation has to be ascertained having regard
to the conditions existing on the date of the breach.”
(Emphasis supplied)
75. It is apposite to mention that in Fateh Chand (supra) this Court had
clarified that so far as forfeiture of earnest-money is concerned, Section 74 of the
1872 Act will not be applicable. The relevant observations are reproduced below:
“(7) The Attorney-General appearing on behalf of the defendant
has not challenged the plaintiff's right to forfeit Rs. 1,000/- which
were expressly named and paid as earnest money. He has,
however, contended that the covenant which gave to the plaintiff
the right to forfeit Rs. 24,000/- out of the amount paid by the
defendant was stipulation in the nature of penalty, and the plaintiff
can retain that amount or part thereof only if he establishes that
in consequence of the breach by the defendant, he suffered loss,
and in the view of the Court the amount or part thereof is
reasonable compensation for that loss. We agree with the
Attorney-General that the amount of Rs. 24,000/- was not of the
nature of earnest money. The agreement expressly provided for
payment of Rs. 1,000/- as earnest money, and that amount was
paid by the defendant. The amount of Rs. 24,000/- was to be paid
when vacant possession of the land and building was delivered,
and it was expressly referred to as "out of the sale price." If this
amount was also to be regarded as earnest money, there was no
reason why the parties would not have so named it in the
agreement of sale. We are unable to agree with the High Court
that this amount was paid as security for due performance of the
contract. No such case appears to have been made out in the plaint
and the finding of the High Court on that point is based on no
evidence. It cannot be assumed that because there is a stipulation
for forfeiture the amount paid must bear the character of a deposit
for due performance of the contract.”
(Emphasis supplied)
76. In another decision of this Court in Maula Bux v. Union of India reported
in 1969 (2) SCC 554, a similar view was reiterated and it was held that forfeiture
Page 57 of 81
of earnest money is not a penalty and that Section 74 of the 1872 Act will only
apply where the forfeiture is in the nature of a penalty. The relevant observations
read as under: -
“4. Under the terms of the agreements the amounts deposited by
the plaintiff as security for due performance of the contracts were
to stand forfeited in case the plaintiff neglected to perform his part
of the contract. The High Court observed that the deposits so made
may be regarded as earnest money. But that view cannot be
accepted. According to Earl Jowitt in “The Dictionary of English
Law” at p. 689; “Giving an earnest or earnest-money is a mode
of signifying assent to a contract of sale or the like, by giving to
the vendor a nominal sum (e.g. a shilling) as a token that the
parties are in earnest or have made up their minds”. As observed
by the Judicial Committee in Kunwar Chiranjit Singh v. Har
Swarup:
“Earnest money is part of the purchase price when the
transaction goes forward; it is forfeited when the transaction
falls through, by reason of the fault or failure of the vendee.”
In the present case the deposit was made not of a sum of money by
the purchaser to be applied towards part payment of the price
when the contract was completed and till then as evidencing an
intention on the part of the purchaser to buy property or goods.
Here the plaintiff had deposited the amounts claimed as security
for guaranteeing due performance of the contracts. Such deposits
cannot be regarded as earnest money. ...
5. Forfeiture of earnest money under a contract for sale of
property — Movable or immovable — If the amount is reasonable,
does not fall within Section 74. That has been decided in several
cases: Kunwar Chiranjit Singh v. Har Swarup (supra); Roshan Lal
v. Delhi Cloth and General Mills Company Ltd. Delhi, ILR 33 All.
166.; Muhammad Habibullah v. Muhammad Shafi, ILR 41 All.
324.; Bishan Chand v. Radhakishan Das, ILR 19 All. 490. These
cases are easily explained, for forfeiture of reasonable amount
paid as earnest money does not amount to imposing a penalty. But
if forfeiture is of the nature of penalty, Section 74 applies. Where
under the terms of the contract the party in breach has undertaken
Page 58 of 81
to pay a sum of money or to forfeit a sum of money which he has
already paid to the party complaining of a breach of contract, the
undertaking is of the nature of a penalty.”
(Emphasis supplied)
77. In Satish Batra v. Sudhir Rawal reported in (2013) 1 SCC 345, this Court
after a review of the entire case law starting from Fateh Chand (supra), Videocon
Properties Ltd. v. Dr. Bhalchandra Laboratories & Ors. reported in (2004) 3
SCC 711 and Shree Hanuman Cotton Mills & Ors. v. Tata Air Craft Limited
reported in (1969) 3 SCC 522, laid down the principles regarding earnest money,
which read as under: -
“9. …
“21. From a review of the decisions cited above, the
following principles emerge regarding ‘earnest’:
‘(1) It must be given at the moment at which the contract is
concluded.
(2) It represents a guarantee that the contract will be
fulfilled or, in other words, “earnest” is given to bind the
contract.
(3) It is part of the purchase price when the transaction is
carried out.
(4) It is forfeited when the transaction falls through by
reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of
the contract, on default committed by the buyer, the seller is
entitled to forfeit the earnest.””
