Title: CENTRAL BANK OF INDIA VERSUS SHANMUGAVELU
CIVIL APPEAL NO(S). 235-236 OF 2024
Date of Judgment- 2nd February, 2024
CORAM- CJI. Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, Justice Manoj Misra
Facts of the case:
The case revolves around a dispute concerning the auction of a property under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The appellant bank had sanctioned credit facilities to ‘Best and Crompton Engineering Projects’, secured against a parcel of land in Chennai. However, the borrowers defaulted on the loan, leading the bank to declare the loan account as a non-performing asset (NPA) and initiate proceedings under the SARFAESI Act to recover its dues.
In pursuit of recovering the outstanding amount, the appellant bank proceeded with the auction of the secured asset, following which the respondent emerged as the highest bidder at Rs. 12,27,00,000/-. The respondent made an initial deposit of 25% of the bid amount, as required, but failed to pay the balance within the stipulated time despite extensions granted by the bank.
Subsequently, the appellant bank canceled the sale and forfeited the amount deposited by the respondent. The respondent contested this action before the Debt Recovery Tribunal-II (DRT), challenging the cancellation of the sale and forfeiture of the deposit. The DRT, in its order, directed the appellant bank to refund the earnest money deposited by the respondent, albeit after deducting certain expenses.
Unsatisfied with the DRT’s decision, the appellant bank appealed to the Debt Recovery Appellate Tribunal, Chennai (DRAT), seeking to overturn the order. The DRAT, while acknowledging that the secured creditor was not entitled to forfeit the entire amount, partially upheld the appeal and enhanced the forfeiture amount.
From there the matter was escalated to the Supreme Court. The appellants contested the decisions of the lower courts, arguing against the refund of the earnest money.
Laws Involved:
- Sections 73 & 74 of the SARFAESI Act, 1872
Issues framed by the Court:
- Whether the forfeiture of the entire earnest money deposit amount to Unjust Enrichment?
- Whether Exceptional Circumstances exist to set aside the forfeiture of the earnest money deposit?
Courts Judgment and Analysis:
On the first Issue, the Supreme Court reviewed the High Court’s decision on reducing forfeited amounts by considering subsequent asset sales by the appellant bank. The High Court argued against full forfeiture, citing unjust enrichment under the SARFAESI Act. However, the Supreme Court disagreed, noting the uncertainty in future auctions and erosion of asset value over time. It clarified unjust enrichment as inequitable retention of rightful benefits and emphasized adherence to established law.
The Court highlighted that forfeiture, based on public auction and statutory provisions, doesn’t constitute unjust enrichment. It asserted the bank’s right as a secured creditor to enforce its security interest within legal boundaries. The Court stressed that statutory consequences of forfeiture are unaffected by prior recovery or debt extent. Criticizing the High Court’s application of unjust enrichment, the Supreme Court affirmed that where the law is clear, equity must follow, reaffirming statutory forfeiture provisions under SARFAESI Rules despite subsequent asset sales.
On the second issue the court referenced, Alisha Khan v. Indian Bank & Ors., the court directed the refund of earnest money deposit to a successful auction purchaser unable to pay the balance due to the COVID-19 pandemic, stressing such relief as rare. The court emphasized that once earnest money is forfeited, interference by courts should be limited, barring exceptional circumstances. However, the COVID-19 pandemic was deemed an exceptional circumstance, allowing for a refund.
Yet, the court underscored the need for a case-by-case assessment with cogent reasons, cautioning against swaying by extraneous factors like subsequent sales or sentiments. In the case at hand, the respondent’s claims of inability to pay due to demonetization and document delays were dismissed. Demonetization predating the auction and document requests post-sale confirmation were considered insufficient reasons. Despite an extension, the respondent failed to fulfill the payment obligation.
Ultimately, the court concluded that the respondent voluntarily participated in the auction with full awareness of the consequences, hence no exceptional circumstance justified setting aside the earnest money deposit forfeiture.
Conclusion:
The Supreme Court held that the High Court had committed a significant error in its judgment and order. Consequently, the Supreme Court set aside the impugned judgment and order passed by the High Court. As a result, the appeal filed by the bank was allowed, and the judgment and order of the High Court dated 27.10.2021 were overturned. Additionally, the respondent’s appeal before the Debt Recovery Tribunal (SA No. 143 of 2018) was dismissed.
Furthermore, the Supreme Court ordered that each party should bear its costs and any pending applications were disposed of accordingly.
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Written by- Aditi
