SARFAESI | Bank Can't Forfeit Deposit Made After Auction Purchase When Bidder Wasn't Informed Of Challenge Pending Against Sale : Supreme Court

The Supreme Court has granted relief to an auction purchaser by directing the refund of the deposit made by him, which was forfeited by the bank by invoking Rule 9(5) of Security Interest (Enforcement) Rules, 2002.

Rule 9(5) enables the bank to forfeit the deposit amount on default of the auction purchaser to deposit the balance bid amount within the stipulated time. In this case, the Supreme Court noted that the auction purchaser was not informed by the bank about the challenge pending in the Debts Recovery Tribunal against the auction purchase.

The Supreme Court held that Rule 9(5) of SARFAESI Rules cannot be pressed into service since the auction purchaser was not informed regarding the proceedings pending before DRT at the time of auction or even thereafter. It was observed that:

“So far as the submission made by the first respondent(bank) in reference to Rule 9(5) of the Rules, 2002 is concerned, that may not be of any assistance for the reason that ordinarily if the highest bidder fails to deposit the balance amount of the purchase price, in terms of 9(4) within the stipulated period and commits default, its consequence is stipulated under Rule 9(5) of the Rules, 2002. But the instant case was not a case of simple default. The appellant has come with the bona fide defence that he was never informed on the date when the auction was held or day thereafter that the substantive proceedings are pending before the DRT instituted at the instance of the borrower. As a man of ordinary prudence, if someone has been called upon to participate in the bidding process, the facts must be made clear to the parties for the reason that there is always a high variance between market realizable value and the distress value of the mortgaged property when put to public auction under the provisions of the Act, 2002.”

BACKGROUND FACTS

The Punjab National Bank (“Respondent/Bank”) initiated recovery proceedings against its Borrower (Third Respondent) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act, 2002”).

On 18.06.2013, the Bank issued a notice for auctioning the property of the Borrower and the reserve price was fixed at Rs.1.19 Crores. Mr. Mohd. Shariq (“Appellant”) submitted the highest bid of Rs. 2.01 Crores and became the successful bidder. The Appellant deposited the earnest money amount of Rs.11.19 lakhs on 22.07.2013. The bid was finalized in the auction held on 26.07.2013. Subsequently, the Appellant deposited 25% of the bid amount of Rs.38.35 Crores on 27.06.2013 and the total amount paid stood at Rs. 50,25,000/­.

In the meanwhile, the Borrower approached the Debt Recovery Tribunal (“DRT”) challenging the auction notice. On 26.07.2013 the DRT permitted the Bank to proceed with the auction, but confirmation of the sale shall be kept in abeyance until further orders.

On 18.10.2013 the Bank demanded the balance bid amount from the Appellant since as interim relief has been rejected by DRT. The Appellant communicated that balance amount would be released once DRT decides the matter pending before it. Later the Bank also stated that the earnest money would be forfeited in terms of Rule 9(5) of SARFAESI Rules, 2002, if balance amount is not paid within time.

The proceedings before DRT came into the Appellant’s knowledge only on 18.10.2013, when he had already deposited Rs. 50,25,000/­ with the Bank. Subsequently, the Bank issued a re-auction notice dated 05.05.2014 with a reserve price of Rs. 1.7 Crores and the highest bid was of Rs.1,70,50,000/­.

The Appellant filed a writ petition before the High Court seeking direction to the Bank to withhold re-auction and either execute sale deed in favour of Appellant or in the alternative refund the money deposited by the Appellant. The High Court asked the Appellant to deposit the balance amount of Rs.1.77 crores to show its bona fide and the Appellant abided by the same. The Single Judge of High Court set aside the re-auction dated 05.05.2014 and directed the Bank to execute the sale deed in favour of the Appellant.

However, in appeal the Division Bench of the High Court upheld the re-auction and directed the Bank to return the bid amount of Rs. 1.77 Crores received from Appellant. Further, with respect to the money which was forfeited by the Bank, the High Court granted liberty to Appellant to initiate independent proceedings before the competent forum for recovery of the amount.

The Appellant filed an appeal before the Supreme Court. It was argued that it is an undisputed fact that the Appellant is qualified to claim the forfeited money from the Bank, still the High Court has left the Appellant to avail the remedy which the law permits.

SUPREME COURT VERDICT

The Bench comprising of Justice Ajay Rastogi and Justice Bela M. Trivedi held there being no dispute to the auction purchaser’s right to recovery of forfeited amount, the High Court cannot relegate the auction purchaser to avail other remedial mechanisms for recovery of the undisputed amount.

While adjudicating on the issue of whether High Court should have directed the Appellant to avail remedy under law for recovery of undisputed amount or not, the Bench observed as under:

“We are of the considered view that once there is no dispute on the facts came on record, there appears no reason for the appellant to be relegated to avail other remedial mechanisms for recovery of the indisputed amount and the Division Bench has committed a manifest error in the facts and circumstances in not exercising its power under Article 226 of the Constitution and instead of resolving the dispute, the Division Bench under the impugned judgment has kept the issue alive, permitting the parties to have a second innings in reference to the dispute which stands crystalized/settled.”

The Bench has allowed the appeal and the Bank has been directed to return the amount of Rs. 50.25 lakhs to the Appellant. However, having regard to the delay in filing the appeal by the appellant, the Court refused to order grant of interest.

Case Title: Mohd. Shariq v Punjab National Bank and Others

Citation: 2023 LiveLaw (SC) 308

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- Security Interest (Enforcement) Rules, 2002- Rule 9(5)-Rule 9(5) of SARFAESI Rules cannot be pressed into service since the auction purchaser was not informed regarding the proceedings pending before DRT at the time of auction or even thereafter- Directs refund of the deposit forfeited by the bank

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