Holding

Rule 9(5) of the SARFAESI Rules, being a provision of a special enactment, overrides Sections 73 and 74 of the Contract Act; the statutory forfeiture of the earnest‑money is valid, does not constitute unjust enrichment, and no exceptional circumstances exist to overturn it.

Summary

The Central Bank of India conducted an e‑auction of a secured asset under the SARFAESI Act and the successful bidder, Shanmugavelu, deposited 25% earnest‑money. After being granted a 90‑day extension, he failed to pay the balance and the bank forfeited the entire deposit under Rule 9(5) of the SARFAESI Rules. Shanmugavelu challenged the forfeiture, arguing that Sections 73 and 74 of the Contract Act should limit forfeiture to actual loss and that the forfeiture amounted to unjust enrichment, also seeking relief on the ground of exceptional circumstances (demonetisation). The Supreme Court held that the SARFAESI Act is a special legislation with overriding effect, so its Rule 9(5) operates independently of the general principles of Sections 73 and 74, and the statutory forfeiture of 25% of the deposit is valid, not an unjust enrichment, and no exceptional circumstance justified setting it aside. Consequently, the High Court’s order was set aside and the bank’s appeal was allowed.

Issues considered

Whether Sections 73 and 74 of the Contract Act apply to the forfeiture of earnest‑money under Rule 9(5) of the SARFAESI Rules
Whether the forfeiture of the entire earnest‑money deposit under Rule 9(5) amounts to unjust enrichment
Whether the respondent has shown any exceptional circumstances warranting the setting aside of the forfeiture order

Legislation cited

Contract Act, 1872s. 73, s. 74
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002s. 13(4), s. 35, s. 37

Subjects

SARFAESI Actearnest moneyforfeitureSection 73Section 74reading downunjust enrichmentauctionsecured creditorspecial legislationcontract law

Judgment

[2024] 2 S.C.R. 12 : 2024 INSC 80

The Authorised Officer, Central Bank of India
v.
Shanmugavelu
(Civil Appeal No(s). 235-236 of 2024)
02 February 2024
[Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala,*
Manoj Misra, JJ.]

Issue for Consideration
(i)Whether, the underlying principle of Section(s) 73 & 74 respectively
of the Contract Act, 1872 Act is applicable to forfeiture of earnest-
money deposit under Rule 9(5) of the SARFAESI Rules. In other
words, whether the forfeiture of the earnest-money deposit under
Rule 9(5) of the SARFAESI Rules can be only to the extent of
loss or damages incurred by the Bank; (ii) Whether, the forfeiture
of the entire amount towards the earnest-money deposit under
Rule 9(5) of the Rules amounts to unjust enrichment. In other
words, whether the quantum of forfeiture under the SARFAESI
Rule is limited to the extent of debt owed; (iii) Whether a case of
exceptionable circumstances could be said to have been made
out by the respondent to set aside the order of forfeiture of the
earnest money deposit.

Headnotes
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 – Security Interest
(Enforcement) Rules, 2002 – Contract Act, 1872 – ss. 73 and
74 – Whether, the underlying principle of Section(s) 73 & 74
respectively of the Contract Act, 1872 Act is applicable to
forfeiture of earnest-money deposit under Rule 9(5) of the
SARFAESI Rules:
Held: The SARFAESI Act is a special legislation with an overriding
effect on the general law, and only those legislations which are either
specifically mentioned in Section 37 or deal with securitization will
apply in addition to the SARFAESI Act – Being so, the underlying
principle envisaged under Section(s) 73 & 74 of the 1872 Act which
is a general law will have no application, when it comes to the
SARFAESI Act more particularly the forfeiture of earnest-money
deposit which has been statutorily provided under Rule 9(5) of the

* Author
[2024] 2 S.C.R. 13

The Authorised Officer, Central Bank of India v. Shanmugavelu

SARFAESI Rules as a consequence of the auction purchaser’s
failure to deposit the balance amount – The forfeiture can be justified
if the terms of the contract are clear and explicit – If it is found that
the earnest money was paid in accordance with the terms of the
tender for the due performance of the contract by the Promisee,
the same can be forfeited in case of non-performance by him or
her – Since, the forfeiture under Rule 9(5) of the SARFAESI Rules
is also taking place pursuant to the terms & conditions of a public
auction – Suffice to say, Section(s) 73 and 74 of the 1872 Act will
have no application whatsoever, when it comes to forfeiture of the
earnest-money deposit under Rule 9 sub-rule (5) of the SARFAESI
Rules. [Paras 68, 89, 91]
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 – Security Interest
(Enforcement) Rules, 2002 – Contract Act, 1872 – The High
Court held that forfeiture of the entire deposit u/r. 9 sub-
rule (5) of the SARFAESI Rules by the appellant bank after
having recovered its dues from the subsequent sale amounts
to unjust enrichment – Whether, the forfeiture of the entire
amount towards the earnest-money deposit under Rule 9(5)
of the Rules amounts to unjust enrichment:
Held: The consequence of forfeiture of 25% of the deposit under
Rule 9(5) of the SARFAESI Rules is a legal consequence that has
been statutorily provided in the event of default in payment of the
balance amount – The consequence envisaged under Rule 9(5)
follows irrespective of whether a subsequent sale takes place at a
higher price or not, and this forfeiture is not subject to any recovery
already made or to the extent of the debt owed – In such cases,
no extent of equity can either substitute or dilute the statutory
consequence of forfeiture of 25% of deposit under Rule 9(5) of
the SARFAESI Rules – The High Court erred in law by holding
that forfeiture of the entire deposit under Rule 9 sub-rule (5) of
the SARFAESI Rules by the appellant bank after having already
recovered its dues from the subsequent sale amounts to unjust
enrichment. [Paras 111, 113]
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 – Security Interest
(Enforcement) Rules, 2002 – Contract Act, 1872 – Whether a
case of exceptionable circumstances could be said to have
been made out by the respondent to set aside the order of
forfeiture of the earnest money deposit:
14 [2024] 2 S.C.R.

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Held: Where extraneous conditions exist that might have led to the
inability of the successful auction purchaser despite best efforts
from depositing the balance amount to no fault of its own, in such
cases the earnest-money deposited by such innocent successful
auction purchaser could certainly be asked to be refunded – In the
instant case, it is the respondent’s case that he was unable to make
the balance payment owing to the advent of the demonetization –
The same led to a delay in raising the necessary finance – It has
been pleaded by the respondent that the appellant bank failed to
provide certain documents to him in time as a result of which he
was not able to secure a term loan – However, the aforesaid by no
stretch can be said to be an exceptional circumstance warranting
judicial interference – Because demonetization had occurred much
before the e-auction was conducted by the appellant bank – As
regards the requisition of documents, the sale was confirmed on
07.12.2016, and the respondent first requested for the documents
only on 20.12.2016, and the said documents were provided to
him by the appellant within a month’s time i.e., on 21.01.2017 – It
may also not be out of place to mention that the respondent was
granted an extension of 90-days’ time period to make the balance
payment, and was specifically reminded that no further extension
would be granted, in-spite of this the respondent failed to make the
balance payment – The e-auction notice inviting bids along with the
correspondence between the appellant bank and the respondent
are unambiguous and clearly spelt out the consequences of not
paying the balance amount within the specified period. [Paras
117, 118, 119, 120]
Doctrines/Principles – Principle of ‘Reading-Down’ a provision:
Held: The principle of “reading down” a provision refers to a legal
interpretation approach where a court, while examining the 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 the idea that courts should make every effort
to preserve the 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, the court may opt to read down the
provision –Reading down involves construing the language of the
provision in a manner that limits its scope or application, making
it consistent with constitutional or legal principles – The rationale
[2024] 2 S.C.R. 15

The Authorised Officer, Central Bank of India v. Shanmugavelu

behind the principle of reading down is to avoid striking down an
entire legislation – Courts generally prefer to preserve the intent
of the legislature and the overall validity of a law by adopting an
interpretation that addresses the specific constitutional concerns
without invalidating the entire statute. [Paras 93, 94, 95]
Security Interest (Enforcement) Rules, 2002 – Rule 9 sub-rule
(5) – Harshness of a provision is no reason to read down the
same:
Held: Harshness of a provision is no reason to read down the
same, if its plain meaning is unambiguous and perfectly valid – A
law/rule should be beneficial in the sense that it should suppress
the mischief and advance the remedy – The harsh consequence of
forfeiture of the entire earnest-money deposit has been consciously
incorporated by the legislature in Rule 9(5) of the SARFAESI
Rules so as to sub-serve the larger object of the SARFAESI Act
of timely resolving the bad debts of the country – The idea behind
prescribing such a harsh consequence is not illusory, it is to attach
a legal sanctity to an auction process once conducted under the
SARFAESI Act from ultimately getting concluded – Any dilution of
the forfeiture provided under Rule 9(5) of the SARFAESI Rules
would result in the entire auction process under the SARFAESI
Act being set at naught by mischievous auction purchaser(s)
through sham bids, thereby undermining the overall object of the
SARFAESI Act of promoting financial stability, reducing NPAs and
fostering a more efficient and streamlined mechanism for recovery
of bad debts. [Paras 101 and 102]
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 – Legislative History
and scheme – Discussed.

Case Law Cited
Fateh Chand v. Balkishan Dass, [1964] SCR 515 : AIR
1963 SC 1405 – followed.
Madras Petrochem Ltd. & Anr. v. Board for Industrial
and Financial Reconstruction & Ors., [2016] 11 SCR
419 : (2016) 4 SCC 1; Karsandas H. Thacker v. M/s.
The Saran Engineering Co. Ltd., AIR 1965 SC 1981;
K. P. Subbarama Sastri and others v. K. S. Raghavan
& Ors., [1987] 2 SCR 767 : (1987) 2 SCC 424; Rakesh
16 [2024] 2 S.C.R.

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Birani (Dead) through LRs v. Prem Narain Sehgal &
Anr., [2018] 3 SCR 750 : (2018) 5 SCC 543; Agarwal
Tracom Private Limited v. Punjab National Bank & Ors.,
[2017] 11 SCR 164 : (2018) 1 SCC 626; Celir LLP. v.
Bafna Motors (Mumbai) Pvt. Ltd. & Ors., 2023 SCC
OnLine SC 1209; R.S. Joshi, Sales Tax Officer, Gujarat
& Ors. v. Ajit Mills Limited & Anr., [1978] 1 SCR 338 :
(1977) 4 SCC 98; Maula Bux v. Union of India, [1970] 1
SCR 928 : 1969 (2) SCC 554; Kailash Nath Associates
v. Delhi Development Authority & Anr., [2015] 1 SCR
627 : (2015) 4 SCC 136; B.R. Enterprises v. State of
U.P. & Ors., [1999] 2 SCR 1111 : (1999) 9 SCC 700;
Calcutta Gujarati Education Society & Anr. v. Calcutta
Municipal Corpn. & Ors., [2003] 2 Suppl. SCR 915 :
(2003) 10 SCC 533; Sahakari Khand Udyog Mandal
Ltd. v. Commissioner of Central Excise & Customs,
[2005] 2 SCR 606 : (2005) 3 SCC 738; National Spot
Exchange Ltd. v. Anil Kohli, Resolution Professional for
Dunar Foods Ltd., [2021] 7 SCR 1024 : (2022) 11 SCC
761; Alisha Khan v. Indian Bank (Allahabad Bank) &
Ors, 2021 SCC OnLine SC 3340; Authorized Officer
State Bank of India v. C. Natarajan, [2023] 5 SCR 1067:
2023 SCC Online SC 510 – relied on.
Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.,
[2004] 3 SCR 982 : (2004) 4 SCC 311; United Bank
of India v. Satyawati Tondon & Ors., [2010] 9 SCR 1 :
(2010) 8 SCC 110; Satish Batra v. Sudhir Rawal, [2012]
9 SCR 662 : (2013) 1 SCC 345; Videocon Properties
Ltd. v. Dr. Bhalchandra Laboratories & Ors., [2003] 6
Suppl. SCR 1197 : (2004) 3 SCC 711; Shree Hanuman
Cotton Mills & Ors. v. Tata Air Craft Limited, [1970]
3 SCR 127 : (1969) 3 SCC 522; Delhi Development
Authority v. Grihshapana Cooperative Group Housing
Society Ltd., [1995] 2 SCR 115 : 1995 Supp (1) SCC
751; V. Lakshmanan v. B.R. Mangalagiri & Ors., 1995
Supp (2) SCC 33; HUDA v. Kewal Krishnan Goel, [1996]
2 Suppl. SCR 587 : 1996 (4) SCC 249 – referred to.
Dinanath Damodar Kale v. Malvi Mody Ranchhoddas
and Co., AIR 1930 Bom 213 – referred to.
[2024] 2 S.C.R. 17

The Authorised Officer, Central Bank of India v. Shanmugavelu

Hadley & Anr. v. Baxendale & Ors., (1843-60) ALL E.R.
Rep. 461; Victoria Laundry (Windsor) Ltd v. Newman
Industrial Ltd., [1949] 2 K.B. 528; Kunwar Chiranjit
Singh v. Har Swarup, (1926) 23 LW 172; Vide Howe
v. Smith, (1884) 27 Ch.D. 89; Stockloser v. Johnson,
(1954) 1 All. E.R. 630 – referred to.

Books and Periodicals Cited
Treatise on the Law of Sale of Personal Property by
Benjamin, 1950, 8th Edition at page 946; Halsbury’s
Laws of England, third edition, volume XXXIV, page
118; G. C. Cheshire and C.H.S. Fifoot on the Law of
Contracts (fifth edition) at pages 496- 497.

List of Acts
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002; Security Interest
(Enforcement) Rules, 2002; Contract Act, 1872.

List of Keywords
Simple mortgage; Default in payment; e-auction notice; Secured
asset; Public auction; Auction purchaser; Failure in remitting balance
amount; Cancellation of sale; Forfeiture under the SARFAESI
Rules; Secured creditor; Earnest money; Law on forfeiture of
earnest money; Principle of ‘Reading-Down’; Unjust enrichment;
Compensation for loss or damage caused by breach of contract.

Case Arising From

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.235-236 of
2024.
From the Judgment and Order dated 27.10.2021 of the High Court
of Judicature at Madras in CRP Nos.1892 and 2282 of 2021.
Appearances for Parties
Dhruv Mehta, Sr. Adv., Amit K. Nain, PBA Srinivasan, Keith Verghese,
V. Aravind, Ms. Srishti Bansal, Sumit Swami, Ms. Pooja Kumari,
Advs. for the Appellant.
Dr. S. Muralidhar, Sr. Adv., S. Sethuraman, M. A. Karthik, Ms. Aswathi
M. K., Advs. for the Respondents.
18 [2024] 2 S.C.R.

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Judgment / Order of the Supreme Court

Judgment
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

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

* Ed. Note : Pagination is as per the original judgment.
[2024] 2 S.C.R. 19

The Authorised Officer, Central Bank of India v. Shanmugavelu

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: -
20 [2024] 2 S.C.R.

