[SARFAESI Act] Forfeiture Of Earnest Money Is Statutory Consequence If Auction Purchaser Fails To Deposit Balance Within Time: Karnataka HC

The Karnataka High Court has reiterated that when an auction purchaser fails to deposit the balance amount within the statutory period prescribed under the SARFAESI Act, despite having been granted an extension, the forfeiture of his earnest money deposit is a statutory consequence.

A division bench of Chief Justice N V Anjaria and Justice K V Aravind held thus while allowing an appeal filed by Canara Bank and set aside the single judge bench's January 12 order by which it had directed the Bank to return the earnest money amount of Rs.3.25 crores to the respondents (original petitioners before the single judge bench). 

It said, “In the facts of the case, no special circumstance exists which would justify the demand for return of earnest money by the petitioner. There is no unjust enrichment on the part of the Bank. When the petitioner-bidder failed to deposit the balance amount within the statutory period despite having been granted extension, the forfeiture of his earnest money deposit was a statutory consequence.”

The original petitioners (before the single judge bench) had participated and purchased the property as a successful bidder paying Rs.3.25 crores which was 25% of the bid amount. The balance 75% amount to the extent of Rs.9.75 crores was to be paid within 15 days as per the condition of the bid.

On January 13, 2022, a communication was sent by the petitioners seeking an extension of 30 days to pay the amount to the Bank. The Bank replied asking the petitioner to remit the balance amount on or before  January 28, 2022. On the said date, the petitioners again sent a communication asking for a further extension of 30 days.

Then the petitioners claimed that they were in the process of securing the amount and the loan process was underway with the HDFC Bank. In reply the Bank intimated that if the amount is not paid by February 10, 2022, the sale in favour of the petitioners will be cancelled and the amount paid will be forfeited without further notice.

Challenging the single judge bench's order, the bank in its appeal raised the issue of maintainability of the petition in view of the remedy of appeal available before the Debt Recovery Tribunal. Further, it was said that as per Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 an action of a secured creditor in forfeiting the deposit made by the auction purchaser is part of measures taken by the secured creditor under Section 13(4) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

It was argued that the single judge bench failed to appreciate that the extraordinary writ jurisdiction under Article 226 of the Constitution could not have been exercised by it and that there are decisions which say that the High Courts would normally not entertain the writ petition in the matters of SARFAESI action by the Bank.

The division bench relied on the Supreme Court's decision in Authorised Officer, Central Bank of India v. Shanmugavelu (2024) wherein the apex court had taken note of the mandatory application of Rule 9(5) of 2002 Rules and held that SARFAESI Act is a "special legislation with an overriding effect over general law and that forfeiture of earnest money deposit is statutorily provided as a consequence of failure of the auction purchaser to deposit the balance amount".

Following this the division bench held, “The above dictum of law has been plainly disregarded by learned Single Judge in allowing the petition and directing the refund of the earnest money to the respondent-petitioner.”

It further added, “Once the auction purchaser is unable to pay the balance amount of sale consideration within the statutory time limit contemplated for the purpose. The Rule 9(5) has the compulsory consequence of forfeiture of the earnest money in the event of commission of default by the auction purchaser in paying the balance amount.”

Accordingly, it allowed the appeal.

Case Title: Canara Bank AND Subramanya Rao K & ANR

Counsel for Appellant: Advocate Shetty Vignesh Shivaram

Counsel for Respondents: Senior Advocate Aditya Sondhi  along with Advocate A.S Ravi Kumar

Citation No: 2024 LiveLaw (Kar) 441

Case No: WA 349/2024

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