78. This Court in Satish Batra (supra) after taking note of the decisions in
Delhi Development Authority v. Grihshapana Cooperative Group Housing
Society Ltd. reported in 1995 Supp (1) SCC 751, V. Lakshmanan v. B.R.
Mangalagiri & Ors. reported in 1995 Supp (2) SCC 33 and HUDA v. Kewal
Page 59 of 81
Krishnan Goel reported in 1996 (4) SCC 249 concluded that only that deposit
which has been given as an earnest-money for the due performance of the
obligation is liable to be forfeited in the event of a breach. The relevant
observations read as under: -
“15. The law is, therefore, clear that to justify the forfeiture of
advance money being part of 'earnest money' the terms of the
contract should be clear and explicit. Earnest money is paid or given
at the time when the contract is entered into and, as a pledge for its
due performance by the depositor to be forfeited in case of non-
performance by the depositor. There can be converse situation also
that if the seller fails to perform the contract the purchaser can also
get double the amount, if it is so stipulated. It is also the law that
part-payment of purchase price cannot be forfeited unless it is a
guarantee for the due performance of the contract. In other words,
if the payment is made only towards part-payment of consideration
and not intended as earnest money then the forfeiture clause will not
apply.”
79. Since Rule 9 sub-rule (5) provides for the forfeiture of only the earnest-
money deposit of the successful auction purchaser i.e. only 25% of the total
amount, by no stretch of imagination it can be regarded as a penal clause by virtue
of the afore-stated decisions of this Court in Fateh Chand (supra), Maula Bux
(supra) and Satish Batra and as such Section(s) 73 and 74 of the 1872 Act will
have no application.
80. Even otherwise, what is discernible from the above referred decisions of
Fateh Chand (supra), Maula Bux (supra) and Satish Batra (supra) is that there
lies a difference between forfeiture of any amount and forfeiture of earnest money
Page 60 of 81
with the former being a penal clause and the latter a general forfeiture clause. A
clause providing for forfeiture of an amount could fundamentally be in the nature
of a penalty clause or a forfeiture clause in the strict sense or even both, and the
same has to be determined in the facts of every case keeping in mind the nature
of contract and the nature of consequence envisaged by it.
81. Ordinarily, a forfeiture clause in the strict sense will not be a penal clause,
if its consequence is intended not as a sanction for breach of obligation but rather
as security for performance of the obligation. This is why Fateh Chand (supra)
Maula Bux (supra) and Satish Batra (supra) held that forfeiture of earnest-money
deposit is not a penal clause, as the deposit of earnest money is intended to signify
assent of the purchaser to the contract, and its forfeiture is envisaged as a deterrent
to ensure performance of the obligation.
82. We are conscious of the fact that in Maula Bux (supra) this Court observed
that the deposit of a sum by the purchaser as security for guaranteeing due
performance was held as a penalty. However, a close reading would reveal that
the reason why this Court held the said deposit as a penal clause was because the
said amount was paid over and above the earnest-money deposit already paid by
the purchaser in the said case and more importantly the said sum was not liable
to be adjusted against the total consideration. Hence, this Court held the same to
be a penalty rather than earnest money. The relevant observation read as under: -
Page 61 of 81
“4. ... In the present case the deposit was made not of a sum of
money by the purchaser to be applied towards part payment of the
price when the contract was completed and till then as evidencing
an intention on the part of the purchaser to buy property or goods.
Here the plaintiff had deposited the amounts claimed as security
for guaranteeing due performance of the contracts. Such deposits
cannot be regarded as earnest money. …”
(Emphasis supplied)
83. The difference between an earnest or deposit and an advance part payment
of price is now well established in law. Earnest is something given by the
Promisee to the Promisor to mark the conclusiveness of the contract. This is quite
apart from the price. It may also avail as a part payment if the contract goes
through. But even so it would not lose its character as earnest, if in fact and in
truth it was intended as mere evidence of the bargain. An advance is a part to be
adjusted at the time of the final payment. If the Promisee defaults to carry out the
contract, he loses the earnest but may recover the part payment leaving untouched
the Promisor’s right to recover damages. Earnest need not be money but may be
some gift or token given. It denotes a thing of value usually a coin of the realm
given by the Promisor to indicate that the bargain is concluded between them and
as tangible proof that he means business. Vide Howe v. Smith (1884) 27 Ch.D.
89.
84. The practice of giving earnest is current in the present day commercial
contracts. An advance is made and accepted by way of deposit or guarantee for
the due performance of the contract. The distinction between a deposit and a part
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payment is thus described by Benjamin, in his book “Treatise on the Law of Sale
of Personal Property”, 1950, 8
th
Edition at page 946: -
“A deposit is not recoverable by the buyer, for a deposit is a
guarantee that the buyer shall perform his contract and is forfeited
on his failure to do so. As regards the recovery of part payments, the
question must depend upon the terms of the particular contract. If the
contract distinguishes between the deposit and instalments of price
and the buyer is in default, the deposit is forfeited and that is all. And
in ordinary circumstances, unless the contract otherwise provides,
the seller, on rescission following the buyer's default, becomes liable
to repay the part of the part of the price paid.”
