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2024 Supreme(Online)(SC) 4945
Dr. Dhananjaya Y. Chandrachud,CJ, J.B. Pardiwala,J, Manoj Misra,J
THE AUTHORISED OFFICER CENTRAL BANK OF INDIA – Appellant
Versus
SHANMUGAVELU – Respondent
CIVIL APPEAL NO(S). 235-236 OF 2024
AMIT K. NAIN
The SARFAESI Act's provisions for forfeiture of earnest money deposits are statutory and do not allow for application of unjust enrichment principles or compensation for loss under the Indian Contract Act.
Headnote:(A) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 13(4) - SARFAESI Rules - Rule 9(5) - Forfeiture of earnest money deposit - The High Court held that forfeiture could only be to the extent of loss suffered by the bank, which was set aside by the Supreme Court - The court ruled that the SARFAESI Act is a special enactment with overriding effect over the Indian Contract Act, 1872, and thus, the principles of unjust enrichment and compensation for loss under Sections 73 and 74 of the Contract Act do not apply to forfeiture under Rule 9(5) - The court emphasized that the forfeiture is a statutory consequence of default in payment and is not subject to the bank's recovery from subsequent sales - The court concluded that the High Court erred in reading down Rule 9(5) and in finding unjust enrichment based on subsequent auction results. (Paras 19, 20, 106, 112, 123)
Facts of the case:
The appellant bank sanctioned credit facilities secured by a mortgage on a property. The respondent participated in an e-auction for the property but failed to pay the balance amount after being declared the successful bidder. The bank forfeited the earnest money deposit due to non-payment, which was challenged by the respondent in the DRT and subsequently in the High Court. The High Court ruled in favor of the respondent, leading to the bank's appeal. (Paras 4-18)
Findings of Court:
The Supreme Court found that the High Court's interpretation of the SARFAESI Rules was incorrect and that the forfeiture of the earnest money deposit was valid under the statutory provisions of the SARFAESI Act. (Paras 19-123)
Issues: The main issues were whether the forfeiture of the earnest money deposit could exceed the loss suffered by the bank and whether the SARFAESI Rules could be read down in light of the Indian Contract Act. (Paras 34-36)
Ratio Decidendi: The court ruled that the SARFAESI Act and its Rules provide a clear framework for forfeiture that does not allow for the application of general contract principles regarding unjust enrichment or compensation for loss. (Paras 19-20, 106-112)
Result: Appeals allowed; the impugned judgment of the High Court is set aside. (Paras 123)
JUDGEMENT
J.B. PARDIWALA, J.: For the convenience of exposition, this judgment is divided in the following parts:-
- INDEX A. FACTUAL MATRIX ............................................................................. 3 B. IMPUGNED ORDER .......................................................................... 13 C. SUBMISSIONS OF THE APPELLANT ............................................ 17 D. SUBMISSIONS OF THE RESPONDENT ......................................... 18 E. ANALYSIS (Points for Determination) .............................................. 19 i) Legislative History and Scheme of the SARFAESI Act ..................... 20 ii) Applicability of Section(s) 73 & 74 of the 1872 Act to Forfeiture under the SARFAESI Rules. ............................................................... 32 a. Forfeiture under the SARFAESI Rules ........................................... 44 Digitally signed by Sanjay Kumar Date: 2024.02.02 15:31:40 IST Reason:
- Signature Not Verified b. Concept of Earnest-Money & Law on Forfeiture of Earnest-Money Deposit ............................................................................................ 49 c. Law on the principle of ‘Reading-Down’ a provision ...................... 66 iii) Whether, the forfeiture of the entire earnest-money deposit amounts to Unjust Enrichment? ........................................................................ 73 iv) Whether Exceptional Circumstances exist to set aside the forfeiture of the earnest money deposit? .................................................................. 77 F. CONCLUSION .................................................................................... 81 a
1. Since the issues raised in both the captioned appeals are the same, the parties are also the same and the challenge is also to the self-same judgment and order passed by the High Court, those were taken up for hearing analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the appellant shall hereinafter be referred to as the Bank being the Secured Creditor, and the respondent shall hereinafter be referred to as the original Auction-Purchaser.
3. These appeals are at the instance of a Nationalized Bank and are directed against the common judgment and order dated 27.10.2021 passed by the High Court of judicature at Madras in C.R.P No(s). 1892 & 2282 respectively of 2021 (“Impugned Order”) by which the High Court allowed the respondent’s writ petition and held that the forfeiture of the earnest money deposit by the appellant bank could only be to the extent of the loss suffered by it.
A. FACTUAL MATRIX
4. It appears from the materials on record that the appellant bank herein had sanctioned credit facilities to one ‘Best and Crompton Engineering Projects’ against a parcel of land admeasuring 10581 sq.ft. (approx.) with superstructures situated in Survey Nos. 60 and 65/2, Block 6, Alandur village, Mambalam- Guindy, Chennai (for short the, “Secured Asset”) as security interest in the form of a simple mortgage in lieu of the sanctioned credit. Sometime thereafter the said borrowers defaulted and the said loan account was classified as a non- performing asset (“NPA”) by the appellant bank on 28.05.2013.
5. In order to recover its dues, the appellant bank took measures under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the “SARFAESI Act”), more particularly under Section 13(4) by taking over the possession of the Secured Asset and putting the same for sale by way of public auction.
6. Accordingly, on 24.10.2016 an e-auction notice for the sale of the Secured Asset at a reserve price of Rs. 9,62,00,000/- came to be issued by the appellant bank, with the following terms and conditions: -
- “TERMS & CONDITIONS IS” basis and “NO COMPLAINT” condition.
- https://www.bankeauctions.com on 07-12-2016 from 11.00 a.m. to 12. Noon mail address and P