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“TERMS & CONDITIONS
1. The e-Auction is being held on “AS IS WHERE IS” and “AS IS
WHAT IS” basis and “NO COMPLAINT” condition.
2. The auction sale will be Online E-Auction/Bidding through
website https://www.bankeauctions.com on 07-12-2016 from
11.00 a.m. to 12. Noon
3. Intending bidders shall hold a valid Digital Signature Certificate,
e-mail address and PAN number. For details with regard to
Digital Signature Certificate please contact M/s C1 India Pvt.
Ltd., E-Mail ID: support@bankeauctions.com or shankar.
ganesh@c1india.com
4. Bidders are required to go through the website https://www.
bankeauctions.com for detailed terms and conditions of auction
sale before submitting their bids and taking part in the e- Auction
sale proceedings.
5. To the best of knowledge and information of the Authorized
Officer, there is no encumbrance on property affecting the
security interest. However, the intending bidders should make
their own independent inquiries regarding the encumbrances,
title of property put on auction and claims / rights / dues
affecting the property, prior to submitting their bid. The e-Auction
advertisement does not constitute and will not be deemed to
constitute any commitment or any representation of the bank.
The property is being sold with all the existing and future
encumbrances whether known or unknown to the bank. The
Authorized Officer / Secured Creditor shall not be responsible
in any way for any third party claims / rights / dues.
6. It shall be the responsibility of the bidders to inspect and
satisfy themselves about the asset and specification before
submitting the bid. The inspection of property put on auction
will be permitted to interested bidders at site on 23-11-2016
from 10.00 a.m. to 5.00 p.m.
7. The above mentioned amount should be remitted towards EMD
through RTGS/NEFT to Account No. 3227870680 of Central
Bank of India, CFB, Chennai 600008 IFSC Code CBIN0283507.
Cheques or demand draft shall not be accepted as EMD amount.
[2024] 2 S.C.R. 21

The Authorised Officer, Central Bank of India v. Shanmugavelu

8. Prospective bidders are advised to obtain user id and password
which are mandatory for bidding in the above e-auction from M/s
C1India Pvt. Ltd., helpline 01244302020/2021/2022/2023/2024
E-mail support@bankerauctions.com or K.N.
SHRINATH-9840446485. Passwords will be allotted only to
those bidders who fulfil all the terms and conditions of e-auction
and have deposited the requisite EMD. And for further property
related query you may contact Mr. G.S. Prasad, Chief Manager,
Central Bank of India, CFB, Chennai Tel. No. 044-42625259
Mobile 9962029300 e-mail ID: bmchen3507@centralbank.co.in
during officer hours i.e. 10 AM to 5 PM during the working days.
9. After Registration by the bidder in the Web-Portal, the intending
bidder / purchaser is required to get the copies of the following
documents uploaded in the Web Portal before last date of
submission of the bid viz. i) Copy of the NEFT/RTGS Challan;
ii) Copy of PAN Card; iii) Proof of Identification (KYC) viz. self-
attested copy of Voter ID Card / Driving License / Passport etc.
iv) Copy of proof of address; without which the bid is liable to
be rejected.
10. The interested bidders, who have submitted their bid not below
the Reserve price through online mode before 4.00 p.m. on
05-12-2016 shall be eligible for participating in the e-bidding
process. The e-Auction of above properties would be conducted
exactly on the scheduled Date & Time as mentioned against
each property by way of inter-se bidding amongst the bidders.
The bidder shall improve their offer in multiple of the amount
mentioned under the column “Bid Increase Amount”. In case
bid is placed in the last 5 minutes of the closing time of the
e-Auction, the closing time will automatically get extended for
3 minutes (subject to maximum of unlimited extensions of 3
minutes each). The bidder who submits the highest bid amount
(not below the Reserve Price) on closure of e-Auction process
shall be declared as Successful Bidder and a communication
to that effect will be issued which shall be subject to approval
by the Authorized Officer/Secured Creditor.
11. The Earnest Money Deposit (EMD) of the successful bidder
shall be retained towards part sale consideration and the EMD
of unsuccessful bidders shall be refunded. The Earnest Money
Deposit shall not bear any interest. The successful bidder shall
22 [2024] 2 S.C.R.

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have to deposit 25% of the auction price less the EMD already
paid, within 24 hours of the acceptance of bid price by the
Authorized Officer and the balance 75% of the sale price on
or before 15th day of sale or within such extended period as
agreed upon in writing by and solely at the discretion of the
Authorized Officer. If any such extension is allowed, the amount
deposited by the successful bidder shall not carry any interest.
In case of default in payment by the highest and successful
bidder, the amount already deposited by the bidder shall be
liable to be forfeited and property shall be put to re-auction
and the defaulting bidder shall have no claim / right in respect
of property/amount.
12. The authorized Officer is not bound to accept the highest offer
and the authorized officer has absolute right to accept or reject
any or all offer(s) or adjourn / postpone / cancel the e-auction
without assigning any reasons thereof. ...”
7. Pursuant to the same, the e-auction was conducted on 07.12.2016
and a total of four bids were received wherein the respondent also
participated and submitted its bid to the tune of Rs. 12,27,00,000/-.
The respondent’s bid was found to be the highest and was classified
as H1 and accordingly, the respondent was declared as the successful
auction purchaser.
8. Pursuant to the aforesaid, the respondent on the same day deposited
25% of the bid amount i.e., Rs. 3,06,75,000/- as the earnest money
deposit upon which, the appellant confirmed the sale of the Secured
Asset in favour of the respondent vide its letter dated 07.12.2016
which inter-alia stipulated that in the event of default in payment of
the balance amount, the sale shall be liable to be cancelled and the
earnest money would be forfeited. The said sale confirmation letter
is being reproduced below: -
“CFB/CHEN/2016-17/685 December 7, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
[2024] 2 S.C.R. 23

The Authorised Officer, Central Bank of India v. Shanmugavelu

Sir,
Reg: Recovery Proceedings under the provision of SARFAESI
Act 2002 in our borrowal account M/s Best & Crompton
Engineering Projects Limited – E Auction of property held on
07/12/2016.
We have to inform you that in the E auction held on 07/12/2016
pursuant to the E-auction sale notice dated 24/10/2016 issued by
the Authorized Officer. In respect of Schedule property covered
in the E auction sale notice i.e.,
Lot no. 1: Property belonging to M/s Futuretech Industries Ltd.
presently known as Candid Industries Ltd. All that piece and
parcel of the immovable property being industrial land together
with the superstructure/shed standing thereon admeasuring
10581 sq. ft. or thereabouts comprised in survey nos. 60 part
and 65/2, Block no. 6, Alandur village, Mambalam-Guindy Taluk,
sub-registration district Alandur, registration district Chennai
South presently situated at plot no. A-19, Thiru Vi Ka Industrial
Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate
East by: 80 feet Road, West by: Service Road.
You have been declared as successful bidder at the sale price
of Rs. 12,27,00,000/- (Rupees Twelve Crore Twenty Seven
Lac only). You are now required to remit as per E auction
Sale notice 25% of the sale price less Earnest Money Deposit
amount already remitted by you i.e., Rs. 3,06,75,000/- minus
EMD remitted Rs. 96,20,000/- = Rs. 2,10,55,000/- (Rupees
Two Crore Ten Lac Fifty Five Thousand only) by RTGS/NEFT
to the same account number to which you have remitted the
Earnest Money Deposit within 24 hours of acceptance of bid.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees
Nine Crore Twenty Lac Twenty Five Thousand Only) is to be
remitted by you by RTGS to the same account number on or
before 15 days from today; failing which the sale is liable to be
cancelled and the EMD will be forfeited.
Please note that the E Auction sale has been conducted strictly
as per the terms and conditions spelt out in the E Auction notice
dated 24/10/2016.
24 [2024] 2 S.C.R.

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Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
9. The respondent vide its email dated 19.12.2016, requested the
appellant bank for grant of extension of three-months’ time for the
payment of the balance amount on the ground that its term-loan
was still under-process.
10. The appellant bank vide its letter dated 20.12.2016, acceded to
the request of the respondent and granted a further extension of
three-months’ time i.e., till 07.03.2017 in terms of Rule 9(4) of the
Security Interest (Enforcement) Rules, 2002 (for short, the “SARFAESI
Rules”). The said letter also stated that no further extension of time
shall be granted and in the event the respondent fails to pay the
balance amount, the sale shall be cancelled and the amount already
paid shall be forfeited. The said letter is being reproduced below: -
“CFB/CHEN/2016-17/718 December 20, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI
Act 2002 in the account M/s Best & Crompton Engineering
Projects Limited – E Auction of property held on 07/12/2016.
We may once again inform you that in the E auction held
on 07/12/2016 pursuant to the E-auction sale notice dated
24/10/2016 issued by the Authorized Officer in respect of
Schedule property covered in the E auction sale notice i.e.,
Property belonging to M/s Futuretech Industries Ltd. presently
known as Candid Industries Ltd. Al that piece and parcel of
the immovable property being industrial land together with the
superstructure/shed standing thereon admeasuring 10581 sq.
[2024] 2 S.C.R. 25

The Authorised Officer, Central Bank of India v. Shanmugavelu

ft. or thereabouts comprised in survey nos. 60 part and 65/2
part, Block no. 6, Alandur village, Mambalam-Guindy Taluk, sub-
registration district Alandur, registration district Chennai South
presently situated at plot no. A-19, Thiru Vi Ka Industrial Estate,
South by: Plot no. A-18, Thiru Vi Ka Industrial Estate East by:
80 feet Road, West by: Service Road, you have been declared
as successful bidder at the sale price of Rs. 12,27,00,000/-
(Rupees Twelve Crore Twenty Seven Lac only).
You had remitted Rs. 2,10,55,000/- (Rupees Two Crore Ten Lac
Fifty Five Thousand only) as per E auction Sale notice 25%
of the sale price less Earnest Money Deposit amount already
remitted by you (i.e., Rs. 3,06,75,000/- minus Rs.96,20,000/-)
on 08/12/2016 as per the bid terms.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees
Nine Crore Twenty Lac Twenty Five Thousand Only) was to be
remitted by you before 15 days from the date of bid failing which
the sale is liable to be cancelled and the EMD will be forfeited.
However, you had vide your mail dated 19/12/2016 requested to
give you three (3) months time to pay the balance 75% payment
of the bid amount and also assured that you will honour the
offer in the time frame.
After carefully going through your request, the Authorized
officer hereby permit/ allow you to pay the balance amount of
Rs 9,20,25,000/- (Rupees Nine crore Twenty Lac Twenty Five
Thousand Only) within 90 days from the date of BID. Further
we may also inform you that no further extension of time will
be granted and if you fail to pay the balance sale amount the
sale will be cancelled and the amount already paid will be
forfeited by the Bank.
Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
11. The respondent being unable to pay the balance amount within
the extended period sought an additional 15-days for making the
balance-payment vide its letter dated 06.03.2017.
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12. However, the appellant vide its letter dated 27.03.2017 turned down
the said request for further extension and intimated the respondent that
due to its failure in remitting the balance amount within the stipulated
time, the sale is cancelled and the amount already deposited stands
forfeited. The said sale cancellation letter is being reproduced below: -
“CFB/CHEN/2016-17/919 March 27, 2017
Mr. R. Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No.-4, Readymade Garment Complex
SIDCO Industrial Estates, Guindy
Chennai-600032
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI
Act 2002 in the account M/s Best & Crompton Engineering
Projects Limited
Ref: E Auction of property held on 07/12/2016
You were declared as successful bidder at the sale price of Rs.
12,27,00,000/- (Rupees Twelve Crore Twenty Seven Lac only)
in the E auction held on 07/12/2016 pursuant to the E auction
sale notice dated 24/10/2016 issued by the Authorised Officer
in respect of Schedule property covered in the E auction sale
notice i.e., mortgaged property belonging to M/s Futuretech
Industries Ltd presently known as Candid Industries Ltd.
Schedule
All that place and parcel of the immovable property being
industrial land together with the superstructure/shed standing
thereon admeasuring 10581 sq.ft. or thereabouts comprised in
survey nos. 60 part and 65/2 part. Block no. 6, Alandur village,
Mambalam-Guindy Taluk, sub-registration district Alandur,
registration district Chennai South presently situated at plot
no. A-19. Thiru Vi Ka Industrial Estate, South by: Plot no. A-18,
Thiru Vi Ka Industrial Estate, and East by: 80 feet Road, West
by: Service Road.
[2024] 2 S.C.R. 27

The Authorised Officer, Central Bank of India v. Shanmugavelu

You had remitted a total of Rs. 3,06,75,000 towards 25% of the
sale price on (i.e. Rs. 96,20,000 on 7-12-2016 towards EMD
and Rs. 2,10,55,000 on 08/12/2016 as per the terms of the bid.
The balance sale price amount to Rs. 9,20,25,000/- (Rupees
Nine Crore Twenty Lac Twenty Five Thousand only) was to be
remitted by you before 15 days from the date of bid failing which
the sale was liable to be cancelled and the amount deposited
by you had to be forfeited. However, you had vide your mail
dated 19/12/2016 requested to give you three (3) months’ time
to pay the balance 75% payment of the bid amount and also
assured that you will honour the offer in the time frame.
After carefully going through your request, the Authorized
officer permitted/allowed you to pay the balance amount of
Rs.9,20,25,000/-( Rupees Nine crore Twenty Lac Twenty Five
Thousand Only) within 90 days from the date of BID vide our
letter No. CFB/CHEN/2016-17/718 dated 20/12/2016. Further
we also informed you that no further extension of time will be
granted and if you fail to pay the balance sale amount the sale
will be cancelled and the amount already paid was liable to be
forfeited by the Bank.
You had again requested for extension of time for another 15
days vide your letter dated 06/03/2017. After going through your
representation/request, we permitted you to remit the balance
of Rs. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty
Five Thousand Only) by 22/03/2017 thereby giving three months
time from the 15th day of confirmation of sale as per the Security
Interests (Enforcement) Rules, 2002.
We hereby inform you that as you have failed to remit the balance
amount of Rs. 9,20,25,000/- (Rupees Nine crore Twenty Lac
Twenty Five Thousand Only) by 22/03/2017, the amount of Rs.
3,06,75,000/- which was already paid by you stands forfeited.
This letter issued without prejudice to the bank’s rights to bring
the property for fresh auction sale.
Thanking you
Yours sincerely,
Sd/-
AUTHORISED OFFICER”
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13. Despite the aforesaid letter, the respondent on 05.04.2017 addressed
one another letter to the appellant seeking further extension of 90
days for making the balance sale payment by enclosing a cheque
of Rs.50,00,000/- to show its bona fides. However, the appellant
returned the cheque and declined the said request vide its letter
dated 06.04.2017.
14. Aggrieved by the aforesaid, the respondent filed an application being
SA No. 143 of 2018 before the Debts Recovery Tribunal-II (“DRT”)
assailing the appellant’s sale cancellation and forfeiture letters dated
27.03.2017 and 06.04.2017 respectively.
15. During the pendency of the proceedings before the DRT as aforesaid
a fresh auction of the Secured Asset was conducted by the appellant
bank on 13.03.2019, and it appears that pursuant to the same the
sale was completed at an enhanced price of Rs. 14.76 crore i.e.,
more than the price fetched in the previous auction.
16. The DRT-II vide its order dated 06.05.2019 allowed the application
being SA No. 143 of 2018 and directed the appellant bank to refund
the earnest money deposited by the respondent after deducting a
sum of Rs. 5,00,000/- towards the expenditure incurred. The DRT-II
in its order observed that the respondent had requested the appellant
bank to provide certain documents required for the grant of term loan
which was not provided, as a result of which the term loan was not
granted and the respondent failed to remit the balance amount. It
further observed that as the Secured Asset had been sold for an
amount higher than the initial bid, no loss was caused to the appellant.
17. The aforesaid order was challenged by the appellant before the Debt
Recovery Appellate Tribunal, Chennai (“DRAT”) by way of RA(SA)
No. 119 of 2019. The DRAT vide its order dated 30.07.2021 observed
that the secured creditor was not entitled to forfeit the entire amount
deposited, but partly allowed the appeal and enhanced the forfeiture
from Rs. 5 Lac to Rs. 55 Lac.
B. IMPUGNED ORDER
18. Aggrieved with the aforesaid, both the appellant and the respondent
approached the High Court of judicature at Madras by way of
C.R.P. No(s). 1892 & 2282 of 2021 respectively, assailing the
order dated 30.07.2021 passed by the DRAT, Chennai, wherein
[2024] 2 S.C.R. 29