85. In Halsbury's Laws of England, third edition, volume XXXIV, page 118
the distinction between the two is thus pointed out: -
“Part of the price may be payable as a deposit. A part payment is to
be distinguished from a deposit or earnest.
A deposit is paid primarily as security that the buyer will duly accept
and pay for the goods, but, subject thereto, forms part of the price.
Accordingly, if the buyer is unable or unwilling to accept and pay for
the goods, the seller may repudiate the contract and retain the
deposit. If the seller is unable or unwilling to deliver the goods, or to
pass a good title thereto, or the contract is voidable by the buyer for
any reason, the buyer may repudiate the contract and recover the
deposit. The buyer may also recover it where, without the default of
either party, the contract is rescinded by either party pursuant to an
express power in the contract in that behalf.”
86. In G. C. Cheshire and C.H.S. Fifoot on the Law of Contracts (fifth edition)
at pages 496- 497, the position is thus summed up: -
“Where, therefore, it has been agreed that a sum of money shall be
paid by the one to the other immediately or at certain stated
intervals, the question whether in the event of rescission repayment
will be compelled depends upon the proper construction of the
contract. The object that the parties had in view in providing for the
payment must first be ascertained.
Page 63 of 81
Where the intention was that the money should form a part payment
of the full amount due, then, as we have seen, if the contract is
rescinded for the payer's default the payee is required at law to
restore the money, subject to a cross-claim for damages. If, on the
other hand, the intention was that the money should be deposited as
earnest or as a guarantee for the due performance of the payer's
obligation, the rule at common law is that if the contract is rescinded
by reason of his default the deposit is forfeited to the payer and
cannot be recovered.
In the latter case, however, and also where it has been expressly
agreed that a part payment shall be forfeited in the event of the
payer's default, equity is prepared within limits to grant relief
against the forfeiture.”
87. The observations of Mellish, L.J., in Ex parte Barrell: [L.R.] In Re.
Parnell 10 Ch. App. 512 assume importance. The learned Judge observed that
even when there is no clause in the contract as to the forfeiture of the deposit if
the purchaser repudiates the contract, he cannot have back the money if it was a
deposit, as the contract has gone off through his default. It is characteristic of a
deposit to entail forfeiture if the depositor commits breach of his obligation. On
the contrary it is inherent in a part payment of price in advance that it should be
returned to the buyer if the sale does not fructify. The buyer is not disentitled to
recover, even if he is the party in breach, because breach of contract on the part
of the buyer would only entitle the seller to sue for damages but not to forfeit the
advance. A specific forfeiture clause might operate to defeat the buyer's right of
recovery of even an advance payment. But equity might step in to relieve the
buyer from forfeiture. If the amount forfeited cannot stand the test of a genuine
pre-estimate of damages, it would be unconscionable for the seller to retain it.
Page 64 of 81
The question whether the amount is a deposit (earnest) or a part payment cannot
be determined by the presence or absence of a forfeiture clause. Whether the sum
in question is a deposit to ensure due performance of the contract or not is not
dependent on the phraseology adopted by the parties or by the presence or
otherwise of a forfeiture clause. The proportion the amount bears to the total sale
price, the need to take a deposit intended to act in terrorem, the nature of the
contract and other circumstances which cannot be exhaustively listed have to be
taken into account in ascertaining the true nature of the amount. In essence the
question is one of proper interpretation of the terms of a contract.
88. We would like to refer to a decision of the Court of Appeal in England in
Stockloser v. Johnson reported in (1954) 1 All. E.R. 630 and particularly to the
observations of Denning, L.J., which, if we may say so with respect, has set out
the legal position succinctly and with great clarity. The facts of that case need not
be set out and it would be sufficient to refer only to the principle of law laid down
by the Court of Appeal. At page 637 Denning L.J., observes thus:
“It seems to me that the cases show the law to be this. (i) When there
is no forfeiture clause, if money is handed over in part payment of
the purchase price, and then the buyer makes default as to the
balance, then, so long as the seller keeps the contract open and
available for performance, the buyer cannot recover the money, but
once the seller rescinds the contract or treats it as at an end owing
to the buyer's default, then the buyer is entitled to recover his money
by action at law, subject to a cross-claim by the seller for damages:
see Palmer v. Temple 112 E.R. 1304, Mayson v. Clouet (1924) A.C.
980, Dies v. British and International Mining and Finance
Corporation Ltd. (1939) 1 .K.B. 724 and Williams on Vendor and
Purchaser 4th ed., vol. 2, p. 1006. (ii) But when there is a forfeiture
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clause or the money is expressly paid as a deposit (which is
equivalent to a forfeiture clause) then the buyer who is in default
cannot recover the money at law at all. He may, however, have a
remedy in equity, for, despite the express stipulation in the contract,
equity can relieve the buyer from forfeiture of the money and order
the seller to repay it on such terms as the Court thinks fit.”
89. Therefore, it is clear that the forfeiture can be justified if the terms of the
contract are clear and explicit. If it is found that the earnest money was paid in
accordance with the terms of the tender for the due performance of the contract
by the Promisee, the same can be forfeited in case of non-performance by him or
her.
