Bank Can't Forfeit More Than 25% Deposit Made By Auction Purchaser Who Fails To Deposit Remaining Amount: Karnataka High Court

The Karnataka High Court has made it clear that a bank cannot forfeit over 25% of the deposit amount made by an auction purchaser who fails to deposit the remaining purchase amount within the stipulated period for completion of the sale.

A single judge bench of Justice K V Aravind directed the State Bank of India to refund a sum of Rs.10,00,000, along with applicable interest from the date of payment till refund, within eight weeks to one Kalyanamurthy K.

It said “The petitioner has made a payment of Rs.31,73,750/-. 25% of the total bid amount is Rs.21,73,750/-. Payment of Rs.10,00,000/- is in excess of 25% of the bid amount referred to in Rule 9 of the Rules. Sum of Rs.10,00,000/- cannot be considered as deposit under sub-rule (3) and (4) enabling the respondent to forfeit under sub-rule (5). The petitioner is entitled to a refund of payment made in excess of 25 % of the total bid amount. Any retention of the amount by the respondent without authority of law would amount to unjust enrichment.”

Further, the court held that as forfeiture is a statutory action, given non-compliance with Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (Rules), it leaves no discretion with the secured creditor.

The petitioner had approached the court seeking a direction on the respondent to refund a sum of Rs.31,73,750/- forfeited due to non-compliance with the conditions of a Sale Notice dated 16.12.2021.

It was submitted that the petitioner had participated in the auction and was declared a successful bidder with the highest quoted amount of Rs.86,95,000.

It was submitted that he deposited 25% of the total amount in compliance with the terms and conditions of the e-auction.

The petitioner by letter dated 29.12.2021 requested an extension to make payment till 20.01.2022. The time was extended by the respondent accordingly.

Petitioner argued that on 20.01.2022, a further extension was requested till 20.02.2022, and the respondent accepted and extended the time accordingly.

It was submitted that since there was no response after the extension of time till 20.02.2022, the respondent issued a letter dated 04.03.2022 requesting the petitioner to make payment of the difference amount on or before 08.03.2022. The letter further indicated that failure to pay the amount would result in forfeiture of the amount already paid.

The petitioner submitted that he through e-mail dated 08.03.2022 requested two weeks to make the payment on the ground that he was suffering from age-related health issues and hence had not been able to pay the remaining amount within the stipulated time; after this, the respondent by letter dated 16.03.2022 addressed to the petitioner forfeited the amount.

The petitioner claimed the remaining amount was not deposited within the extended period as agreed by the respondent given financial difficulties due to the Covid-19 pandemic.

It was argued that the petitioner was suffering from Kidney disease and was undergoing treatment and that the property had been re-auctioned and sold for a sum of Rs.87,79,000.

It was argued that thus, there was no financial loss caused to the respondent and forfeiture of the amount paid by the petitioner would amount to unjust enrichment.

The bank opposed the plea stating that the petitioner had been provided with extensions to the outer limit provided under Rule 9 of the Rules. Thus, due to failure to comply with the terms and conditions of the auction, an order of forfeiture had been rightly made in conformity with Rule 9(5) of the Rules.

Merely, because the property has been sold subsequently for a higher price would not entitle the petitioner to seek a refund of the forfeited amount, it was argued.

The bench on going through the records noted that the rules only allow the respondent secured creditor to extend the period of payment by three months. It held:

"As the Rules provide for extent of benefit to the auction purchaser and discretion of the secured creditor, forfeiture by the respondent cannot be said to be in violation of Rule 9 of the Rules or as arbitrary. The power of forfeiture under sub-rule (5) of Rule 9 of the Rules is statutorily conferred. Hence, there is no scope for judicial review.”

It further held that the health condition of the petitioner in not making the payment would be irrelevant while examining the correctness of forfeiture under Rule 9(5) of the Rules.

Accordingly, in partly allowing the plea, the Court held that the amount paid under Rule 9(3) of the Rules to the extent of 25% can be characterised as a deposit and payment over and above 25% is only a balance consideration and cannot be considered as a deposit.

Accordingly, it allowed the petition in part.

Appearance: Advocate D.V. Venkatesh for Petitioner.

Advocate Chithra Nirmala P for Respondent

Citation No. 2023 LiveLaw (Kar) 503

Case Title: Kalyanamurthy K AND State Bank of India

Case No: WRIT PETITION No.23327/2022

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