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Supreme Court Rules EMD Shortfall Does Not Invalidate Auction If 25 Percent Deposit Made
In a significant ruling that clarifies the importance of in the conduct of auctions under the , the has held that a mere shortfall in the deposit of cannot be used to invalidate an auction, provided the successful bidder has complied with the statutory requirement of depositing on the very day of the auction.
A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe overturned the decisions of the and the , which had set aside the auction sale on grounds of non-compliance with the terms of the auction notice. The Court allowed the appeals of the auction purchasers and the bank while disposing of the borrower's challenge.
The Auction and the Shortfall
The case arose from a loan default by , leading to the classification of its account as a by the (now merged with ). The bank initiated proceedings under the SARFAESI Act and issued a dated , fixing , as the date of auction. The notice required intending bidders to submit their offers on or before , along with an earnest money deposit of ₹21,50,000.
The auction purchasers, including the late Mrs. Lakshmi Mohan and her legal representatives, submitted a bid on , with an EMD of ₹21,15,000—a shortfall of ₹35,000. The other bidder also submitted the same shortfall amount. Despite the deficiency, the bank entertained both bids. At the auction on , the appellants' bid of ₹2,17,40,000 was declared the highest. On the same day, they deposited a further ₹33,20,000, bringing the total deposit to ₹54,35,000, which constituted 25% of the bid amount as required under .
The Legal Battle
The borrower challenged the auction before the , which initially dismissed the challenge. However, the DRAT set aside the sale, holding that the auction was vitiated by the non-compliance with and the express terms of the auction notice. The upheld this decision in a batch of writ petitions, prompting the auction purchasers and the bank to approach the Supreme Court.
Before the Supreme Court, the auction purchasers argued that the deposit of earnest money was not a statutorily prescribed condition and that the shortfall had not caused any prejudice to the borrower. They pointed out that the other bidder had also made an identical shortfall. The bank submitted that acceptance of a non-compliant bid could only be questioned by a rival bidder, and since the only other bidder was similarly placed, no valid challenge could arise.
In response, the borrower contended that the deposit of EMD was an essential condition of eligibility, and the bank was not competent to deviate from it. It was further argued that the balance sale consideration was paid after a delay of nearly five months.
Supreme Court's Verdict:
Delivering the judgment, Justice Alok Aradhe relied on a long line of precedents to distinguish between and . The Court observed that requirements in a tender notice can be classified into two categories: those that lay down , which must be enforced rigidly, and those that are merely ancillary to the main object, from which the authority may deviate.
The Court noted that Clause 7 of the , which stipulated the EMD amount, was non-statutory and had been incorporated to filter out non-serious bidders. Both bidders had deposited a sum of ₹21,15,000—a shortfall of ₹35,000 each. Since the bank had entertained and considered both bids, and the auction purchasers had fully complied with the under Rule 9(3) by depositing on the auction day itself, any anterior shortfall in the EMD was rendered inconsequential.
"The auction-purchasers were statutorily obliged to comply with the 25% mark of the sale price on the same day which was made good. Therefore, any anterior shortfall in deposit of EMD pales into insignificance, the moment the was deposited. Thus, the non-conformity of the bid of the auction-purchasers insofar as it pertains to deposit of EMD has not resulted in any to the other bidder much less to the borrower."
The Court emphasized that the test is not whether there was strict compliance with every term, but whether the non-compliance resulted in substantial to any party or to .
Balancing Interests
Addressing the borrower's argument regarding the delayed payment of the balance amount, the Court noted that the plea had not been raised before the DRT or DRAT. It observed that the bank had extended time for payment in view of the pending litigation, and the auction purchasers had paid the outstanding amount immediately after the borrower's appeals were dismissed. Moreover, the bank had retained an excess amount of ₹1,33,94,054 from the sale proceeds, which it had offered to the borrower but was declined. The Court directed the bank to refund this surplus amount with interest at 7% per annum from —the date it was kept in a non-interest-bearing account—until the payment is made, to ensure the borrower suffers no loss due to the bank's omission.
Final Order
The Supreme Court quashed and set aside the impugned judgment of the and the order of the DRAT. It allowed the appeals of the auction purchasers and the bank, while disposing of the borrower's appeal. The Court directed the bank to refund the surplus amount with interest at 7% per annum. No order was made as to costs.
This ruling provides much-needed clarity on the conduct of auctions under the SARFAESI Act, reinforcing the principle that that do not cause prejudice should not be allowed to derail a valid sale.