90. We are conscious of the decision of this 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
relevant observations are reproduced below: -
“43.1. Where a sum is named in a contract as a liquidated amount
payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if
it is a genuine pre-estimate of damages fixed by both parties and
found to be such by the court. In other cases, where a sum is named
in a contract as a liquidated amount payable by way of damages,
only reasonable compensation can be awarded not exceeding the
amount so stated. Similarly, in cases where the amount fixed is in
the nature of penalty, only reasonable compensation can be
awarded not exceeding the penalty so stated. In both cases, the
liquidated amount or penalty is the upper limit beyond which the
court cannot grant reasonable compensation.
Page 66 of 81
43.2. Reasonable compensation will be fixed on well-known
principles that are applicable to the law of contract, which are to be
found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for damage
or loss caused by a breach of contract, damage or loss caused is a
sine qua non for the applicability of the Section.
43.4. The Section applies whether a person is a plaintiff or a
defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in future.
43.6. The expression "whether or not actual damage or loss is
proved to have been caused thereby" means that where it is possible
to prove actual damage or loss, such proof is not dispensed with. It
is only in cases where damage or loss is difficult or impossible to
prove that the liquidated amount named in the contract, if a genuine
pre-estimate of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money
under a contract. Where, however, forfeiture takes place under the
terms and conditions of a public auction before agreement is
reached, Section 74 would have no application.”
(Emphasis supplied)
91. Since, the forfeiture under Rule 9(5) of the SARFAESI Rules is also taking
place pursuant to the terms & conditions of a public auction, we need not dwell
any further on the decision of Kailash Nath (supra) and leave it at that. Suffice
to say, in view of the above discussion, Section(s) 73 and 74 of the 1872 Act will
have no application whatsoever, when it comes to forfeiture of the earnest-money
deposit under Rule 9 sub-rule (5) of the SARFAESI Rules.
c. Law on the principle of ‘Reading-Down’ a provision:
92. We must deal with yet one another aspect that weighed with the High Court
while passing the Impugned Order. In the Impugned Order, the High Court also
Page 67 of 81
took the view that Rule 9(5) of the SARFAESI Rules must be read down so as to
yield to the underlying principle recognized in Section(s) 73 & 74 of the 1872
Act. This reading down of the relevant rules in the opinion of the High Court was
necessary, as otherwise irrespective of whether the default is of the entire balance
amount or only one rupee, the same harsh consequence of forfeiture would ensue
in both the cases. The relevant observations are reproduced below: -
“12. Rule 9(5) of the said Rules of 2002 has to be seen as an
enabling provision that permits forfeiture in principle. However,
such Rule cannot be conferred an exalted status to override the
underlying ethos of Section 73 of the Contract Act. In other words,
Rule 9(5) has to yield to the principle recognised in Section 73 of
the Contract Act or it must be read down accordingly. Thus,
notwithstanding the wide words used in Rule 9(5) of the said Rules,
a secured creditor may not forfeit any more than the loss or damage
suffered by such creditor as a consequence of the failure on the part
of a bidder to make payment of the consideration or the balance
consideration in terms of the bid. It is only if such principle as
embodied in Section 73 of the Contract Act, is read into Rule 9 (5)
of the said Rules, would there be an appropriate answer to the
conundrum as to whether a colossal default of the entirety of the
consideration or the mere default of one rupee out of the
consideration would result in the identical consequence of forfeiture
as indicated in the provision.”
(Emphasis supplied)
93. The principle of "reading down" a provision refers to a legal interpretation
approach where a court, while examining the validity of a statute, attempts to give
a narrowed or restricted meaning to a particular provision in order to uphold its
constitutionality. This principle is rooted in the idea that courts should make every
effort to preserve the validity of legislation and should only declare a law invalid
as a last resort.
Page 68 of 81
94. When a court encounters a provision that, if interpreted according to its
plain and literal meaning, might lead to constitutional or legal issues, the court
may opt to read down the provision. Reading down involves construing the
language of the provision in a manner that limits its scope or application, making
it consistent with constitutional or legal principles.
95. The rationale behind the principle of reading down is to avoid striking
down an entire legislation. Courts generally prefer to preserve the intent of the
legislature and the overall validity of a law by adopting an interpretation that
addresses the specific constitutional concerns without invalidating the entire
statute.
96. It is a judicial tool used to salvage the constitutionality of a statute by
giving a provision a narrowed or limited interpretation, thereby mitigating
potential conflicts with constitutional or legal principles.