The Authorised Officer, Central Bank of India v. Shanmugavelu

the High Court vide the impugned judgment and final order dated
27.10.2021 allowed the respondent’s civil revision petition. The
operative portion is reproduced below: -
“19. For the reasons aforesaid, the enhancement of
the quantum of forfeiture as permitted by the Appellate
Tribunal in the impugned order of July 30, 2021 cannot
be sustained and the same is set aside. The quantum
as awarded by the DRT-II, Chennai in its order of May
06, 2019 is restored and to such extent the order of the
appellate authority is set aside.”
19. The impugned judgment of the High Court is in two-parts. In other
words, the High Court allowed the respondent’s civil revision petition
setting aside the DRAT’s order on two grounds: -
(i) First, the High Court took the view that the forfeiture of an amount
or deposit by a secured creditor under the SARFAESI Rules
cannot be more than the loss or damage suffered by it. The
High Court held that Rule 9 sub-rule (5) of the SARFAESI Rules
which provides for forfeiture cannot override the underlying ethos
of Section 73 of the Indian Contract Act, 1872 (for short, “the
1872 Act”). The relevant observations are reproduced below: -
“10. Section 74 of the Contract Act, 1872 provides for
compensation for breach of contract where the penalty is
stipulated. Section 73 of the Contract Act is the general
rule that provides for compensation for loss or damage
caused by breach of contract and Section 74 is where
the quantum is specified. What Section 73 of the Contract
Act mandates is that a party who suffers as a result of
a breach committed by the other party to the contract
“is entitled to receive from the party who has broken the
contract, compensation for any loss or damage caused to
him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when
they made the contract, to be likely to result from the breach
of it.” Any detailed discussion on such provision would
be beyond the scope of the present lis and may require
many more sheets that may be conveniently expended in
the present exercise. Indeed, Section 73 of the Contract
Act is in the nature of a jurisprudential philosophy that is
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accepted as a part of the law in this country. In short, it
implies that only such of the loss or damage suffered by
the party not in breach, may be recovered from the party
in breach, as a consequence of the breach. It is possible
that as a result of the breach, the party not in breach does
not suffer any adverse impact. It is also possible, as in the
present case, that as a consequence of the breach, the
party not in breach obtains a benefit, in such cases, where
no loss or damage has been occasioned to the party not
in breach, such party cannot extract any money merely
on account of such breach, as the entitlement in law to
compensation is not upon the commission of breach, but
only upon any loss or damage suffered as a consequence
thereof. That is elementary.
xxx xxx xxx
12. Rule 9(5) of the said Rules of 2002 has to be seen as
an enabling provision that permits forfeiture in principle.
However, such Rule cannot be conferred an exalted status
to override the underlying ethos of Section 73 of the
Contract Act. In other words, Rule 9(5) has to yield to the
principle recognised in Section 73 of the Contract Act or
it must be read down accordingly. Thus, notwithstanding
the wide words used in Rule 9(5) of the said Rules, a
secured creditor may not forfeit any more than the loss
or damage suffered by such creditor as a consequence of
the failure on the part of a bidder to make payment of the
consideration or the balance consideration in terms of the
bid. It is only if such principle as embodied in Section 73 of
the Contract Act, is read into Rule 9(5) of the said Rules,
would there be an appropriate answer to the conundrum
as to whether a colossal default of the entirety of the
consideration or the mere default of one rupee out of the
consideration would result in the identical consequence
of forfeiture as indicated in the provision.
13. In any event, notwithstanding the reference to Section
35 of the Act of 2002, the apparent overriding effect of
the provisions of the Act of 2002 has to be tempered in
the light of Section 37 of the Act. Though Section 37 of
[2024] 2 S.C.R. 31

The Authorised Officer, Central Bank of India v. Shanmugavelu

the Act refers to several statutes by name, the residual
limb of such provision recognises “or any other law for the
time being in force”, which would embrace the Contract
Act within its fold. It is completely unacceptable that by
virtue of the delegated legislation as in the Rules of 2002,
the fundamental principle envisaged in the Contract Act
would get diluted or altogether disregarded.”
(Emphasis supplied)
(ii) Secondly, the High Court was of the view that the forfeiture of
the entire earnest money deposit by the appellant amounts to
unjust enrichment which is not permissible. It observed that
under the SARFAESI Act, a secured creditor is not entitled to
obtain any amount more than the debt due to it, and as such
any forfeiture under the SARFAESI Act ought to be assessed
by computing damages on the basis of evidence. The relevant
observations are reproduced below: -
“18. It was completely open to the appellate authority
to enhance the quantum as awarded by the DRT.
However, such exercise could have been undertaken by
inviting evidence in such regard. The appellate authority
purported to enhance the quantum from Rs 5 lakh to
Rs 55 lakh without indicating any or cogent grounds for
such enhancement. Though an element of guesstimation
is permitted while assessing damages, when an initial
authority has indicated a ballpark figure, any tinkering with
such figure at the appellate stage would require material in
support thereof, which is completely lacking in the judgment
and order impugned dated July 30, 2021 passed by the
appellate authority in the present case.
xxx xxx xxx
20. Before parting, there is another aspect that has to be
referred to for the completeness of the discussion. The
purpose of the Act of 2002 is to ensure speedy recovery
of the debt due to secured creditors covered by such
statute. Towards such end, the provisions of the said
Act and the Rules made thereunder give primacy to the
secured creditor in initially assessing the quantum of debt
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due and in proceeding against the securities furnished for
realising such debt due. However, no secured creditor,
not even by embracing the provisions of the said Act of
2002, can unjustly enrich itself or obtain any more by way
of resorting to any of the measures contemplated under
Section 13(4) of the Act or otherwise than the debt that
is due to it and the costs that may have been incurred in
course of trying to recover the debt due. In a sense, if the
forfeiture provision in Rule 9(5) of the said Rules is ready
to imply what the secured creditor in this case seeks to, it
may result in a secured creditor unjustly enriching itself,
which is not permissible.”
(Emphasis supplied)
20. The plain reading of the aforesaid findings recorded by the High
Court lays down three propositions of law as follows:
(1) Rule 9(5) of the SARFAESI Rules is merely an enabling
provision that permits forfeiture in principle. It cannot override
the underlying ethos of Section 73 of the 1872 Act. It should
yield to the principle recognised in Section 73 of the 1872 Act
or must be read down accordingly.
(2) By virtue of the delegated legislation as in the SARFAESI Rules,
the fundamental principle envisaged in the 1872 Act should not
be permitted to be diluted or altogether disregarded.
(3) Rule 9(5) of the SARFAESI Rules if not read along with the
principle recognised in Section 73 of the 1872 Act, the same
may result in a secured creditor unjustly enriching itself which
is not permissible.
21. In view of the aforesaid, the Bank being aggrieved with the impugned
order passed by the High Court is here before this Court with the
present appeals.
C. SUBMISSIONS OF THE APPELLANT
22. Mr. Dhruv Mehta, the learned Senior Counsel appearing for the
appellants submitted that the issue framed by the High Court in its
Impugned Judgment is wholly alien to the sale conducted under the
SARFAESI Rules, more particularly Rule 9.
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The Authorised Officer, Central Bank of India v. Shanmugavelu

23. It was submitted that the High Court was not correct in reading down
Rule 9(5) and holding that the same must yield to the principles
recognized in Section 73 of the 1872 Act, notwithstanding the wide
words used in Rule 9(5) of SARFAESI Rules.
24. It was further submitted that the High Court failed to appreciate that
the auction sale under consideration was a statutory sale conducted
by the appellant in accordance with the SARFAESI Rules and as
Section 35 of the SARFAESI Act gives an overriding effect, this would
not be a case of breach of contract which would attract principles
underlying Section 73 of the 1872 Act.
25. Mr. Mehta placed strong reliance on a recent decision of this Court
in Authorized Officer State Bank of India v. C. Natarajan reported
in 2023 SCC Online SC 510, wherein whilst dealing with a similar
issue, it was held that Rule 9 which is part of a special enactment
will have precedence over Sections 73 and 74 respectively of the
1872 Act which is a general provision.
26. It was further submitted that Rule 9(5) of the SARFAESI Rules, ought
to be interpreted strictly because often the borrowers use subversive
methods to hinder the auction process which may lead to erosion
of the secured asset’s value in light of reauctions.
27. In the last, Mr. Mehta submitted that clause 11 of the e-auction notice
dated 24.10.2016 explicitly provided that the failure of the auction
purchaser in paying the balance amount would result in forfeiture
of the earnest-money deposit.
28. In such circumstances referred to above, the learned Senior Counsel
prayed that there being merit in his appeals, the same be allowed
and the impugned judgment and order of the High Court be set aside.
D. SUBMISSIONS OF THE RESPONDENT
29. Dr. S. Muralidhar, the learned Senior Counsel appearing for the
respondent on the other hand vehemently submitted that no error not
to speak of any error of law could be said to have been committed
by the High Court in passing the impugned judgment and order.
30. It was submitted that Section 35 of the SARFAESI Act only gives the
Act an overriding effect over other laws, and is not applicable to the
SARFAESI Rules made under it. Therefore Rule 9(5) of SARFASI
Rules is only an enabling provision and cannot override the statutory
provisions of the 1872 Act.
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31. It was submitted that the High Court committed no error in holding
that the appellant bank could not have forfeited the amount deposited
by a third party being the auction purchaser without any real damage
or loss being caused to it.
32. It was further submitted that under the SARFAESI Rules, the
authorized officer is left with an unguided power of forfeiture. Such
unguided power conferred on a delegated authority like the authorized
officer in a bank is opposed to public policy and would result in unjust
enrichment. Therefore, the said Rule 9(5) is liable to be struck down
as unconstitutional being opposed to public policy and principles of
fair play and unreasonableness.
33. In such circumstances referred to above, it was prayed on behalf of
the respondent that there being no merit in the appeals, the same
may be dismissed.
E. ANALYSIS (Points for Determination)
34. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the following questions
fall for our consideration: -
I. Whether, the underlying principle of Section(s) 73 & 74
respectively of the 1872 Act is applicable to forfeiture of earnest-
money deposit under Rule 9(5) of the SARFAESI Rules? In
other words, whether the forfeiture of the earnest-money deposit
under Rule 9(5) of the SARFAESI Rules can be only to the
extent of loss or damages incurred by the Bank?
II. Whether, the forfeiture of the entire amount towards the earnest-
money deposit under Rule 9(5) of the Rules amounts to unjust
enrichment? In other words, whether the quantum of forfeiture
under the SARFAESI Rule is limited to the extent of debt owed?
III. Whether a case of exceptionable circumstances could be said
to have been made out by the respondent to set aside the order
of forfeiture of the earnest money deposit?

i) Legislative History and Scheme of the SARFAESI Act
35. Till early 1990s, the civil suits were being filed for recovery of the
dues of banks and financial institutions under the Act 1882 and the
Code of Civil Procedure, 1908 (“CPC”). Due to various difficulties the
[2024] 2 S.C.R. 35

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banks and financial institutions had to face in recovering loans and
enforcement of securities, the Parliament enacted the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (for short,
the “RDBFI Act”).
36. On account of lack of infrastructure and manpower, the regular
civil courts were not in a position to cope up with the speed in the
adjudication of recovery cases. In the light of recommendations of
the Tiwari Committee the special tribunals came to be set up under
the provisions of the RDBFI Act referred to above for the recovery
of huge accumulated NPA of the Bank loans.
37. On the continuing rise in number of Non-Performing Assets (NPA)
at banks and other financial institutions in India; a poor rate of loan
recovery and the failure of the existing legislation in redressing the
difficulties of recovery by banks; the Narasimham Committee I & II
and Andyarujina Committee were constituted by the Government
for examining and suggesting banking reforms in India. These
Committees in their reports observed that one out of every five
borrower was a defaulter, and that due to the long and tedious
process of existing frame work of law and the overburdening of
existing forums including the specialised tribunals under the 1993
Act, any attempt of recovery with the assistance of court/tribunal
often rendered the secured asset nearly worthless due to the long
delays. In this background the Committees thus, proposed new laws
for securitisation in order to permit banks and financial institutions
to hold securities and sell them in a timely manner without the
involvement of the courts.
38. On the recommendations of the Narasimham Committee and
Andyarujina Committee, the SARFAESI Act was enacted to empower
the banks and financial institutions to take possession of the securities
and to sell them without intervention of the court.
39. The statement of objects and reasons for which the Act has been
enacted reads as under: -
“STATEMENT OF OBJECTS AND REASONS
The financial sector has been one of the key drivers in India’s
efforts to achieve success in rapidly developing its economy.
While the banking industry in India is progressively complying
with the international prudential norms and accounting practices
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there are certain areas in which the banking and financial
sector do not have a level playing field as compared to other
participants in the financial markets in the world. There is no
legal provision for facilitating securitisation of financial assets
of banks and financial institutions. Further, unlike international
banks, the banks and financial institutions in India do not have
power to take possession of securities and sell them. Our existing
legal framework relating to commercial transactions has not
kept pace with the changing commercial practices and financial
sector reforms. This has resulted in slow pace of recovery of
defaulting loans and mounting levels of non-performing assets
of banks and financial institutions. Narasimham Committee I
and II and Andhyarujina Committee constituted by the Central
Government for the purpose of examining banking sector reforms
have considered the need for changes in the legal system in
respect of these areas. These Committees, inter alia, have
suggested enactment of a new legislation for securitisation and
empowering banks and financial institutions to take possession
of the securities and to sell them without the intervention of
the court. Acting on these suggestions, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance, 2002 was promulgated on the 21st June,
2002 to regulate securitisation and reconstruction of financial
assets and enforcement of security interest and for matters
connected therewith or incidental thereto. The provisions of the
Ordinance would enable banks and financial institutions to realise
long-term assets, manage problem of liquidity, asset liability
mismatches and improve recovery by exercising powers to take
possession of securities, sell them and reduce nonperforming
assets by adopting measures for recovery or reconstruction.”
40. This Court in Mardia Chemicals Ltd. & Ors. v. Union of India & Ors.
reported in (2004) 4 SCC 311, examined the history and legislative
backdrop that ultimately led to the enactment of the SARFAESI Act
as under: -
“34. Some facts which need to be taken note of are that the
banks and the financial institutions have heavily financed the
petitioners and other industries. It is also a fact that a large sum
of amount remains unrecovered. Normal process of recovery
of debts through courts is lengthy and time taken is not suited
for recovery of such dues. For financial assistance rendered
[2024] 2 S.C.R. 37

