LI Network
Published on: February 4, 2024 at 11:31 IST
In a landmark ruling, the Supreme Court has affirmed that under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules), banks have the authority to forfeit the entire earnest money deposited by an auction purchaser if they fail to pay the remaining amount within the specified period.
The Court rejected the interpretation of the Madras High Court, which suggested that the bank’s forfeiture of the earnest money should only cover the extent of loss suffered.
The Supreme Court emphasized that the forfeiture of the entire deposit is a statutory consequence outlined in Rule 9(5) and is not contingent upon whether a subsequent sale results in a higher price. The Court highlighted that this forfeiture is not subject to recovery already made or to the extent of debt owed.
The bench, comprising Chief Justice D.Y. Chandrachud, and Justices J.B. Pardiwala and Manoj Misra, underscored that the right of the secured creditor to forfeit the earnest deposit arises from a statutory requirement, not merely from a breach of contract.
The Court clarified that Sections 73 and 74 of the Indian Contract Act, which limit compensation for breach of contract to the losses suffered, do not apply to auction purchases under the SARFAESI Act. The SARFAESI Act, being a special legislation, overrides general contract law.
The ruling emphasized that the purpose of SARFAESI is to ensure the liquidity of finances and efficient debt recovery. Therefore, the forfeiture provision aims to deter unscrupulous behavior and maintain the integrity of auction processes.
The Court concluded that the forfeiture consequence is not due to breach of contract but operates as per statutory provisions. It highlighted that the legislature intentionally provided for forfeiture as the sole consequence of non-payment by the auction purchaser to expedite debt recovery.
Case Details: THE AUTHORISED OFFICER CENTRAL BANK OF INDIA VERSUS SHANMUGAVELU | CIVIL APPEAL NO(S). 235-236 OF 2024