97. In B.R. Enterprises v. State of U.P. & Ors. reported in (1999) 9 SCC 700,
this Court observed that the principles such as “Reading Down” emerge from the
concern of the courts towards salvaging a legislation to ensure that its intended
objectives are achieved. The relevant observations read as under: -
“81. … It is also well settled that first attempt should be made by
the courts to uphold the charged provision and not to invalidate it
merely because one of the possible interpretations leads to such a
result, howsoever attractive it may be. Thus, where there are two
possible interpretations, one invalidating the law and the other
upholding, the latter should be adopted. For this, the courts have
Page 69 of 81
been endeavouring, sometimes to give restrictive or expansive
meaning keeping in view the nature of legislation, maybe
beneficial, penal or fiscal etc. Cumulatively it is to subserve the
object of the legislation. Old golden rule is of respecting the
wisdom of legislature that they are aware of the law and would
never have intended for an invalid legislation. This also keeps
courts within their track and checks individual zeal of going
wayward. Yet in spite of this, if the impugned legislation cannot be
saved the courts shall not hesitate to strike it down. Similarly, for
upholding any provision, if it could be saved by reading it down,
it should be done, unless plain words are so clear to be in defiance
of the Constitution. These interpretations spring out because of
concern of the courts to salvage a legislation to achieve its
objective and not to let it fall merely because of a possible
ingenious interpretation. The words are not static but dynamic.
This infuses fertility in the field of interpretation. This equally
helps to save an Act but also the cause of attack on the Act. Here
the courts have to play a cautious role of weeding out the wild from
the crop, of course, without infringing the Constitution. For doing
this, the courts have taken help from the Preamble, Objects, the
scheme of the Act, its historical background, the purpose for
enacting such a provision, the mischief, if any which existed, which
is sought to be eliminated. …”
(Emphasis supplied)
98. A similar view was reiterated by this Court in its decision in Calcutta
Gujarati Education Society & Anr. v. Calcutta Municipal Corpn. & Ors.
reported in (2003) 10 SCC 533, wherein this Court observed that the rule of
“Reading Down” is only for the limited purpose of making a provision workable
so as to fulfil the purpose and object of the statute. The relevant observations read
as under: -
“35. The rule of “reading down” a provision of law is now well
recognised. It is a rule of harmonious construction in a different
name. It is resorted to smoothen the crudities or ironing out the
creases found in a statute to make it workable. In the garb of
“reading down”, however, it is not open to read words and
expressions not found in it and thus venture into a kind of judicial
Page 70 of 81
legislation. The rule of reading down is to be used for the limited
purpose of making a particular provision workable and to bring it in
harmony with other provisions of the statute. It is to be used keeping
in view the scheme of the statute and to fulfil its purposes. …”
(Emphasis supplied)
99. Thus, the principle of ‘Reading Down” a provision emanates from a very
well settled canon of law, that is, the courts while examining the validity of a
particular statute should always endeavour towards upholding its validity, and
striking down a legislation should always be the last resort. “Reading Down” a
provision is one of the many methods, the court may turn to when it finds that a
particular provision if for its plain meaning cannot be saved from invalidation and
so by restricting or reading it down, the court makes it workable so as to salvage
and save the provision from invalidation. Rule of “Reading Down” is only for the
limited purpose of making a provision workable and its objective achievable.
100. The High Court in its Impugned Order resorted to reading down Rule 9(5)
of the SARFAESI Rules not because its plain meaning would result in the
provision being rendered invalid or unworkable or the statute’s objective being
defeated, but because it would result in the same harsh consequence of forfeiture
of the entire earnest-money deposit irrespective of the extent of default in
payment of balance amount.
101. However, harshness of a provision is no reason to read down the same, if
its plain meaning is unambiguous and perfectly valid. A law/rule should be
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beneficial in the sense that it should suppress the mischief and advance the
remedy. The harsh consequence of forfeiture of the entire earnest-money deposit
has been consciously incorporated by the legislature in Rule 9(5) of the
SARFAESI Rules so as to sub-serve the larger object of the SARFAESI Act of
timely resolving the bad debts of the country. The idea behind prescribing such a
harsh consequence is not illusory, it is to attach a legal sanctity to an auction
process once conducted under the SARFAESI Act from ultimately getting
concluded.
102. Any dilution of the forfeiture provided under Rule 9(5) of the SARFAESI
Rules would result in the entire auction process under the SARFAESI Act being
set at naught by mischievous auction purchaser(s) through sham bids, thereby
undermining the overall object of the SARFAESI Act of promoting financial
stability, reducing NPAs and fostering a more efficient and streamlined
mechanism for recovery of bad debts.
103. This Court in Mardia Chemical (supra) observed that the provisions of the
SARFAESI Act & SARFAESI Rules must be interpreted keeping in mind the
economic object which is sought to be achieved by the legislature, the relevant
observations read as under: -
“34. Some facts which need to be taken note of are that the banks
and the financial institutions have heavily financed the petitioners
and other industries. It is also a fact that a large sum of amount
remains unrecovered. Normal process of recovery of debts through
courts is lengthy and time taken is not suited for recovery of such
Page 72 of 81
dues. For financial assistance rendered to the industries by the
financial institutions, financial liquidity is essential failing which
there is a blockade of large sums of amounts creating circumstances
which retard the economic progress followed by a large number of
other consequential ill effects. Considering all these circumstances,
the Recovery of Debts Due to Banks and Financial Institutions Act
was enacted in 1993 but as the figures show it also did not bring the
desired results. Though it is submitted on behalf of the petitioners
that it so happened due to inaction on the part of the Governments
in creating Debts Recovery Tribunals and appointing presiding
officers, for a long time. Even after leaving that margin, it is to be
noted that things in the spheres concerned are desired to move
faster. In the present day global economy it may be difficult to stick
to old and conventional methods of financing and recovery of dues.