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to the industries by the financial institutions, financial liquidity
is essential failing which there is a blockade of large sums of
amounts creating circumstances which retard the economic
progress followed by a large number of other consequential ill
effects. Considering all these circumstances, the Recovery of
Debts Due to Banks and Financial Institutions Act was enacted
in 1993 but as the figures show it also did not bring the desired
results. Though it is submitted on behalf of the petitioners that
it so happened due to inaction on the part of the Governments
in creating Debts Recovery Tribunals and appointing presiding
officers, for a long time. Even after leaving that margin, it is
to be noted that things in the spheres concerned are desired
to move faster. In the present-day global economy it may be
difficult to stick to old and conventional methods of financing
and recovery of dues. Hence, in our view, it cannot be said that
a step taken towards securitisation of the debts and to evolve
means for faster recovery of NPAs was not called for or that
it was superimposition of undesired law since one legislation
was already operating in the field, namely, the Recovery of
Debts Due to Banks and Financial Institutions Act. It is also
to be noted that the idea has not erupted abruptly to resort to
such a legislation. It appears that a thought was given to the
problems and the Narasimham Committee was constituted
which recommended for such a legislation keeping in view the
changing times and economic situation whereafter yet another
Expert Committee was constituted, then alone the impugned
law was enacted. Liquidity of finances and flow of money is
essential for any healthy and growth-oriented economy. But
certainly, what must be kept in mind is that the law should
not be in derogation of the rights which are guaranteed to the
people under the Constitution. The procedure should also be
fair, reasonable and valid, though it may vary looking to the
different situations needed to be tackled and object sought to
be achieved.
xxx xxx xxx
36. In its Second Report, the Narasimham Committee observed
that NPAs in 1992 were uncomfortably high for most of the
public sector banks. In Chapter VIII of the Second Report
the Narasimham Committee deals about legal and legislative
framework and observed:
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“8.1. A legal framework that clearly defines the rights and
liabilities of parties to contracts and provides for speedy
resolution of disputes is a sine qua non for efficient trade
and commerce, especially for financial intermediation. In
our system, the evolution of the legal framework has not
kept pace with changing commercial practice and with
the financial sector reforms. As a result, the economy
has not been able to reap the full benefits of the reforms
process. As an illustration, we could look at the scheme of
mortgage in the Transfer of Property Act, which is critical
to the work of financial intermediaries….”
One of the measures recommended in the circumstances was to
vest the financial institutions through special statutes, the power
of sale of the assets without intervention of the court and for
reconstruction of assets. It is thus to be seen that the question
of non-recoverable or delayed recovery of debts advanced by
the banks or financial institutions has been attracting attention
and the matter was considered in depth by the Committees
specially constituted consisting of the experts in the field. In the
prevalent situation where the amounts of dues are huge and
hope of early recovery is less, it cannot be said that a more
effective legislation for the purpose was uncalled for or that it
could not be resorted to. It is again to be noted that after the
Report of the Narasimham Committee, yet another Committee
was constituted headed by Mr Andhyarujina for bringing about
the needed steps within the legal framework. We are therefore,
unable to find much substance in the submission made on
behalf of the petitioners that while the Recovery of Debts Due
to Banks and Financial Institutions Act was in operation it was
uncalled for to have yet another legislation for the recovery of
the mounting dues. Considering the totality of circumstances
and the financial climate world over, if it was thought as a
matter of policy to have yet speedier legal method to recover
the dues, such a policy decision cannot be faulted with nor is
it a matter to be gone into by the courts to test the legitimacy
of such a measure relating to financial policy.”
41. In this regard, reference may be made to the following observations
of this Court in the case of United Bank of India v. Satyawati
Tondon & Ors. reported in (2010) 8 SCC 110. The relevant paras
are being reproduced hereunder:
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“1. … With a view to give impetus to the industrial
development of the country, the Central and State
Governments encouraged the banks and other financial
institutions to formulate liberal policies for grant of loans
and other financial facilities to those who wanted to set
up new industrial units or expand the existing units. Many
hundred thousand took advantage of easy financing by the
banks and other financial institutions but a large number
of them did not repay the amount of loan, etc. Not only
this, they instituted frivolous cases and succeeded in
persuading the civil courts to pass orders of injunction
against the steps taken by banks and financial institutions
to recover their dues. Due to lack of adequate infrastructure
and non-availability of manpower, the regular courts could
not accomplish the task of expeditiously adjudicating the
cases instituted by banks and other financial institutions for
recovery of their dues. As a result, several hundred crores
of public money got blocked in unproductive ventures.
2. In order to redeem the situation, the Government of India
constituted a committee under the Chairmanship of Shri T.
Tiwari to examine the legal and other difficulties faced by
banks and financial institutions in the recovery of their dues
and suggest remedial measures. The Tiwari Committee noted
that the existing procedure for recovery was very cumbersome
and suggested that special tribunals be set up for recovery
of the dues of banks and financial institutions by following a
summary procedure. The Tiwari Committee also prepared a
draft of the proposed legislation which contained a provision
for disposal of cases in three months and conferment of
power upon the Recovery Officer for expeditious execution
of orders made by adjudicating bodies.”
42. Section 13 of the SARFAESI Act contains the provisions relating to
the enforcement of the security interest and the manner in which the
same may be done by the secured creditor without the intervention
of the court or ribunal in accordance with its provisions.
43. Rules 8 and 9 respectively of the SARFAESI Rules prescribe the
procedure and formalities to be followed for the sale of immovable
secured asset as per Section 13 of the SARFAESI Act. In the present
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lis, we are concerned with Rule 9 more particularly sub-rule (5) of
the SARFAESI Rules which provides for forfeiture of 25% of the
deposit made under sub-rule (3) in the event the successful auction
purchaser fails to pay the balance amount within the stipulated time
period under sub-rule (4). The said Rule reads as under: -
“9. Time of sale, issue of sale certificate and delivery
of possession, etc.–(1) No sale of immovable property
under these rules, in first instance shall take place before
the expiry of thirty days from the date on which the public
notice of sale is published in newspapers as referred to in
the proviso to sub-rule (6) of rule 8 or notice of sale has
been served to the borrower:
Provided further that if sale of immovable property by
any one of the methods specified by sub-rule (5) of rule
8 fails and sale is required to be conducted again, the
authorised officer shall serve, affix and publish notice of
sale of not less than fifteen days to the borrower, for any
subsequent sale.
(2) The sale shall be confirmed in favour of the purchaser
who has offered the highest sale price in his bid or tender
or quotation or offer to the authorised officer and shall be
subject to confirmation by the secured creditor:
Provided that no sale under this rule shall be confirmed, if
the amount offered by sale price is less than the reserve
price, specified under sub-rule (5) of rule 8:
Provided further that if the authorised officer fails to obtain
a price higher than the reserve price, he may, with the
consent of the borrower and the secured creditor effect
the sale at such price.
(3) On every sale of immovable property, the purchaser
shall immediately, i.e. on the same day or not later than
next working day, as the case may be, pay a deposit
of twenty five per cent. of the amount of the sale price,
which is inclusive of earnest money deposited, if any, to
the authorised officer conducting the sale and in default
of such deposit, the property shall be sold again;
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(4) The balance amount of purchase price payable shall be
paid by the purchaser to the authorised officer on or before
the fifteenth day of confirmation of sale of the immovable
property or such extended period as may be agreed upon
in writing between the purchaser and the secured creditor,
in any case not exceeding three months.
(5) In default of payment within the period mentioned in
sub-rule (4), the deposit shall be forfeited to the secured
creditor and the property shall be resold and the defaulting
purchaser shall forfeit all claim to the property or to any
part of the sum for which it may be subsequently sold.
(6) On confirmation of sale by the secured creditor and
if the terms of payment have been complied with, the
authorised officer exercising the power of sale shall issue a
certificate of sale of the immovable property in favour of the
purchaser in the Form given in Appendix V to these rules.
(7) Where the immovable property sold is subject to any
encumbrances, the authorised officer may, if he thinks
fit, allow the purchaser to deposit with him the money
required to discharge the encumbrances and any interest
due thereon together with such additional amount that
may be sufficient to meet the contingencies or further
cost, expenses and interest as may be determined by him.
Provided that if after meeting the cost of removing
encumbrances and contingencies there is any surplus
available out of money deposited by the purchaser such
surplus shall be paid to the purchaser within fifteen days,
from date of finalisation of the sale.
(8) On such deposit of money for discharge of the
encumbrances, the authorised officer shall issue or cause
the purchaser to issue notices to the persons interested
in or entitled to the money deposited with him and take
steps to make, the payment accordingly.
(9) The authorised officer shall deliver the property to the
purchaser free from encumbrances known to the secured
creditor on deposit of money as specified in sub-rule (7)
above.
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(10) The certificate of sale issued under sub-rule (6)
shall specifically mention that whether the purchaser has
purchased the immovable secured asset free from any
encumbrances known to the secured creditor or not.”
44. Section 35 of the SARFAESI Act contains the overriding clause and
provides that the Act shall override any other law which is inconsistent
with its provisions, and reads as under: -
“35. The provisions of this Act to override other laws.–
The provisions of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law
for the time being in force or any instrument having effect
by virtue of any such law.”
45. Section 37 of the SARFAESI Act provides that the provisions of the
SARFAESI Act shall be in addition to the Acts mentioned in or and
any other law for the time being in force and that the other laws
shall also be applicable alongside the SARFAESI Act, and reads
as under: -
“37. Application of other laws not barred.–The provisions
of this Act or the rules made thereunder shall be in addition
to, and not in derogation of, the Companies Act, 1956 (1
of 1956), the Securities Contracts (Regulation) Act, 1956
(42 of 1956), the Securities and Exchange Board of India
Act, 1992 (15 of 1992), the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (51 of 1993)
or any other law for the time being in force.”
46. This Court in Madras Petrochem Ltd. & Anr. v. Board for Industrial
and Financial Reconstruction & Ors. reported in (2016) 4 SCC 1,
recapitulated the object behind the enactment of the SARFAESI Act
and in that context examined the purpose of Sections 13, 35 and 37
respectively of the SARFAESI Act with the following observations
given as under: -
“16. It is important at this stage to refer to the genesis of these
three legislations. Each of them deals with different aspects of
recovery of debts due to banks and financial institutions. Two
of them refer to creditors’ interests and how best to deal with
recovery of outstanding loans and advances made by them on
the one hand, whereas the Sick Industrial Companies (Special
[2024] 2 S.C.R. 43

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Provisions) Act, 1985, on the other hand, deals with certain
debtors which are sick industrial companies [i.e. companies
running industries named in the Schedule to the Industries
(Development and Regulation) Act, 1951] and whether such
“debtors” having become “sick”, are to be rehabilitated. The
question, therefore, is whether the public interest in recovering
debts due to banks and financial institutions is to give way to
the public interest in rehabilitation of sick industrial companies,
regard being had to the present economic scenario in the
country, as reflected in parliamentary legislation.
xxx xxx xxx
19. While this Act had worked for a period of about 7 years,
the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 was brought into force, pursuant to various committee
reports. The Statement of Objects and Reasons for this Act
reads as follows:
Statement of Objects and Reasons of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993
“1. Banks and financial institutions at present experience
considerable difficulties in recovering loans and enforcement
of securities charged with them. The existing procedure
for recovery of debts due to the banks and financial
institutions has blocked a significant portion of their funds
in unproductive assets, the value of which deteriorates
with the passage of time. The Committee on the Financial
System headed by Shri M. Narasimham has considered the
setting up of the Special Tribunals with special powers for
adjudication of such matters and speedy recovery as critical
to the successful implementation of the financial sector
reforms. An urgent need was, therefore, felt to work out a
suitable mechanism through which the dues to the banks
and financial institutions could be realised without delay.
In 1981, a Committee under the Chairmanship of Shri T.
Tiwari had examined the legal and other difficulties faced
by banks and financial institutions and suggested remedial
measures including changes in law. The Tiwari Committee
had also suggested setting up of Special Tribunals for
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recovery of dues of the banks and financial institutions by
following a summary procedure. The setting up of Special
Tribunals will not only fulfil a long-felt need, but also will
be an important step in the implementation of the Report
of Narasimham Committee. Whereas on 30-9-1990 more
than fifteen lakhs of cases filed by the public sector banks
and about 304 cases filed by the financial institutions were
pending in various courts, recovery of debts involved more
than Rs 5622 crores in dues of public sector banks and
about Rs 391 crores of dues of the financial institutions.
The locking up of such huge amount of public money in
litigation prevents proper utilisation and recycling of the
funds for the development of the country.
2. The Bill seeks to provide for the establishment of Tribunals
and Appellate Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions.
Notes on clauses explain in detail the provisions of the Bill.”
20. The Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 took away the jurisdiction of the courts
and vested this jurisdiction in tribunals established by the Act
so as to ensure speedy recovery of debts due to the banks
and financial institutions mentioned therein. This Act also
included one appeal to the Appellate Tribunal, and transfer
of all suits or other proceedings pending before any court
to tribunals set up under the Act. The Act contained a non
obstante clause in Section 34 stating that its provisions will
have effect notwithstanding anything inconsistent contained in
any other law for the time being in force or in any instrument
having effect by virtue of any other law. In the year 2000, this
Act was amended so as to incorporate a new sub-section (2) in
Section 34 together with a saving provision in sub-section (1).
It is of some interest to note that this Act was to be in addition
to and not in derogation of various Financial Corporation Acts
and the Sick Industrial Companies (Special Provisions) Act,
1985. Clearly, therefore, the object of the 2000 Amendment to
the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 was to make the Sick Industrial Companies (Special
Provisions) Act, 1985 prevail over it.
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21. Regard being had to the poor working of the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993,
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 was brought into
force in the year 2002. …
22. This 2002 Act was brought into force as a result of two
committee reports which opined that recovery of debts due to
banks and financial institutions was not moving as speedily as
expected, and that, therefore, certain other measures would
have to be put in place in order that these banks and financial
institutions would better be able to recover debts owing to them.
xxx xxx xxx
24. The “pivotal” provision, namely, Section 13 of the said
Act makes it clear that banks and financial institutions would
now no longer have to wait for a tribunal judgment under the
Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 to be able to recover debts owing to them. They
could, by following the procedure laid down in Section 13,
take direct action against the debtors by taking possession of
secured assets and selling them; they could also take over the
management of the business of the borrower. They could also
appoint any person to manage the secured assets possession
of which has been taken over by them, and could require, at
any time by notice in writing to any person who has acquired
any of the secured assets from the borrower and from whom
any money is due or may become due from the borrower, to
pay the secured creditor so much of the money as is sufficient
to pay the secured debt.
25. In order to further the objects of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, the Act contains a non obstante clause in
Section 35 and also contains various Acts in Section 37 which
are to be in addition to and not in derogation of the Securitisation
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. Three of these Acts, namely, the
Companies Act, 1956, the Securities Contracts (Regulation)
Act, 1956 and the Securities and Exchange Board of India Act,
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1992, relate to securities generally, whereas the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 relates
to recovery of debts due to banks and financial institutions.
Significantly, under Section 41 of this Act, three Acts are, by
the Schedule to this Act, amended. We are concerned with
the third of such Acts, namely, the Sick Industrial Companies
(Special Provisions) Act, 1985, in Section 15(1) of which two
provisos have been added. It is the correct interpretation of the
second of these provisos on which the fate of these appeals
ultimately hangs.”
(Emphasis supplied)

