2024 Supreme(SC) 96

SUPREME COURT OF INDIA
DHANANJAYA Y. CHANDRACHUD, CJI., J.B. PARDIWALA, MANOJ MISRA, JJ.
The Authorised Officer, Central Bank Of India - Appellant
Versus
Shanmugavelu - Respondent
Civil Appeal No(S). 235-236 of 2024
Decided on : 02-02-2024

IMPORTANT POINTS
(1) Auction sale of secured asset – Forfeiture of earnest money deposit – Consequence of forfeiture of 25% of deposit under Rule 9(5) of SARFAESI Rules is a legal consequence that has been statutorily provided in the event of default in payment of balance amount – In such cases, no extent of equity can either substitute or dilute statutory consequence of forfeiture of 25% of deposit under Rule 9(5) of SARFAESI Rules.
(2) Breach of contract – Award of damages – Damages can be awarded only for loss directly suffered on account of breach and not for any remote or indirect loss sustained by reason of breach of contract.
(3) Interpretation of Statute – Principle of ‘Reading-Down’ a provision – It is a judicial tool used to salvage constitutionality of a statute.

Headnote:

(A) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Sections 13, 35 and 37 – Security Interest (Enforcement) Rules, 2002 – Rule 9(5) – Indian Contract Act,1872 – Sections 73 and 74 – Auction sale of secured asset – Forfeiture of earnest money deposit – Legislature through Rule 9(5) of SARFAESI Rules, has made conscious departure from general law by statutorily providing for forfeiture of earnest-money deposit of successful auction purchaser for its failure in depositing balance consideration within statutory period – Forfeiture is a result of breach of obligation, but consequence of forfeiture in such case is taking place not because of breach but because of operation of statutory provision providing for forfeiture that is attracted as a result of breach – If consequence of forfeiture was purely a matter of breach of contract, then there would have been no occasion for legislature to specifically provide for forfeiture through statutory provisions, and it would have simpliciter relegated consequences of such breach to already existing general law under Section(s) 73 and 74 of 1872 Act – However, legislature has consciously provided for only one consequence in event of failure of successful auction purchaser in depositing balance amount i.e., forfeiture and has not provided for imposition of any other stipulation by secured creditor in event of breach – This has been done, keeping in mind larger object of SARFAESI Act, which is to facilitate recovery of debt in a time-bound manner by giving teeth to measures enumerated within Section 13 of SARFAESI Act, more particularly sale of secured asset in the event borrower fails to repay debt. (Paras 61, 62 and 63)

(B) Security Interest (Enforcement) Rules, 2002 – Rule 9(5) – Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Sections 13, 35 and 37 – Indian Contract Act,1872 – Sections 73 and 74 – Auction sale of secured asset – Forfeiture of earnest money deposit – Quantum of forfeiture – Forfeiture of earnest money is not a penalty and Section 74 of 1872 Act will only apply where forfeiture is in nature of a penalty – Only that deposit which has been given as earnest-money for due performance of obligation is liable to be forfeited in event of a breach – There lies a difference between forfeiture of any amount and forfeiture of earnest money – Ordinarily, a forfeiture clause in 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 obligation – Where such forfeiture takes place under terms and conditions of a public auction, Section 74 will have no application – Forfeiture of 25% of deposit does not constitute as unjust enrichment – Concept of ‘Unjust Enrichment’ is a by-product of doctrine of equity – Equity cannot supplant law, equity has to follow law if law is clear and unambiguous – Consequence of forfeiture of 25% of deposit under Rule 9(5) of SARFAESI Rules is a legal consequence that has been statutorily provided in the event of default in payment of balance amount – In such cases, no extent of equity can either substitute or dilute statutory consequence of forfeiture of 25% of deposit under Rule 9(5) of SARFAESI Rules – Where extraneous conditions exist that might have led to inability of successful auction purchaser despite best efforts from depositing balance amount to no fault of its own, in such cases earnest-money deposited by such innocent successful auction purchaser could certainly be asked to be refunded – Respondent being aware of his financial capacity, willingly participated in the e-auction and offered his bid fully knowing reserve price of Secured Asset and consequences of its failure in depositing balance amount – Impugned judgment and order passed by High Court set aside. (Paras 76, 78, 80, 81, 90, 109, 110, 117, 121, 122 and 123 )

(C) Indian Contract Act,1872 – Sections 73 and 74 – Breach of contract – Award of damages – Damages can be awarded only for loss directly suffered on account of breach and not for any remote or indirect loss sustained by reason of breach of contract – If any special circumstances about dependency of performance of other contract(s) by party complaining of breach, on performance of contract in dispute by party in breach, had been communicated to party in breach, and thus known to both parties at the time of entering into contract, then damages for breach of contract in dispute, may include compensation for loss suffered in regard to such other dependent contracts – But, on other hand, if special circumstances were not made known to party breaking contract, party breaking contract, at the most, could only be supposed to have had in its contemplation amount of injury which would arise generally and directly and not any remote or unknown loss or damage. (Para 52)

(D) Finance and Debt Laws – Difference between earnest or deposit and advance part payment – Earnest is something given by Promisee to Promisor to mark conclusiveness of contract – This is quite apart from price – It may also avail as a part payment if 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 bargain – Advance is a part to be adjusted at the time of final payment – If Promisee defaults to carry out contract, he loses earnest but may recover part payment leaving untouched 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 realm given by Promisor to indicate that bargain is concluded between them and as tangible proof that he means business – Question whether amount is a deposit (earnest) or a part payment cannot be determined by presence or absence of a forfeiture clause – Whether sum in question is a deposit to ensure due performance of contract or not is not dependent on phraseology adopted by parties or by presence or otherwise of a forfeiture clause. (Paras 83 and 87)

(E) Interpretation of Statute – Principle of ‘Reading-Down’ a provision – It refers to a legal interpretation approach where a court, while examining 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 idea that courts should make every effort to preserve validity of legislation and should only declare a law invalid as a last resort – When a court encounters a provision that, if interpreted according to its plain and literal meaning, might lead to constitutional or legal issues, court may opt to read down the provision – Reading down involves construing language of provision in a manner that limits its scope or application, making it consistent with constitutional or legal principles – Rationale behind principle of reading down is to avoid striking down an entire legislation – It is a judicial tool used to salvage constitutionality of a statute by giving a provision a narrowed or limited interpretation, thereby mitigating potential conflicts with constitutional or legal principles – Courts while examining validity of a particular statute should always endeavour towards upholding its validity and striking down a legislation should always be last resort – Rule of “Reading Down” is only for limited purpose of making a provision workable and its objective achievable – Harshness of a provision is no reason to read down the same, if its plain meaning is unambiguous and perfectly valid. (Paras 93, 94, 95, 96, 99 and 101)

Facts of the case:

Present appeals are at instance of a Nationalized Bank and are directed against common judgment and order dated 27.10.2021 passed by High Court of Judicature at Madras in C.R.P No(s). 1892 & 2282 respectively of 2021 (Impugned Order) by which High Court allowed respondent’s writ petition and held that forfeiture of earnest money deposit by the appellant bank could only be to the extent of loss suffered by it.

Findings of Court:

Appeals filed by bank succeed and are hereby allowed. Impugned judgment and order passed by High Court dated 27.10.2021 is hereby set aside. As a result, the SA No. 143 of 2018 filed by respondent before DRT-II also stands dismissed.

Result : Appeals allowed.