Hence, in our view, it cannot be said that a step taken towards
securitisation of the debts and to evolve means for faster recovery
of NPAs was not called for or that it was superimposition of
undesired law since one legislation was already operating in the
field, namely, the Recovery of Debts Due to Banks and Financial
Institutions Act. It is also to be noted that the idea has not erupted
abruptly to resort to such a legislation. It appears that a thought
was given to the problems and the Narasimham Committee was
constituted which recommended for such a legislation keeping in
view the changing times and economic situation whereafter yet
another Expert Committee was constituted, then alone the impugned
law was enacted. Liquidity of finances and flow of money is essential
for any healthy and growth-oriented economy. But certainly, what
must be kept in mind is that the law should not be in derogation of
the rights which are guaranteed to the people under the
Constitution. The procedure should also be fair, reasonable and
valid, though it may vary looking to the different situations needed
to be tackled and object sought to be achieved.”
(Emphasis supplied)
104. Thus, the High Court committed an egregious error by proceeding to read
down Rule 9(5) of the SARFAESI Rules in the absence of the said provision
being otherwise invalid or unworkable in terms of its plain and ordinary meaning
without appreciating the purpose and object of the said provision.
Page 73 of 81
iii) Whether, the forfeiture of the entire earnest-money deposit amounts to
Unjust Enrichment?
105. The High Court whilst passing the impugned order thought fit to reduce
the extent of amount forfeited in view of the subsequent sale of the Secured Asset
by the appellant bank at much higher price than the previous auction. This in the
High Court’s opinion meant that no loss had been caused to the appellant bank,
as it had duly recovered more than its dues from the subsequent sale and as such
was not entitled to forfeit the entire amount of deposit as doing so would amount
to unjust enrichment, which is not permissible by the SARFAESI Act.
106. However, we are not in agreement with the aforesaid observations of the
High Court. When an auction fails and a fresh auction is required to be conducted
in respect of the Secured Asset, there looms a degree of uncertainty as to the
extent of bids that may be received in the future auction or whether the fresh
auction would even be successful or not. More often than not, with the efflux of
time, the value of the Secured Asset erodes. In such a case it would be
preposterous to tie or limit the forfeiture under Rule 9(5) of the SARFAESI Rules
on an eventuality or a contingency of a subsequent sale of the secured asset if
any.
107. As regards whether, the forfeiture of the entire amount of deposit even after
having recovered the entire debt amounts to unjust enrichment or not? It would
be apposite to understand what is meant by ‘unjust enrichment’.
Page 74 of 81
108. In Sahakari Khand Udyog Mandal Ltd. v. Commissioner of Central
Excise & Customs reported in (2005) 3 SCC 738, the Court observed that the
doctrine of unjust enrichment is based on equity and refers to the inequitable
retention of a benefit. The relevant observations are reproduced below: -
“31. Stated simply, “unjust enrichment” means retention of a
benefit by a person that is unjust or inequitable. “Unjust
enrichment” occurs when a person retains money or benefits which
in justice, equity and good conscience, belong to someone else.
32. The doctrine of “unjust enrichment”, therefore, is that no person
can be allowed to enrich inequitably at the expense of another. A
right of recovery under the doctrine of “unjust enrichment” arises
where retention of a benefit is considered contrary to justice or
against equity.
xxx xxx xxx
45. From the above discussion, it is clear that the doctrine of “unjust
enrichment” is based on equity and has been accepted and applied
in several cases. ...”
(Emphasis supplied)
109. Thus, from the aforesaid, it is clear 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.
110. This Court in C. Natarajan (supra) had held that forfeiture of 25% of the
deposit does not constitute as an unjust enrichment with the following relevant
observations being reproduced below: -
“35. In the light of guidance provided by the above decisions, what
needs to be ascertained first is whether the Bank received or derived
any benefit or advantage by forfeiture of 25% of the sale price. We
do not think that the Bank has been enriched, much less unjustly
Page 75 of 81
enriched, by reason of the impugned forfeiture. Receipt of 25% of
the sale price by the Bank from the contesting respondent was not
the outcome of any private negotiation or arrangement between
them. It was pursuant to a public auction, involving a process of
offer and acceptance, and it was in terms of statutory provisions
contained in the Rules, particularly rule 9(3), that money changed
hands for a definite purpose. Receipt of 25% of the sale price does
not constitute a benefit, a fortiori, retention thereof by forfeiture
cannot be termed unjust or inequitable, so as to attract the doctrine
of unjust enrichment. The Bank, as a secured creditor, is entitled in
law to enforce the security interest and in the process to initiate all
such steps and take all such measures for protection of public
interest by recovering the public money, lent to a borrower and who
has squandered it, in a manner authorized by law. The contesting
respondent participated in the auction well and truly aware of the
risk of having 25% of the sale price forfeited in case of any default
or failure on his part to make payment of the balance amount of the
sale price. Question of the Bank being enriched by a forfeiture,
which is in the nature of a statutory penalty, does not and cannot
therefore arise in the circumstances.”