ii) Applicability of Section(s) 73 & 74 of the 1872 Act to
Forfeiture under the SARFAESI Rules.
47. Before we proceed to answer the first question formulated by us in
para 34 of this judgment, we must look into the principles underlying
Section 73 of the 1872 Act.
48. Section 73 of the 1872 Act deals with the compensation for loss or
damage caused by breach of contract. The same is extracted below:
“73. Compensation for loss or damage caused by
breach of contract. — When a contract has been broken,
the party who suffers by such breach is entitled to receive,
from the party who has broken the contract, compensation
for any loss or damage caused to him thereby, which
naturally arose in the usual course of things from such
breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and
indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation
resembling those created by contract. — When an
obligation resembling those created by contract has been
incurred and has not been discharged, any person injured
by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.
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Explanation. In estimating the loss or damage arising from
a breach of contract, the means which existed of remedying
the inconvenience caused by the non-performance of the
contract must be taken into account.”
49. The principles underlying Section 73 of the 1872 Act are well settled.
The classic case dealing with remoteness of damages is Hadley &
Anr. v. Baxendale & Ors. reported in (1843-60) ALL E.R. Rep. 461,
wherein it was observed:
“Where two parties have made a contract which one of
them has broken, the damages which the other party ought
to receive in respect of such breach of contract should
be such as may fairly and reasonably be considered
as either arising naturally, i.e., according to the usual
course of things, from such breach of contract itself, or
such as may reasonably be supposed to have been in
the contemplation of both parties at the time they made
the contract as the probable result of the breach of it.
If special circumstances under which the contract was
actually made were communicated by the plaintiffs to the
defendants, and thus known to both parties, the damages
resulting from the breach of such a contract which they
would reasonably contemplate would be the amount
of injury which would ordinarily follow from a breach of
contract under these special circumstances so known and
communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking
the contract, he, at the most, could only be supposed to
have had in his contemplation the amount of injury which
would arise generally, and in the great multitude of cases
not affected by any special circumstances, from such a
breach of contract. For, had the circumstances been known,
the parties might have provided for the breach of contract
by special terms as to the damages in that case; and of
this advantage it would be very unjust to deprive them.”
50. The above principles were explained and clarified by the Court of
Appeal in Victoria Laundry (Windsor) Ltd v. Newman Industrial
Ltd., [1949] 2 K.B. 528 as under:
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“(1.) It is well settled that the governing purpose of damages
is to put the party whose rights have been violated in the
same position, so far as money can do so, as if his rights
had been observed: …
(2.) In cases of breach of contract the aggrieved party
is only entitled to recover such part of the loss actually
resulting as was at the time of the contract reasonably
foreseeable as liable to result from the breach.
(3.) What was at that time reasonably so foreseeable
depends on the knowledge then possessed by the parties
or, at all events, by the party who later commits the breach.
(4.) For this purpose, knowledge “possessed” is of two
kinds; one imputed, the other actual. Everyone, as a
reasonable person, is taken to know the “ordinary course of
things” and consequently what loss is liable to result from
a breach of contract in that ordinary course. This is the
subject matter of the “first rule” in Hadley v. Baxendale 9
Exch. 341. But to this knowledge, which a contract-breaker
is assumed to possess whether he actually possesses
it or not, there may have to be added in a particular
case knowledge which he actually possesses, of special
circumstances outside the “ordinary course of things,” of
such a kind that a breach in those special circumstances
would be liable to cause more loss. Such a case attracts
the operation of the “second rule” so as to make additional
loss also recoverable.
(5.) In order to make the contract-breaker liable under
either rule it is not necessary that he should actually have
asked himself what loss is liable to result from a breach.
As has often been pointed out, parties at the time of
contracting contemplate not the breach of the contract, but
its performance. It suffices that, if he had considered the
question, he would as a reasonable man have concluded
that the loss in question was liable to result ….
(6.) Nor, finally, to make a particular loss recoverable,
need it be proved that upon a given state of knowledge
the defendant could, as a reasonable man, foresee that
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a breach must necessarily result in that loss. It is enough
if he could foresee it was likely so to result. It is indeed
enough, to borrow from the language of Lord du Parcq in
the same case, at page 158, if the loss (or some factor
without which it would not have occurred) is a “serious
possibility” or a “real danger.” …”
51. The above principles apply to grant of compensation under Section
73 of the 1872 Act. This is clear from the decision of this Court in
Karsandas H. Thacker v. M/s. The Saran Engineering Co. Ltd.
reported in AIR 1965 SC 1981. The Court held that when a party
commits breach of contract, the other party is entitled to receive
compensation for any loss by the damage caused to him which
naturally arose in the usual course of business from such breach
or which the parties knew when they made the contract to be likely
to result from the breach of it. Remote and indirect loss or damage
sustained by reason of the breach will not entitle the party complaining
breach, to any compensation. Referring to the facts of the case and
Illustration (k) to Section 73 of the 1872 Act, the Court held:
“13. …On account of the non-delivery of scrap iron, he
could have purchased the scrap iron from the market at
the same controlled price and similar incidental charges.
This means that he did not stand to pay a higher price than
what he was to pay to the respondent and therefore he
could not have suffered any loss on account of the breach
of contract by the respondent. The actual loss, which,
according to the appellant, he suffered on account of the
breach of contract by the respondent was the result of his
contracting to sell 200 tons of scrap iron for export to the
Export Corporation. It may be assumed that, as stated,
the market price of scrap iron for export on January 30,
1953, was the price paid by the Export Corporation for
the purchase of scrap iron that day. As the parties did not
know and could not have known when the contract was
made in July 1952 that the scrap iron would be ultimately
sold by the appellant to the Export Corporation, the parties
could not have known of the likelihood of the loss actually
suffered by the appellant, according to him, on account of
the failure of the respondent to fulfil the contract.
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14. Illustration (k) to S. 73 of the Contract Act is apt for
the purpose of this case. According to that illustration,
the person committing breach of contract has to pay to
the other party the difference between the contract price
of the articles agreed to be sold and the sum paid by the
other party for purchasing another article on account of
the default of the first party, but the first party has not to
pay the compensation which the second party had to pay
to third parties as he had not been told at the time of the
contract that the second party was making the purchase
of the article for delivery to such third parties.”
52. Damages can be awarded only for the loss directly suffered on account
of the breach and not for any remote or indirect loss sustained by
reason of the breach of contract. The general rule is that where
two parties enter into a contract and one of them commits breach,
the other party will be entitled to receive as damages in respect of
such breach of contract, such sum as may fairly and reasonably be
considered arising naturally, that is according to the usual course of
things, from such breach of contract itself or such as may reasonably
be supposed to have been in the contemplation of both parties
at the time they made the contract, as the probable result of the
breach of it. If any special circumstances about the dependency of
the performance of other contract(s) by the party complaining of the
breach, on the performance of the contract in dispute by the party
in breach, had been communicated to the party in breach, and thus
known to both parties at the time of entering into the contract, then
the damages for the breach of the contract in dispute, may include the
compensation for the loss suffered in regard to such other dependent
contracts. But, on the other hand, if the special circumstances were
not made known to the party breaking the contract, the party breaking
the contract, at the most, could only be supposed to have had in its
contemplation the amount of injury which would arise generally and
directly and not any remote or unknown loss or damage.
53. What would be a ‘penalty’ under Section 74 of the 1872 Act was
explained by this Court in K. P. Subbarama Sastri and others v.
K. S. Raghavan & Ors. reported in (1987) 2 SCC 424 as under:
“5. …The question whether a particular stipulation in a
contractual agreement is in the nature of a penalty has to be
determined by the court against the background of various
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relevant factors, such as the character of the transaction
and its special nature, if any, the relative situation of the
parties, the rights and obligations accruing from such a
transaction under the general law and the intention of
the parties in incorporating in the contract the particular
stipulation which is contended to be penal in nature. If on
such a comprehensive consideration, the court finds that
the real purpose for which the stipulation was incorporated
in the contract was that by reason of its burdensome or
oppressive character it may operate in terrorem over the
promiser so as to drive him to fulfil the contract, then the
provision will be held to be one by way of penalty.”
54. The SARFAESI Rules, more particularly Rule 9 was first examined
by this Court in Rakesh Birani (Dead) through LRs v. Prem
Narain Sehgal & Anr. reported in (2018) 5 SCC 543, wherein the
entire auction process under Rule 9 was explained. The relevant
observations read as under: -
“8. In order to comprehend the rival submissions, it is
necessary to ponder as to intendment of Rule 9 of the
2002 Rules which deals with the time of sale, issues of sale
certificate and delivery of possession, etc. Public notice
of sale is to be published in the newspaper and only after
thirty days thereafter, the sale of immovable property can
take place. Under Rule 9(2) of the 2002 Rules, the sale is
required to be confirmed in favour of the purchaser who
has offered the highest sale price to the authorised officer
and shall be subject to confirmation by the secured creditor.
The proviso makes it clear that sale under the said Rule
would be confirmed if the amount offered and the whole
price is not less than the reserved price as specified in
Rule 9(5). It is apparent that Rule 9(1) does not deal with
the confirmation by the authorised officer. It only provides
confirmation by the secured creditor.
9. Rule 9(3) makes it clear that on every sale of immovable
property, the purchaser on the same day or not later than
next working day, has to make a deposit of twenty-five per
cent of the amount of the sale price, which is inclusive of
earnest money deposited if any. Rule 9(4) makes it clear
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that balance amount of the purchase price payable shall be
paid by the purchaser to the authorised officer on or before
the fifteenth day of “confirmation of sale of the immovable
property” or such extended period as may be agreed upon
in writing between the purchaser and the secured creditor.
Thus, Rule 9(2) makes it clear that after confirmation by
the secured creditor the amount has to be deposited. Rule
9(3) also makes it clear that period of fifteen days has to
be computed from the date of confirmation.”
55. This Court in Rakesh Birani (supra) while interpreting Rule 9(5) of
the SARFAESI Rules made the following pertinent observations: -
a. That, the liability of a successful auction purchaser to deposit
the requisite amount begins from the date when the sale is
confirmed by the secured creditor and communicated to the
auction purchaser, wherein 25% of the amount has to be
deposited as earnest money no later than the next working day
from the date of confirmation and the balance amount within
15 days from the said date.
b. That for forfeiture of the 25% earnest money deposit of the
auction purchaser, twin conditions have to be satisfied being (i)
First, that the sale must have been confirmed by the secured
creditor and (ii) second, there is a default in payment of the
balance 75% of the amount.
c. Once the afore-stated conditions are satisfied i.e., the auction
purchaser after confirmation of sale fails to deposit the balance
amount within the stipulated time, the secured creditor is required
to forfeit the original auction purchaser’s earnest money deposit
and the secured assets have to be resold.
d. The relevant observations are being reproduced below: -
“10. In this case, confirmation has been made and
communicated on 27-2- 2013 and within fifteen days
thereof i.e. on 13-3-2018, the amount of twenty-five per
cent had been deposited. Thereafter, sale certificate
has been issued under Rule 9(6). Rule 9(5) also makes
it clear that in default of payment within the period
mentioned in Rule 9(4), the deposit shall be forfeited.
There cannot be any forfeiture of the amount of 25%
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in deposit until and unless the sale is confirmed by the
secured creditor and there is a default of payment of
75% of the amount. The interpretation made by the
High Court thus cannot be accepted.
11. If we read the provisions otherwise then we find
even before the confirmation of sale within fifteen days,
the amount would be forfeited by the authorised officer
who may decide not to confirm the sale that would
be a result not contemplated in Rules 9(2), 9(4) and
9(5) which fortify our conclusion that it is only after the
confirmation is made under Rule 9(4) that amount has
to be deposited and on failure to deposit the amount,
twenty-five per cent amount has to be forfeited and
property has to be resold….”
(Emphasis supplied)
56. In Agarwal Tracom Private Limited v. Punjab National Bank &
Ors. reported in (2018) 1 SCC 626, this Court held that the act of
forfeiture of the earnest money deposit by the secured creditor is
a measure under Section 13(4) of the SARFAESI Act and thus,
challengeable before the DRT under Section 17 of the SARFAESI
Act. The relevant observations are reproduced below: -
“28. We also notice that Rule 9(5) confers express power
on the secured creditor to forfeit the deposit made by the
auction-purchaser in case the auction-purchaser commits
any default in paying instalment of sale money to the
secured creditor. Such action taken by the secured creditor
is, in our opinion, a part of the measures specified in
Section 13(4) and, therefore, it is regarded as a measure
taken Under Section 13(4) read with Rule 9(5)….”
(Emphasis supplied)
57. It appears that the High Court whilst passing the impugned order was
of the view that the legislature had provided for forfeiture under the
SARFAESI Rules as a relief to the secured creditor for the breach
of obligation by the auction purchaser. Thus, it was of the view that
Section 73 of the 1872 Act will be applicable to forfeiture under Rule
9(5) of the SARFAESI Rules and any forfeiture will only be allowed
to the extent of the loss or damage suffered by the secured creditor.
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58. This Court in C. Natarajan (supra) whilst dealing with a similar issue
pertaining to the applicability of Section(s) 73 and 74 of the 1872 Act
on forfeiture under Rule 9(5) of the SARFAESI Rules, answered the
same in a negative. The said decision is in two parts: -
a) It held that as the SARFAESI Act is a special enactment with
overriding effect over other laws by virtue of Section(s) 35 and
37, the 1872 Act more particularly Section(s) 73 and 74 will not
be applicable to Rule 9(5) of the SARFAESI Rules especially
since the rules framed under a statute become part of the statute.
“20. In terms of the Indian Contract Act, 1872 (for brevity
“Contract Act”, hereafter), a person can withdraw his offer
before acceptance. However, once a party expresses
willingness to enter into a contractual relationship subject
to terms and conditions and makes an offer which is
accepted but thereafter commits a breach of contract, he
does so at his own risk and peril and naturally has to suffer
the consequences. We are not oblivious of the terms of
section 73 and section 74 of the Contract Act, being part
of Chapter VI thereof titled “Of the Consequence of Breach
of Contract”. These sections, providing for compensation
for breach of contract and for liquidated damages, have
remained on the statute book for generations and permit
the party suffering the breach to recover such quantum of
loss or damage from the party in breach. However, with
changing times, the minds of people are also changing.
The judiciary, keeping itself abreast of the changes that
are bound to occur in an evolving society, must interpret
new laws that are brought in operation to suit the situation
appropriately. In the current era of globalization, the entire
philosophy of society, mainly on the economic front is
making rapid strides towards changes. Unscrupulous
people have been inventing newer modes and mechanisms
for defrauding and looting the nation. It is in such a scenario
that provisions of enactments, particularly those provisions
which have a direct bearing on the economy of the nation,
must receive such interpretation so that it not only fosters
economic growth but is also in tune with the intention of the
law-makers in introducing a provision such as sub-rule (5)
of rule 9, which though harsh in its operation, is intended to
[2024] 2 S.C.R. 55

