Summary
The highest bidder at a SARFAESI e-auction paid 25 per cent of the price, obtained a 25-day extension to pay the balance, and then sought 15 more days citing the borrower's application before the Debts Recovery Tribunal. The authorised officer refused and, on default, forfeited the deposit of Rs. 30,75,000 under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002. The Madras High Court ordered a refund with interest because the asset was later resold at the same price and the bank should not be enriched. The Supreme Court set this aside: forfeiture under Rule 9(5) is a statutory penalty to be judged on the circumstances when it was made and not on supervening events, receipt of the deposit under a public auction is no unjust enrichment, and writ courts should be extremely reluctant to interfere absent patent arbitrariness.
Issues
- Whether the authorised officer exercised the power of forfeiture under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 arbitrarily in refusing a second extension of time and forfeiting 25 per cent of the sale price.
- Whether the High Court could direct refund of the forfeited amount on the ground that the asset was later sold at the same price and the bank suffered no loss or would be unjustly enriched.
- Whether Rule 9(5) dilutes Sections 73 and 74 of the Indian Contract Act, 1872.
Provisions considered
- Rule 9(2), (3), (4) and (5), Security Interest (Enforcement) Rules, 2002The purchaser must pay 25 per cent immediately and the balance within fifteen days of confirmation or such extended period as agreed in writing not exceeding three months; on default the deposit is forfeited and the property resold. The discretion to extend within ninety days must be exercised reasonably, but no purchaser can claim extension as of right. (¶¶ 12, 13, 14, 18, 25)
- Sections 13(4), 17(1), 35, 37 and 38, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Forfeiture is part of the measures under Section 13(4) challengeable under Section 17(1); the Rules framed under Section 38 are part of the statute; Section 35 overrides inconsistent laws and Section 37 preserves rights under the Act, so the special law prevails over the general law of contract. (¶¶ 14, 22, 23, 39)
- Sections 73 and 74, Indian Contract Act, 1872These general provisions on compensation and liquidated damages are not diluted by Rule 9(5) but are insufficient to protect the secured creditor, whose loss on resale cannot be foreseen when forfeiture is ordered; in any conflict the SARFAESI Act prevails. (¶¶ 20, 21, 22, 23)
Held
- Forfeiture under Rule 9(5) denotes a penalty the defaulting bidder must suffer for failing to pay the entire sale price within the period allowed; once the sale is confirmed a contract comes into existence and the bidder must bear the stipulated consequences of breach. The rule must be interpreted pragmatically to facilitate enforcement of security interest and to deny benefit to borrowers who use proxy bidders to abort auctions and rig valuations. (¶¶ 15, 16, 17, 18, 19, 20)
- Since the loss on resale cannot be foreseen when forfeiture is contemplated, the validity of a forfeiture order must ordinarily be judged on the circumstances prevailing when it was made and not on supervening events such as a later sale at the same or a higher price; tribunals and courts should be extremely reluctant to interfere unless a very exceptional case is made out, with somewhat more intrusive scrutiny where extension was refused within the ninety-day period, while weeding out bidders with a hidden interest in stalling the sale. (¶¶ 21, 24)
- The bidder obtained the 25-day extension he sought, lacked funds even before receiving the Tribunal's summons, did not ask for the full ninety days, and was free to pay and obtain the sale certificate despite the borrower's pending application; the authorised officer was free either to extend or not and his choice was not wholly unreasonable, so there was no arbitrariness in forfeiting the deposit. (¶¶ 25, 26, 27, 28)
- Receipt of 25 per cent of the sale price under a public auction in terms of Rule 9(3) is not a benefit, and its retention by a statutory forfeiture is neither unjust nor inequitable; the High Court posed the wrong question in asking whether the bank was enriched, and judicial review cannot be invoked to protect private interest at the cost of public interest or to decide contractual disputes absent arbitrariness, mala fides, bias or irrationality. A result flowing from a statute is never an evil and cannot be ignored out of misplaced sympathy. (¶¶ 30, 32, 33, 34, 35, 36, 37, 38)
Result
Appeal allowed; Madras High Court judgment dated 27.03.2018 directing refund of Rs. 30,75,000 with interest set aside; forfeiture of 25 per cent of the sale price under Rule 9(5) upheld; parties to bear their own costs.