(Emphasis supplied)
111. 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. The consequence envisaged
under Rule 9(5) follows irrespective of whether a subsequent sale takes place at
a higher price or not, and this forfeiture is not subject to any recovery already
made or to the extent of the debt owed. In such cases, no extent of equity can
either substitute or dilute the statutory consequence of forfeiture of 25% of
deposit under Rule 9(5) of the SARFAESI Rules.
112. This Court in National Spot Exchange Ltd. v. Anil Kohli, Resolution
Professional for Dunar Foods Ltd. reported in (2022) 11 SCC 761 after referring
Page 76 of 81
to a catena of its other judgments, had held that where the law is clear the
consequence thereof must follow. The High Court has no option but to implement
the law. The relevant observations made in it are being reproduced below: -
“15.1. In Mishri Lal [BSNL v. Mishri Lal, (2011) 14 SCC 739 : (2014)
1 SCC (L&S) 387], it is observed that the law prevails over equity if
there is a conflict. It is observed further that equity can only
supplement the law and not supplant it.
15.2. In Raghunath Rai Bareja [Raghunath Rai Bareja v. Punjab
National Bank, (2007) 2 SCC 230], in paras 30 to 37, this Court
observed and held as under : (SCC pp. 242-43)
“30. Thus, in Madamanchi Ramappa v. Muthaluru Bojjappa [AIR
1963 SC 1633] (vide para 12) this Court observed: (AIR p. 1637)
‘12. … [W]hat is administered in Courts is justice according to
law, and considerations of fair play and equity however
important they may be, must yield to clear and express provisions
of the law.’
31. In Council for Indian School Certificate Examination v. Isha
Mittal [(2000) 7 SCC 521] (vide para 4) this Court observed: (SCC
p. 522)
‘4. … Considerations of equity cannot prevail and do not permit
a High Court to pass an order contrary to the law.’
32. Similarly, in P.M. Latha v. State of Kerala [(2003) 3 SCC 541 :
2003 SCC (L&S) 339] (vide para 13) this Court observed: (SCC p.
546)
‘13. Equity and law are twin brothers and law should be applied
and interpreted equitably but equity cannot override written or
settled law.’
33. In Laxminarayan R. Bhattad v. State of Maharashtra [(2003) 5
SCC 413] (vide para 73) this Court observed: (SCC p. 436)
‘73. It is now well settled that when there is a conflict between
law and equity the former shall prevail.’
34. Similarly, in Nasiruddin v. Sita Ram Agarwal [(2003) 2 SCC
577] (vide para 35) this Court observed: (SCC p. 588)
‘35. In a case where the statutory provision is plain and
unambiguous, the court shall not interpret the same in a different
manner, only because of harsh consequences arising therefrom.’
Page 77 of 81
35. Similarly, in E. Palanisamy v. Palanisamy [(2003) 1 SCC 123]
(vide para 5) this Court observed: (SCC p. 127)
‘5. Equitable considerations have no place where the statute
contained express provisions.’
36. In India House v. Kishan N. Lalwani [(2003) 9 SCC 393] (vide
para 7) this Court held that: (SCC p. 398)
‘7. … The period of limitation statutorily prescribed has to be
strictly adhered to and cannot be relaxed or departed from for
equitable considerations.’…”
113. Thus, the High Court erred in law by holding that forfeiture of the entire
deposit under Rule 9 sub-rule (5) of the SARFAESI Rules by the appellant bank
after having already recovered its dues from the subsequent sale amounts to
unjust enrichment.
iv) Whether Any Exceptional Circumstances exist to set aside the forfeiture
of the earnest money deposit?
114. The last aspect which remains to be determined is whether any exceptional
circumstances exist to set aside the forfeiture of the respondent’s earnest money
deposit?
115. This Court in its decision in Alisha Khan v. Indian Bank (Allahabad
Bank) & Ors. reported in 2021 SCC OnLine SC 3340 had directed the refund of
the earnest-money deposit after forfeiture to the successful auction purchaser who
was unable to pay the balance amount on account of the Pandemic. The relevant
observations are being reproduced below:
“3. Having gone through the impugned judgment and orders passed
by the High Court, we are of the opinion that the High Court ought
to have allowed the refund of the amount deposited being 25% of
Page 78 of 81
the auction sale consideration. Considering the fact that though
initially the appellant deposited 25% of the auction sale
consideration, however, subsequently she could not deposit balance
75% due to COVID-19 pandemic. It is required to be noted that
subsequently the fresh auction has taken place and the property has
been sold. It is not the case of the respondents that in the subsequent
sale, lesser amount is received. Thus, as such, there is no loss caused
to the respondents.
4. Considering the aforesaid facts and circumstances, we allow
these appeals and set aside the order of forfeiture of 25% of the
amount of auction sale consideration and direct the respondent
Bank to refund/return the amount earlier deposited by the appellant,
deposited as the part auction sale consideration (minus 50,000/-
towards the expenditure which were required to be incurred by the
respondent Bank for conducting the fresh auction) within a period
of four weeks from today.”