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suppress the mischief and advance the remedy. If indeed
section 73 and section 74, which are part of the general
law of contract, were sufficient to cater to the remedy, the
need to make sub-rule (5) of rule 9 as part of the Rules
might not have arisen. Additionally, insertion of sub-rule
(5) with such specificity regarding forfeiture must not have
been thought of only for reiterating what is already there.
It was visualized by the law makers that there was a need
to arrest cases of deceptive manipulation of prices at the
instance of unscrupulous borrowers by thwarting sale
processes and this was the trigger for insertion of such
a provision with wide words conferring extensive powers
of forfeiture. The purpose of such insertion must have
also been aimed at instilling a sense of discipline in the
intending purchasers while they proceed to participate in
the auction-sale process. At the cost of repetition, it must
not be forgotten that the SARFAESI Act was enacted
because the general laws were not found to be workable
and efficient enough to ensure liquidity of finances and
flow of money essential for any healthy and growth-
oriented economy. The decision of this Court in Mardia
Chemicals v. Union of India [(2004) 4 SCC 311], while
outlawing only a part of the SARFAESI Act and upholding
the rest, has traced the history of this legislation and the
objects that Parliament had in mind in sufficient detail.
Apart from the law laid down in such decision, these are
the other relevant considerations which ought to be borne
in mind while examining a challenge to a forfeiture order.
21. There is one other aspect which is, more often than not,
glossed over. In terms of sub-rule (5) of rule 9, generally,
forfeiture would be followed by an exercise to resell the
immovable property. On the date an order of forfeiture is
in contemplation of the authorized officer of the secured
creditor for breach committed by the bidder, factually, the
position is quite uncertain for the former in that there is
neither any guarantee of his receiving bids pursuant to a
future sale, much to the satisfaction of the secured creditor,
nor is there any gauge to measure the likely loss to be
suffered by it (secured creditor) if no bidders were interested
to purchase the immovable property. Since the extent of
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loss cannot be immediately foreseen or calculated, such
officers may not have any option but to order forfeiture of
the amount deposited by the defaulting bidder in an attempt
to recover as much money as possible so as to reduce the
secured debt. That the immovable property is later sold
at the same price or at a price higher than the one which
was offered by the party suffering the forfeiture is not an
eventuality that occurs in each and every case. Sections
73 and 74 of the Contract Act would not, therefore, be
sufficient to take care of the interest of the secured creditor
in such a case and that also seems to be another reason
for bringing in the provision for forfeiture in rule 9. Ordinarily,
therefore, validity of an order of forfeiture must be judged
considering the circumstances that were prevailing on the
date it was made and not based on supervening events.
22. Does sub-rule (5) of rule 9, which is part of a delegated
legislation, i.e., the Rules, have the effect of diluting
section 73 and section 74 of the Contract Act? We have
considered it necessary to advert to this question as it
is one of general importance and are of the considered
opinion that the answer must be in the negative. While
the Contract Act embodies the general law of contract,
the SARFAESI Act is a special enactment, inter alia,
for enforcement of security interest without intervention
of court. Rule 9(5) providing for forfeiture is part of the
Rules, which have validly been framed in exercise of
statutory power conferred by section 38 of the SARFAESI
Act. Law is well settled that rules, when validly framed,
become part of the statute. Apart from the presumption as
to constitutionality of a statute, the contesting respondent
did not mount any challenge to sub-rule (5) of rule 9 of
the Rules. The applicability and enforcement of sub-rule
(5) of rule 9 on its terms, therefore, has to be secured in
appropriate cases.”
(Emphasis supplied)
b) That if Rule 9(5) is interpreted in light of Section(s) 73 and 74
of the 1872 Act, then the very auction process could be set at
naught by a mischievous or devious borrower by ‘gaming’ the
auction through sham bids.
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“18. Having regard to the terms of rule 9, the notice
for auction constitutes the ‘invitation to offer’; the bids
submitted by the bidders constitute the ‘offer’ and upon
confirmation of sale in favour of the highest bidder under
sub-rule (2) of rule 9, the contract comes into existence.
Once the contract comes into existence, the bidder is bound
to honour the terms of the statute under which the auction
is conducted and suffer consequences for breach, if any,
as stipulated. Rule 9(5) legislatively lays down a penal
consequence. ‘Forfeiture’ referred to in sub-rule (5) of rule
9, in the setting of the SARFAESI Act and the Rules, has
to be construed as denoting a penalty that the defaulting
bidder must suffer should he fail to make payment of the
entire sale price within the period allowed to him by the
authorized officer of a secured creditor.
19. Though it is true that the power conferred by sub-
rule (5) of rule 9 of the Rules ought not to be exercised
indiscriminately without having due regard to all relevant
facts and circumstances, yet, the said sub-rule ought also
not be read in a manner so as to render its existence
only on paper. Drawing from our experience on the
Bench, it can safely be observed that in many a case
the borrowers themselves, seeking to frustrate auction
sales, use their own henchmen as intending purchasers to
participate in the auction but thereafter they do not choose
to carry forward the transactions citing issues which are
hardly tenable. This leads to auctions being aborted and
issuance of fresh notices. Repetition of such a process
of participation-withdrawal for a couple of times or more
has the undesirable effect of rigging of the valuation of the
immovable property. In such cases, the only perceivable
loss suffered by a secured creditor would seem to be
the extent of expenses incurred by it in putting up the
immovable property for sale. However, what does generally
escape notice in the process is that it is the mischievous
borrower who steals a march over the secured creditor by
managing to have a highly valuable property purchased by
one of its henchmen for a song, thus getting such property
freed from the clutches of mortgage and by diluting the
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security cover which the secured creditor had for its loan
exposure. Bearing in mind such stark reality, sub-rule (5) of
rule 9 cannot but be interpreted pragmatically to serve twin
purposes — first, to facilitate due enforcement of security
interest by the secured creditor (one of the objects of the
SARFAESI Act); and second, to prohibit wrong doers from
being benefitted by a liberal construction thereof.”
(Emphasis supplied)
a. Forfeiture under the SARFAESI Rules:
59. We, first come to the aspect of applicability of Section 73 of the
1872 Act vis-à-vis the SARFAESI Act, more particularly Rule 9(5)
of the SARFAESI Rules. In Madras Petrochem (supra) this Court
made a pertinent observation that Sections 35 and 37 respectively
of the SARFAESI Act form a unique scheme of overriding provisions,
however the scope and ambit of Section 37 is restricted only to the
securities law. The relevant portion is reproduced as under: -
“39. This is what then brings us to the doctrine of
harmonious construction, which is one of the paramount
doctrines that is applied in interpreting all statutes. Since
neither Section 35 nor Section 37 of the Securitisation
and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 is subject to the other, we
think it is necessary to interpret the expression “or any
other law for the time being in force” in Section 37. If a
literal meaning is given to the said expression, Section 35
will become completely otiose as all other laws will then
be in addition to and not in derogation of the Securitisation
and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002. Obviously this could not
have been the parliamentary intendment, after providing
in Section 35 that the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002 will prevail over all other laws that are inconsistent
therewith. A middle ground has, therefore, necessarily to
be taken. According to us, the two apparently conflicting
sections can best be harmonised by giving meaning to
both. This can only be done by limiting the scope of the
expression “or any other law for the time being in force”
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contained in Section 37. This expression will, therefore,
have to be held to mean other laws having relation to
the securities market only, as the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 is the
only other special law, apart from the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, dealing with recovery of debts
due to banks and financial institutions. On this interpretation
also, the Sick Industrial Companies (Special Provisions)
Act, 1985 will not be included for the obvious reason
that its primary objective is to rehabilitate sick industrial
companies and not to deal with the securities market.”
(Emphasis supplied)
60. The aforesaid view came to be reaffirmed by this Court in another
decision in Celir LLP. v. Bafna Motors (Mumbai) Pvt. Ltd. & Ors.
reported in 2023 SCC OnLine SC 1209, wherein it was held that only
those laws which have been either enumerated in Section 37 of the
SARFAESI Act or which occupy and deal with the same field as the
SARFAESI Act will be applicable in addition to the SARFAESI Act.
The relevant observations are being reproduced below: -
“72. Thus, it appears from a combined reading of
the decisions rendered by this Court in Madras
Petrochem (supra) and M.D. Frozen Foods Exports (supra)
that this Court has consistently construed that only those
laws which have either been enumerated in Section 37
SARFAESI Act or similar to it would be applicable in
addition to the SARFAESI Act i.e., laws which deal with
securities or occupy the same field as the SARFAESI Act.
Thus, even on this aspect, we are of the view that the Act,
1882 would not be applicable in addition to the SARFAESI
Act. Suffice to say, that in view of the above discussion,
the statutory right of redemption under the Act, 1882 will
not be applicable to the SARFAESI Act at least in view of
the amended Section 13(8) and any right of redemption
of a borrower must be found within the SARFAESI Act in
terms of the amended Section 13(8).”
(Emphasis supplied)
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61. The legislature through Rule 9(5) of the SARFAESI Rules, has made
a conscious departure from the general law by statutorily providing
for the forfeiture of earnest-money deposit of the successful auction
purchaser for its failure in depositing the balance consideration
within the statutory period. No doubt, the forfeiture is a result of a
breach of obligation, but the consequence of forfeiture in such case
is taking place not because of the breach but because of operation
of the statutory provision providing for forfeiture that is attracted as
a result of the breach.
62. If the consequence of forfeiture was purely a matter of breach of
contract, then there would have been no occasion for the legislature
to specifically provide for forfeiture through the statutory provisions,
and it would have simpliciter relegated the consequences of such
breach to already existing general law under Section(s) 73 and 74
of the 1872 Act. [See C. Natarajan (supra) at Para 20]
63. However, the legislature has consciously provided for only one
consequence in the event of failure of the successful auction purchaser
in depositing the balance amount i.e., forfeiture and has not provided
for imposition of any other stipulation by the secured creditor in the
event of a breach. This has been done, keeping in mind the larger
object of the SARFAESI Act, which is to facilitate recovery of debt in
a time-bound manner by giving teeth to the measures enumerated
within Section 13 of the SARFAESI Act, more particularly sale of
the secured asset in the event the borrower fails to repay the debt.
64. If Section(s) 73 and 74 respectively of the 1872 Act are interpreted so
as to be made applicable to a breach in payment of balance amount
by the successful auction purchaser, it would lead to a chilling effect
in the following ways: -
(i) First, it would be quite preposterous to suggest that in an auction
which is a process meant for recovery of debt due to default of
the borrower, the balance amount if not paid by the successful
auction purchaser, another recovery proceeding would have
to be initiated by the secured creditor in terms of Section(s)
73 and 74 of the 1872 Act to recoup the loss and expenditure
occasioned to it by the defaulting successful auction purchaser.
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(ii) Secondly, such an interpretation would allow unscrupulous
borrowers being hands-in-glove with the auction purchasers to
use subversive methods to participate in an auction only to not
pay the balance amount at the very end and escape relatively
unscathed under the guise of Section(s) 73 and 74 of the 1872
Act, thereby gaming the entire auction process and leaving any
possibility of recoveries under the SARFAESI Act at naught.
[See; C. Natarajan (supra) at Para 19]
65. Thus, such an interpretation would completely defeat the very purpose
and object of the SARFAESI Act and would reduce the measures
provided under Section 13 of the SARFAESI Act to a farce and
thereby undermine the country’s economic interest.
66. At this stage, we may also answer the submission of the respondent
that the authorised officer under Rule 9(5) of the SARFAESI Rules
has been conferred with unguided and unfettered power of forfeiture
and as such the said rule is liable to be struck down. However,
we are not impressed with such submission. First, there was no
challenge to the constitutional validity of Rule 9 sub-rule (5) of the
SARFAESI Rules. Secondly, even as per Agarwal Tracom (supra)
it is always open for a person aggrieved by an order of forfeiture
under the SARFAESI Rules to challenge the same before the DRT
under Section 17 of the SARFAESI Act.
67. As regards the contention that the SARFAESI Rules being a delegated
legislation cannot override the substantive provisions of a statutory
enactment more particularly Section(s) 73 & 74 of the 1872 Act, the
same was negatived by this Court in C. Natarajan (supra) with the
following observations: -
“22. .... We have considered it necessary to advert to
this question as it is one of general importance and are
of the considered opinion that the answer must be in the
negative. While the Contract Act embodies the general
law of contract, the SARFAESI Act is a special enactment,
inter alia, for enforcement of security interest without
intervention of court. Rule 9(5) providing for forfeiture
is part of the Rules, which have validly been framed in
exercise of statutory power conferred by section 38 of the
SARFAESI Act. Law is well settled that rules, when validly
framed, become part of the statute. …”
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68. What can be discerned from the above is that the SARFAESI Act
is a special legislation with an overriding effect on the general law,
and only those legislations which are either specifically mentioned
in Section 37 or deal with securitization will apply in addition to the
SARFAESI Act. Being so, the underlying principle envisaged under
Section(s) 73 & 74 of the 1872 Act which is a general law will have
no application, when it comes to the SARFAESI Act more particularly
the forfeiture of earnest-money deposit which has been statutorily
provided under Rule 9(5) of the SARFAESI Rules as a consequence
of the auction purchaser’s failure to deposit the balance amount.