116. In C. Natarajan (supra), this Court while affirming the decision of Alisha
Khan (supra) 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. The relevant observations read as under: -
“13. ... If, however, circumstances are shown to exist where a bidder
is faced with such a grave disability that he has no other option but
to seek extension of time on genuine grounds so as not to exceed the
stipulated period of ninety days and the prayer is rejected without
due consideration of all facts and circumstances, refusal of the
prayer for extension could afford a ground for a judicial review of
the decision-making process on valid ground(s). One such
exceptional circumstance led to the decision in Alisha Khan v.
Indian Bank (Allahabad Bank) [2021 SCC OnLine SC 3340], where
this Court intervened and granted relief because, due to COVID
complications, the appellant had failed to pay the balance amount.
xxx xxx xxx
24. The up-shot of the aforesaid discussion is that whenever a
challenge is laid to an order of forfeiture made by an authorized
officer under sub-rule (5) of rule 9 of the Rules by a bidder, who has
failed to deposit the entire sale price within ninety days, the
Page 79 of 81
tribunals/courts ought to be extremely reluctant to interfere unless,
of course, a very exceptional case for interference is set up. What
would constitute a very exceptional case, however, must be
determined by the tribunals/courts on the facts of each case and by
recording cogent reasons for the conclusion reached. Insofar as
challenge to an order of forfeiture that is made upon rejection of an
application for extension of time prior to expiry of ninety days and
within the stipulated period is concerned, the scrutiny could be a bit
more intrusive for ascertaining whether any patent arbitrariness or
unreasonableness in the decision-making process has had the effect
of vitiating the order under challenge. However, in course of such
scrutiny, the tribunals/courts must be careful and cautious and
direct their attention to examine each case in some depth to locate
whether there is likelihood of any hidden interest of the bidder to
stall the sale to benefit the defaulting borrower and must, as of
necessity, weed out claims of bidders who instead of genuine interest
to participate in the auctions do so to rig prices with an agenda to
withdraw from the fray post conclusion of the bidding process. In
course of such determination, the tribunals/courts ought not to be
swayed only by supervening events like a subsequent sale at a higher
price or at the same price offered by the defaulting bidder or that
the secured creditor has not in the bargain suffered any loss or by
sentiments and should stay at a distance since extending sympathy,
grace or compassion are outside the scope of the relevant
legislation. In any event, the underlying principle of least
intervention by tribunals/courts and the overarching objective of the
SARFAESI Act duly complimented by the Rules, which are geared
towards efficient and speedy recovery of debts, together with the
interpretation of the relevant laws by this Court should not be lost
sight of. Losing sight thereof may not be in the larger interest of the
nation and susceptible to interference.”
(Emphasis supplied)
117. Thus, this Court held that where extraneous conditions exist that might
have led to the inability of the successful auction purchaser despite best efforts
from depositing the balance amount to no fault of its own, in such cases the
earnest-money deposited by such innocent successful auction purchaser could
certainly be asked to be refunded.
Page 80 of 81
118. In the case at hand, it is the respondent’s case that he was unable to make
the balance payment owing to the advent of the demonetisation. The same led to
a delay in raising the necessary finance. It has been pleaded by the respondent
that the appellant bank failed to provide certain documents to him in time as a
result of which he was not able to secure a term loan.
119. However, the aforesaid by no stretch can be said to be an exceptional
circumstance warranting judicial interference. We say so because demonetization
had occurred much before the e-auction was conducted by the appellant bank. As
regards the requisition of documents, the sale was confirmed on 07.12.2016, and
the respondent first requested for the documents only on 20.12.2016, and the said
documents were provided to him by the appellant within a month’s time i.e., on
21.01.2017. It may also not be out of place to mention that the respondent was
granted an extension of 90-days’ time period to make the balance payment, and
was specifically reminded that no further extension would be granted, in-spite of
this the respondent failed to make the balance payment.
120. The e-auction notice inviting bids along with the correspondence between
the appellant bank and the respondent are unambiguous and clearly spelt out the
consequences of not paying the balance amount within the specified period.
121. Thus, what could be said is that the respondent being aware of his financial
capacity, willingly participated in the e-auction and offered his bid fully knowing
Page 81 of 81
the reserve price of the Secured Asset and the consequences of its failure in
depositing the balance amount.
F. CONCLUSION
122. For all the foregoing reasons, we have reached to the conclusion that the
High Court committed an egregious error in passing the impugned judgment and
order. We are left with no other option but to set aside the impugned judgment
and order passed by the High Court.
123. In the result, the appeals filed by the bank succeed and are hereby allowed.
The impugned judgment and order passed by the High Court dated 27.10.2021 is
hereby set aside. As a result, the SA No. 143 of 2018 filed by the respondent
before the DRT-II also stands dismissed.
124. The parties shall bear their own costs.
125. Pending application(s), if any, also stand disposed of.
…...……..….………….……………CJI.
(Dr. Dhananjaya Y. Chandrachud)
…….…..….…….…..…………………J.
(J.B. Pardiwala)
…………...…...……………………….J.
(Manoj Misra)
New Delhi:
2
nd
February, 2024
Legal Notes
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