b. Concept of Earnest-Money & Law on Forfeiture of Earnest-
Money Deposit:
69. This aforesaid aspect may be looked at from another angle.
Section(s) 73 and 74 of the 1872 Act deal with the consequences
and compensation for a breach of contract. It enables a suffering
party to recover such quantum of loss or liquidated damages from
a party in breach so as to make good the loss incurred by it and be
put in the same position prior to its losses.
70. At this juncture, it would be apposite to refer to the meaning of
‘forfeiture’. The word forfeiture is derived from the French word
‘forfaiture’ which means the loss of property by violation of his own
duty. The Black’s Law Dictionary defines ‘forfeiture’ as follows [See:
Henry Campbell Black on “Black’s Law Dictionary”, 1968, 4th Edition]: -
“the loss of a right, privilege, or property because of a
crime, breach of obligation, or neglect of duty.”
“something (especially money or property) lost or
confiscated by this process; a penalty”
“a destruction or deprivation of some estate or right because
of the failure to perform some obligation or condition
contained in a contract”
71. This Court in R.S. Joshi, Sales Tax Officer, Gujarat & Ors. v. Ajit
Mills Limited & Anr. reported in (1977) 4 SCC 98, while explaining
the true purport and meaning of the term ‘forfeiture’ observed that
whether a forfeiture clause is penal in nature must be decided in
the specific setting of a statute. The relevant observations read as
under: -
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“18. Coming to ‘forfeiture’, what is the true character of a
‘forfeiture’ ? Is it punitive in infliction, or merely another form
of exaction of money by one from another? If it is penal, it
falls within implied powers. If it is an act of mere transference
of money from the dealer to the State, then it falls outside the
legislative entry. Such is the essence of the decisions which
we will presently consider. There was a contention that the
expression ‘forfeiture’ did not denote a penalty. This, perhaps,
may have to be decided in the specific setting of a statute. But,
speaking generally and having in mind the object of Section 37
read with Section 46, we are inclined to the view that forfeiture
has a punitive impact. Black’s Legal Dictionary states that ‘to
forfeit’ is ‘to lose, or lose the right to, by some error, fault,
offence or crime’ ‘to incur a penalty.’ ‘Forfeiture’, as judicially
annotated, is ‘a punishment annexed by law to some illegal act
or negligence. . . .’; ‘something imposed as a punishment for an
offence or delinquency.’ The word, in this sense, is frequently
associated with the word ‘penalty’, According to Black’s Legal
Dictionary.
The terms ‘fine’, ‘forfeiture’ and ‘penalty’, are often used loosely
and even confusedly; but when a discrimination is made, the
word ‘penalty’ is found to be generic in its character, including
both fine and forfeiture. A ‘fine’ is a pecuniary penalty and is
commonly (perhaps always) to be collected by suit in some
form. A ‘forfeiture’ is a penalty by which one loses his rights
and interest in his property.
More explicitly, the U. S. Supreme Court has explained the
concept of ‘forfeiture’ in the context of statutory construction.
Chief Justice Taney, in the State of Maryland v. The Baltimore
& Ohio RR Co. 11 L ED. 714, 712 observed:
And a provision, as in this case, that the party shall forfeit a
particular sum, in case he does not perform an act required
by law, has always, in the construction of statutes, been
regarded not as a contract with the delinquent party, but
as the punishment for an offence. Undoubtedly, in the
case of individuals, the word forfeit is construed to be the
language of contract, because contract is the only mode
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in which one person can become liable to pay a penalty
to another for breach of duty, or the failure to perform
an obligation. In legislative proceedings, however, the
construction is otherwise and a forfeiture is always to be
regarded as a punishment inflicted for a violation of some
duty enjoined upon the party by law; and such, very clearly,
is the meaning of the word in the act in question
19. The same connotation has been imparted by our Court
too. A Bench has held: Bankura Municipality v. Lalji Raja and
Sons, 1953 Cri LJ 1101:
According to the dictionary meaning of the word ‘forfeiture’
the loss or the deprivation of goods has got to be in
consequence of a crime, offence or breach of engagement
or has to be by way of penalty of the transgression or a
punishment for an offence. Unless the loss or deprivation
of the goods is by way of a penalty or punishment for a
crime, offence or breach of engagement it would not come
within the definition of forfeiture
This word ‘forfeiture’ must bear the same meaning of a penalty
for breach of a prohibitory direction. The fact that there is
arithmetical identity, assuming it to be so, between the figures
of the illegal collections made by the dealers and the amounts
forfeited to the State cannot create a conceptual confusion
that what is provided is not punishment but a transference of
funds. If this view be correct, and we hold so, the legislature, by
inflicting the forfeiture, does not go outside the crease when it
hits out against the dealer and deprives him, by the penalty of
the law, of the amount illegally gathered from the customers….”
(Emphasis supplied)
72. The privy council in Kunwar Chiranjit Singh v. Har Swarup reported
in (1926) 23 LW 172, while dealing with the concept of earnest
money, had observed as follows: -
“Earnest money is part of the purchase price when the
transaction goes forward: it is forfeited when the transaction
falls through, by reason of the fault or failure of the vendee.”
(Emphasis supplied)
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73. The above referred decision of the Privy Council has been referred to
and relied upon by the High Court of Bombay in the case of Dinanath
Damodar Kale v. Malvi Mody Ranchhoddas and Co. reported in
AIR 1930 Bom 213. The Court observed as under: -
“Turning to the law in England we have a series of decisions
showing that a deposit by way of earnest in a contract for
the sale of land is distinguishable from a penalty for breach
of the contract. The cases cited to us by the appellant’s
counsel are all cases in which either an instalment of the
price or a part payment was by the terms of the contract to
be forfeited on breach by the purchaser. If any authority be
needed to show what the law in England is, it may be found
in the passage in Halsbury, Vol. 25, p. 398, para 681, which
was cited to us by respondents’ counsel. There it is clearly
laid down that there is a distinction between a deposit and
a penalty. This distinction was referred to by the majority of
the Bench in the case of Bishan Chand v. Radha Kishan
Das [(1897) 19 All. 489 = (1897) A.W.N. 123], where it was
stated that a deposit is a payment actually made or advanced
and therefore Ss. 73 and 74 of the Contract Act, have no
application in such a case and are not intended to apply to it.
These sections show what is the compensation to the seller,
who is not responsible for the breach. They contemplate a
case in which he is seeking to recover compensation for the
breach. They do not contemplate a case in which a sum of
money has been paid by way of earnest. Nor is the Contract
Act necessarily exhaustive: see P. R. & Co. v. Bhagwandas
[(1909) 34 Bom. 192, = 2 I.C. 475 = 11 Bom. L.R. 335].
Furthermore, it is to be noted that in this particular contract
there was a specific condition of the sale by auction that the
deposit was to be forfeited in case of default by the purchaser
and we think that such a clause is not unreasonable and
must be given effect to. Our own High Court rules regarding
the sale by the Sheriff’s office (R. 391) specifically allow a
deposit to be forfeited and the mere fact that the word “may”
is used in that Rule cannot be taken to mean that only such
sum out of the deposit can be forfeited as the Court may
think proper as damages following the failure of the buyer
to complete the sale.”
(Emphasis supplied)
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74. Subsequently, a 5-Judge Bench of this Court in its decision in
Fateh Chand v. Balkishan Dass reported in AIR 1963 SC 1405,
held that a forfeiture clause in an ordinary contract would fall within
the meaning of the words “any other stipulation by way of penalty”
of Section 74 of the 1872 Act, and thus only a reasonable amount
can be forfeited. The relevant observations are reproduced below: -
“(10) Section 74 of the Indian Contract Act deals with the
measure of damages in two classes of cases (i) where the
contract names a sum to be paid in case of breach and (ii)
where the contract contains any other stipulation by way
of penalty. We are in the present case not concerned to
decide whether a covenant of forfeiture of deposit for due
performance of a contract falls within the first class. The
measure of damages in the case of breach of a stipulation
by way of penalty is by S. 74 reasonable compensation
not exceeding the penalty stipulated for. In assessing
damages the Court has, subject to the limit of the penalty
stipulated, jurisdiction to award such compensation as it
deems reasonable having regard to all the circumstances of
the case. Jurisdiction of the Court to award compensation
in case of breach of contract is unqualified except as to
the maximum stipulated; but compensation has to be
reasonable, and that imposes upon the Court duty to award
compensation according to settled principles. The section
undoubtedly says that the aggrieved party is entitled to
receive compensation from the party who has broken the
contract, whether or not actual damage or loss is proved
to have been caused by the breach. Thereby it merely
dispenses with proof of “actual loss or damages”; it does
not justify the award of compensation when in consequence
of the breach no legal injury at all has resulted, because
compensation for breach of contract can be awarded to
make good loss or damage which naturally arose in the
usual course of things, or which the parties knew when they
made the contract, to be likely to result from the breach.
(11) Before turning to the question about the compensation
which may be awarded to the plaintiff, it is necessary to
consider whether S. 74 applies to stipulations for forfeiture
of amounts deposited or paid under the contract. It was
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urged that the section deals in terms with the right to
receive from the party who has broken the contract
reasonable compensation and not the right to forfeit what
has already been received by the party aggrieved. There
is however no warrant for the assumption made by some
of the High Courts in India, that S. 74 applies only to
cases where the aggrieved party is seeking to receive
some amount on breach of contract and not to cases
where upon breach of contract an amount received under
the contract is sought to be forfeited. In our judgment the
expression “the contract contains any other stipulation by
way of penalty” comprehensively applies to every covenant
involving a penalty whether it is for payment on breach
of contract of money or delivery of property in future, or
for forfeiture of right to money or other property already
delivered. Duty not to enforce the penalty clause but only
to award reasonable compensation is statutorily imposed
upon Courts by S. 74. In all cases, therefore, where there
is a stipulation in the nature of penalty for forfeiture of an
amount deposited pursuant to the terms of contract which
expressly provides for forfeiture, the court has jurisdiction
to award such sum only as it considers reasonable, but not
exceeding the amount specified in the contract as liable to
forfeiture. We may briefly refer to certain illustrative cases
decided by the High Courts in India which have expressed
a different view.
xxx xxx xxx
(14) … The words “to be paid” which appear in the first
condition do not qualify the second condition relating to
stipulation by way of penalty. The expression “if the contract
contains any other stipulation by way of penalty” widens
the operation of the section so as to make it applicable to
all stipulations by way of penalty, whether the stipulation
is to pay an amount of money, or is of another character,
as, for example, providing for forfeiture of money already
paid. There is nothing in the expression which implies that
the stipulation must be one for rendering something after
the contract is broken. There is no ground for holding that
the expression “contract contains any other stipulation
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by way of penalty” is limited to cases of stipulation in the
nature of an agreement to pay money or deliver property on
breach and does not comprehend covenants under which
amounts paid or property delivered under the contract,
which by the terms of the contract expressly or by clear
implication are liable to be forfeited.
(15) Section 74 declares the law as to liability upon breach
of contract where compensation is by agreement of the
parties pre-determined, or where there is a stipulation by
way of penalty. But the application of the enactment is
not restricted to cases where the aggrieved party claims
relief as a plaintiff. The section does not confer a special
benefit upon any party; it merely declares the law that
notwithstanding any term in the contract pre-determining
damages or providing for forfeiture of any property by way
of penalty, the Court will award to the party aggrieved
only reasonable compensation not exceeding the amount
named or penalty stipulated. The jurisdiction of the Court is
not determined by the accidental circumstance of the party
in default being a plaintiff or a defendant in a suit. Use of
the expression “to receive from the party who has broken
the contract” does not predicate that the jurisdiction of the
Court to adjust amounts which have been paid by the party
in default cannot be exercised in dealing with the claim
of the party complaining of breach of contract. The court
has to adjudge in every case reasonable compensation
to which the plaintiff is entitled from the defendant on
breach of the contract. Such compensation has to be
ascertained having regard to the conditions existing on
the date of the breach.”
(Emphasis supplied)
75. It is apposite to mention that in Fateh Chand (supra) this Court had
clarified that so far as forfeiture of earnest-money is concerned,
Section 74 of the 1872 Act will not be applicable. The relevant
observations are reproduced below:
“(7) The Attorney-General appearing on behalf of the
defendant has not challenged the plaintiff’s right to forfeit
Rs. 1,000/- which were expressly named and paid as
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earnest money. He has, however, contended that the
covenant which gave to the plaintiff the right to forfeit Rs.
24,000/- out of the amount paid by the defendant was
stipulation in the nature of penalty, and the plaintiff can
retain that amount or part thereof only if he establishes
that in consequence of the breach by the defendant, he
suffered loss, and in the view of the Court the amount
or part thereof is reasonable compensation for that loss.
We agree with the Attorney-General that the amount of
Rs. 24,000/- was not of the nature of earnest money. The
agreement expressly provided for payment of Rs. 1,000/- as
earnest money, and that amount was paid by the defendant.
The amount of Rs. 24,000/- was to be paid when vacant
possession of the land and building was delivered, and it
was expressly referred to as “out of the sale price.” If this
amount was also to be regarded as earnest money, there
was no reason why the parties would not have so named
it in the agreement of sale. We are unable to agree with
the High Court that this amount was paid as security for
due performance of the contract. No such case appears
to have been made out in the plaint and the finding of
the High Court on that point is based on no evidence. It
cannot be assumed that because there is a stipulation for
forfeiture the amount paid must bear the character of a
deposit for due performance of the contract.”
(Emphasis supplied)
76. In another decision of this Court in Maula Bux v. Union of India
reported in 1969 (2) SCC 554, a similar view was reiterated and it
was held that forfeiture of earnest money is not a penalty and that
Section 74 of the 1872 Act will only apply where the forfeiture is in
the nature of a penalty. The relevant observations read as under: -
“4. Under the terms of the agreements the amounts deposited
by the plaintiff as security for due performance of the contracts
were to stand forfeited in case the plaintiff neglected to perform
his part of the contract. The High Court observed that the
deposits so made may be regarded as earnest money. But
that view cannot be accepted. According to Earl Jowitt in “The
Dictionary of English Law” at p. 689; “Giving an earnest or
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earnest-money is a mode of signifying assent to a contract of
sale or the like, by giving to the vendor a nominal sum (e.g.
a shilling) as a token that the parties are in earnest or have
made up their minds”. As observed by the Judicial Committee
in Kunwar Chiranjit Singh v. Har Swarup:
“Earnest money is part of the purchase price when the
transaction goes forward; it is forfeited when the transaction
falls through, by reason of the fault or failure of the vendee.”
In the present case the deposit was made not of a sum of money
by the purchaser to be applied towards part payment of the price
when the contract was completed and till then as evidencing
an intention on the part of the purchaser to buy property or
goods. Here the plaintiff had deposited the amounts claimed
as security for guaranteeing due performance of the contracts.
Such deposits cannot be regarded as earnest money. ...
5. Forfeiture of earnest money under a contract for sale
of property — Movable or immovable — If the amount is
reasonable, does not fall within Section 74. That has been
decided in several cases: Kunwar Chiranjit Singh v. Har Swarup
(supra); Roshan Lal v. Delhi Cloth and General Mills Company
Ltd. Delhi, ILR 33 All. 166.; Muhammad Habibullah v. Muhammad
Shafi, ILR 41 All. 324.; Bishan Chand v. Radhakishan Das, ILR
19 All. 490. These cases are easily explained, for forfeiture of
reasonable amount paid as earnest money does not amount to
imposing a penalty. But if forfeiture is of the nature of penalty,
Section 74 applies. Where under the terms of the contract the
party in breach has undertaken to pay a sum of money or to
forfeit a sum of money which he has already paid to the party
complaining of a breach of contract, the undertaking is of the
nature of a penalty.”
(Emphasis supplied)
77. In Satish Batra v. Sudhir Rawal reported in (2013) 1 SCC 345,
this Court after a review of the entire case law starting from Fateh
Chand (supra), Videocon Properties Ltd. v. Dr. Bhalchandra
Laboratories & Ors. reported in (2004) 3 SCC 711 and Shree
Hanuman Cotton Mills & Ors. v. Tata Air Craft Limited reported
in (1969) 3 SCC 522, laid down the principles regarding earnest
money, which read as under: -
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“9. …
“21. From a review of the decisions cited above, the
following principles emerge regarding ‘earnest’:
‘(1) It must be given at the moment at which the contract
is concluded.
(2) It represents a guarantee that the contract will be fulfilled
or, in other words, “earnest” is given to bind the contract.
(3) It is part of the purchase price when the transaction
is carried out.
(4) It is forfeited when the transaction falls through by
reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of
the contract, on default committed by the buyer, the seller
is entitled to forfeit the earnest.””
78. This Court in Satish Batra (supra) after taking note of the decisions
in Delhi Development Authority v. Grihshapana Cooperative
Group Housing Society Ltd. reported in 1995 Supp (1) SCC 751,
V. Lakshmanan v. B.R. Mangalagiri & Ors. reported in 1995 Supp
(2) SCC 33 and HUDA v. Kewal Krishnan Goel reported in 1996 (4)
SCC 249 concluded that only that deposit which has been given as
an earnest-money for the due performance of the obligation is liable
to be forfeited in the event of a breach. The relevant observations
read as under: -
“15. The law is, therefore, clear that to justify the forfeiture
of advance money being part of ‘earnest money’ the terms
of the contract should be clear and explicit. Earnest money
is paid or given at the time when the contract is entered
into and, as a pledge for its due performance by the
depositor to be forfeited in case of non-performance by
the depositor. There can be converse situation also that if
the seller fails to perform the contract the purchaser can
also get double the amount, if it is so stipulated. It is also
the law that part-payment of purchase price cannot be
forfeited unless it is a guarantee for the due performance
of the contract. In other words, if the payment is made only
towards part-payment of consideration and not intended
as earnest money then the forfeiture clause will not apply.”
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79. Since Rule 9 sub-rule (5) provides for the forfeiture of only the earnest-
money deposit of the successful auction purchaser i.e. only 25% of
the total amount, by no stretch of imagination it can be regarded as
a penal clause by virtue of the afore-stated decisions of this Court in
Fateh Chand (supra), Maula Bux (supra) and Satish Batra and as
such Section(s) 73 and 74 of the 1872 Act will have no application.
80. Even otherwise, what is discernible from the above referred decisions
of Fateh Chand (supra), Maula Bux (supra) and Satish Batra (supra)
is that there lies a difference between forfeiture of any amount and
forfeiture of earnest money with the former being a penal clause and
the latter a general forfeiture clause. A clause providing for forfeiture
of an amount could fundamentally be in the nature of a penalty clause
or a forfeiture clause in the strict sense or even both, and the same
has to be determined in the facts of every case keeping in mind the
nature of contract and the nature of consequence envisaged by it.
81. Ordinarily, a forfeiture clause in the 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 the obligation.
This is why Fateh Chand (supra) Maula Bux (supra) and Satish
Batra (supra) held that forfeiture of earnest-money deposit is not a
penal clause, as the deposit of earnest money is intended to signify
assent of the purchaser to the contract, and its forfeiture is envisaged
as a deterrent to ensure performance of the obligation.
82. We are conscious of the fact that in Maula Bux (supra) this Court
observed that the deposit of a sum by the purchaser as security for
guaranteeing due performance was held as a penalty. However, a
close reading would reveal that the reason why this Court held the
said deposit as a penal clause was because the said amount was
paid over and above the earnest-money deposit already paid by the
purchaser in the said case and more importantly the said sum was
not liable to be adjusted against the total consideration. Hence, this
Court held the same to be a penalty rather than earnest money. The
relevant observation read as under: -
“4. ... In the present case the deposit was made not of a
sum of money by the purchaser to be applied towards part
payment of the price when the contract was completed
and till then as evidencing an intention on the part of the
purchaser to buy property or goods. Here the plaintiff had
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deposited the amounts claimed as security for guaranteeing
due performance of the contracts. Such deposits cannot
be regarded as earnest money. …”
(Emphasis supplied)
83. The difference between an earnest or deposit and an advance part
payment of price is now well established in law. Earnest is something
given by the Promisee to the Promisor to mark the conclusiveness
of the contract. This is quite apart from the price. It may also avail
as a part payment if the 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 the bargain. An advance is a part to
be adjusted at the time of the final payment. If the Promisee defaults
to carry out the contract, he loses the earnest but may recover the
part payment leaving untouched the 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 the realm given
by the Promisor to indicate that the bargain is concluded between
them and as tangible proof that he means business. Vide Howe v.
Smith (1884) 27 Ch.D. 89.
84. The practice of giving earnest is current in the present day commercial
contracts. An advance is made and accepted by way of deposit or
guarantee for the due performance of the contract. The distinction
between a deposit and a part payment is thus described by Benjamin,
in his book “Treatise on the Law of Sale of Personal Property”, 1950,
8th Edition at page 946: -
“A deposit is not recoverable by the buyer, for a deposit
is a guarantee that the buyer shall perform his contract
and is forfeited on his failure to do so. As regards the
recovery of part payments, the question must depend
upon the terms of the particular contract. If the contract
distinguishes between the deposit and instalments of price
and the buyer is in default, the deposit is forfeited and that
is all. And in ordinary circumstances, unless the contract
otherwise provides, the seller, on rescission following the
buyer’s default, becomes liable to repay the part of the
part of the price paid.”
85. In Halsbury’s Laws of England, third edition, volume XXXIV, page
118 the distinction between the two is thus pointed out: -
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“Part of the price may be payable as a deposit. A part
payment is to be distinguished from a deposit or earnest.
A deposit is paid primarily as security that the buyer will
duly accept and pay for the goods, but, subject thereto,
forms part of the price. Accordingly, if the buyer is unable
or unwilling to accept and pay for the goods, the seller
may repudiate the contract and retain the deposit. If the
seller is unable or unwilling to deliver the goods, or to
pass a good title thereto, or the contract is voidable by the
buyer for any reason, the buyer may repudiate the contract
and recover the deposit. The buyer may also recover it
where, without the default of either party, the contract is
rescinded by either party pursuant to an express power
in the contract in that behalf.”
86. In G. C. Cheshire and C.H.S. Fifoot on the Law of Contracts (fifth
edition) at pages 496- 497, the position is thus summed up: -
“Where, therefore, it has been agreed that a sum of money
shall be paid by the one to the other immediately or at
certain stated intervals, the question whether in the event
of rescission repayment will be compelled depends upon
the proper construction of the contract. The object that
the parties had in view in providing for the payment must
first be ascertained.
Where the intention was that the money should form a
part payment of the full amount due, then, as we have
seen, if the contract is rescinded for the payer’s default
the payee is required at law to restore the money, subject
to a cross-claim for damages. If, on the other hand, the
intention was that the money should be deposited as
earnest or as a guarantee for the due performance of the
payer’s obligation, the rule at common law is that if the
contract is rescinded by reason of his default the deposit
is forfeited to the payer and cannot be recovered.
In the latter case, however, and also where it has been
expressly agreed that a part payment shall be forfeited in
the event of the payer’s default, equity is prepared within
limits to grant relief against the forfeiture.”
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87. The observations of Mellish, L.J., in Ex parte Barrell: [L.R.] In Re.
Parnell 10 Ch. App. 512 assume importance. The learned Judge
observed that even when there is no clause in the contract as to
the forfeiture of the deposit if the purchaser repudiates the contract,
he cannot have back the money if it was a deposit, as the contract
has gone off through his default. It is characteristic of a deposit to
entail forfeiture if the depositor commits breach of his obligation. On
the contrary it is inherent in a part payment of price in advance that
it should be returned to the buyer if the sale does not fructify. The
buyer is not disentitled to recover, even if he is the party in breach,
because breach of contract on the part of the buyer would only
entitle the seller to sue for damages but not to forfeit the advance.
A specific forfeiture clause might operate to defeat the buyer’s right
of recovery of even an advance payment. But equity might step in
to relieve the buyer from forfeiture. If the amount forfeited cannot
stand the test of a genuine pre-estimate of damages, it would be
unconscionable for the seller to retain it. The question whether the
amount is a deposit (earnest) or a part payment cannot be determined
by the presence or absence of a forfeiture clause. Whether the sum
in question is a deposit to ensure due performance of the contract or
not is not dependent on the phraseology adopted by the parties or
by the presence or otherwise of a forfeiture clause. The proportion
the amount bears to the total sale price, the need to take a deposit
intended to act in terrorem, the nature of the contract and other
circumstances which cannot be exhaustively listed have to be taken
into account in ascertaining the true nature of the amount. In essence
the question is one of proper interpretation of the terms of a contract.
88. We would like to refer to a decision of the Court of Appeal in England
in Stockloser v. Johnson reported in (1954) 1 All. E.R. 630 and
particularly to the observations of Denning, L.J., which, if we may
say so with respect, has set out the legal position succinctly and
with great clarity. The facts of that case need not be set out and
it would be sufficient to refer only to the principle of law laid down
by the Court of Appeal. At page 637 Denning L.J., observes thus:
“It seems to me that the cases show the law to be this. (i)
When there is no forfeiture clause, if money is handed over
in part payment of the purchase price, and then the buyer
makes default as to the balance, then, so long as the seller
keeps the contract open and available for performance,
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the buyer cannot recover the money, but once the seller
rescinds the contract or treats it as at an end owing to
the buyer’s default, then the buyer is entitled to recover
his money by action at law, subject to a cross-claim by
the seller for damages: see Palmer v. Temple 112 E.R.
1304, Mayson v. Clouet (1924) A.C. 980, Dies v. British
and International Mining and Finance Corporation Ltd.
(1939) 1 .K.B. 724 and Williams on Vendor and Purchaser
4th ed., vol. 2, p. 1006. (ii) But when there is a forfeiture
clause or the money is expressly paid as a deposit (which
is equivalent to a forfeiture clause) then the buyer who
is in default cannot recover the money at law at all. He
may, however, have a remedy in equity, for, despite the
express stipulation in the contract, equity can relieve the
buyer from forfeiture of the money and order the seller to
repay it on such terms as the Court thinks fit.”
89. Therefore, it is clear that the forfeiture can be justified if the terms
of the contract are clear and explicit. If it is found that the earnest
money was paid in accordance with the terms of the tender for the
due performance of the contract by the Promisee, the same can be
forfeited in case of non-performance by him or her.
90. We are conscious of the decision of this Court in Kailash Nath
Associates v. Delhi Development Authority & Anr. reported in
(2015) 4 SCC 136 wherein it was held that Section 74 of the 1872
Act will be applicable to cases of forfeiture of earnest-money deposit,
however, where such forfeiture takes place under the terms and
conditions of a public auction, Section 74 will have no application.
The relevant observations are reproduced below: -
“43.1. Where a sum is named in a contract as a liquidated
amount payable by way of damages, the party complaining
of a breach can receive as reasonable compensation
such liquidated amount only if it is a genuine pre-estimate
of damages fixed by both parties and found to be such
by the court. In other cases, where a sum is named in
a contract as a liquidated amount payable by way of
damages, only reasonable compensation can be awarded
not exceeding the amount so stated. Similarly, in cases
where the amount fixed is in the nature of penalty, only
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reasonable compensation can be awarded not exceeding
the penalty so stated. In both cases, the liquidated amount
or penalty is the upper limit beyond which the court cannot
grant reasonable compensation.
43.2. Reasonable compensation will be fixed on well-known
principles that are applicable to the law of contract, which
are to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation
for damage or loss caused by a breach of contract, damage
or loss caused is a sine qua non for the applicability of
the Section.
43.4. The Section applies whether a person is a plaintiff
or a defendant in a suit.
43.5. The sum spoken of may already be paid or be
payable in future.
43.6. The expression “whether or not actual damage or loss
is proved to have been caused thereby” means that where
it is possible to prove actual damage or loss, such proof
is not dispensed with. It is only in cases where damage
or loss is difficult or impossible to prove that the liquidated
amount named in the contract, if a genuine pre-estimate
of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest
money under a contract. Where, however, forfeiture takes
place under the terms and conditions of a public auction
before agreement is reached, Section 74 would have no
application.”
(Emphasis supplied)
91. Since, the forfeiture under Rule 9(5) of the SARFAESI Rules is also
taking place pursuant to the terms & conditions of a public auction, we
need not dwell any further on the decision of Kailash Nath (supra)
and leave it at that. Suffice to say, in view of the above discussion,
Section(s) 73 and 74 of the 1872 Act will have no application
whatsoever, when it comes to forfeiture of the earnest-money deposit
under Rule 9 sub-rule (5) of the SARFAESI Rules.
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c. Law on the principle of ‘Reading-Down’ a provision:
92. We must deal with yet one another aspect that weighed with the High
Court while passing the Impugned Order. In the Impugned Order,
the High Court also took the view that Rule 9(5) of the SARFAESI
Rules must be read down so as to yield to the underlying principle
recognized in Section(s) 73 & 74 of the 1872 Act. This reading down
of the relevant rules in the opinion of the High Court was necessary,
as otherwise irrespective of whether the default is of the entire
balance amount or only one rupee, the same harsh consequence of
forfeiture would ensue in both the cases. The relevant observations
are reproduced below: -
“12. Rule 9(5) of the said Rules of 2002 has to be seen
as an enabling provision that permits forfeiture in principle.
However, such Rule cannot be conferred an exalted status
to override the underlying ethos of Section 73 of the
Contract Act. In other words, Rule 9(5) has to yield to the
principle recognised in Section 73 of the Contract Act or
it must be read down accordingly. Thus, notwithstanding
the wide words used in Rule 9(5) of the said Rules, a
secured creditor may not forfeit any more than the loss
or damage suffered by such creditor as a consequence of
the failure on the part of a bidder to make payment of the
consideration or the balance consideration in terms of the
bid. It is only if such principle as embodied in Section 73 of
the Contract Act, is read into Rule 9 (5) of the said Rules,
would there be an appropriate answer to the conundrum
as to whether a colossal default of the entirety of the
consideration or the mere default of one rupee out of the
consideration would result in the identical consequence
of forfeiture as indicated in the provision.”
(Emphasis supplied)
93. The principle of “reading down” a provision refers to a legal
interpretation approach where a court, while examining the 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 the idea that courts should make every effort
to preserve the validity of legislation and should only declare a law
invalid as a last resort.
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94. When a court encounters a provision that, if interpreted according
to its plain and literal meaning, might lead to constitutional or legal
issues, the court may opt to read down the provision. Reading down
involves construing the language of the provision in a manner that
limits its scope or application, making it consistent with constitutional
or legal principles.
95. The rationale behind the principle of reading down is to avoid striking
down an entire legislation. Courts generally prefer to preserve the
intent of the legislature and the overall validity of a law by adopting
an interpretation that addresses the specific constitutional concerns
without invalidating the entire statute.
96. It is a judicial tool used to salvage the constitutionality of a statute
by giving a provision a narrowed or limited interpretation, thereby
mitigating potential conflicts with constitutional or legal principles.
97. In B.R. Enterprises v. State of U.P. & Ors. reported in (1999) 9
SCC 700, this Court observed that the principles such as “Reading
Down” emerge from the concern of the courts towards salvaging a
legislation to ensure that its intended objectives are achieved. The
relevant observations read as under: -
“81. … It is also well settled that first attempt should be
made by the courts to uphold the charged provision and
not to invalidate it merely because one of the possible
interpretations leads to such a result, howsoever attractive it
may be. Thus, where there are two possible interpretations,
one invalidating the law and the other upholding, the
latter should be adopted. For this, the courts have been
endeavouring, sometimes to give restrictive or expansive
meaning keeping in view the nature of legislation, maybe
beneficial, penal or fiscal etc. Cumulatively it is to subserve
the object of the legislation. Old golden rule is of respecting
the wisdom of legislature that they are aware of the law and
would never have intended for an invalid legislation. This
also keeps courts within their track and checks individual
zeal of going wayward. Yet in spite of this, if the impugned
legislation cannot be saved the courts shall not hesitate
to strike it down. Similarly, for upholding any provision, if
it could be saved by reading it down, it should be done,
unless plain words are so clear to be in defiance of the
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Constitution. These interpretations spring out because of
concern of the courts to salvage a legislation to achieve its
objective and not to let it fall merely because of a possible
ingenious interpretation. The words are not static but
dynamic. This infuses fertility in the field of interpretation.
This equally helps to save an Act but also the cause of
attack on the Act. Here the courts have to play a cautious
role of weeding out the wild from the crop, of course,
without infringing the Constitution. For doing this, the
courts have taken help from the Preamble, Objects, the
scheme of the Act, its historical background, the purpose
for enacting such a provision, the mischief, if any which
existed, which is sought to be eliminated. …”
(Emphasis supplied)
98. A similar view was reiterated by this Court in its decision in Calcutta
Gujarati Education Society & Anr. v. Calcutta Municipal Corpn.
& Ors. reported in (2003) 10 SCC 533, wherein this Court observed
that the rule of “Reading Down” is only for the limited purpose of
making a provision workable so as to fulfil the purpose and object
of the statute. The relevant observations read as under: -
“35. The rule of “reading down” a provision of law is now
well recognised. It is a rule of harmonious construction in
a different name. It is resorted to smoothen the crudities
or ironing out the creases found in a statute to make it
workable. In the garb of “reading down”, however, it is not
open to read words and expressions not found in it and
thus venture into a kind of judicial legislation. The rule
of reading down is to be used for the limited purpose of
making a particular provision workable and to bring it in
harmony with other provisions of the statute. It is to be
used keeping in view the scheme of the statute and to
fulfil its purposes. …”
(Emphasis supplied)
99. Thus, the principle of ‘Reading Down” a provision emanates from
a very well settled canon of law, that is, the courts while examining
the validity of a particular statute should always endeavour towards
upholding its validity, and striking down a legislation should always
be the last resort. “Reading Down” a provision is one of the many
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methods, the court may turn to when it finds that a particular provision
if for its plain meaning cannot be saved from invalidation and so by
restricting or reading it down, the court makes it workable so as to
salvage and save the provision from invalidation. Rule of “Reading
Down” is only for the limited purpose of making a provision workable
and its objective achievable.
100. The High Court in its Impugned Order resorted to reading down Rule
9(5) of the SARFAESI Rules not because its plain meaning would
result in the provision being rendered invalid or unworkable or the
statute’s objective being defeated, but because it would result in the
same harsh consequence of forfeiture of the entire earnest-money
deposit irrespective of the extent of default in payment of balance
amount.
101. However, harshness of a provision is no reason to read down the
same, if its plain meaning is unambiguous and perfectly valid. A
law/rule should be beneficial in the sense that it should suppress
the mischief and advance the remedy. The harsh consequence of
forfeiture of the entire earnest-money deposit has been consciously
incorporated by the legislature in Rule 9(5) of the SARFAESI Rules
so as to sub-serve the larger object of the SARFAESI Act of timely
resolving the bad debts of the country. The idea behind prescribing
such a harsh consequence is not illusory, it is to attach a legal
sanctity to an auction process once conducted under the SARFAESI
Act from ultimately getting concluded.
102. Any dilution of the forfeiture provided under Rule 9(5) of the SARFAESI
Rules would result in the entire auction process under the SARFAESI
Act being set at naught by mischievous auction purchaser(s) through
sham bids, thereby undermining the overall object of the SARFAESI
Act of promoting financial stability, reducing NPAs and fostering a
more efficient and streamlined mechanism for recovery of bad debts.
103. This Court in Mardia Chemical (supra) observed that the provisions
of the SARFAESI Act & SARFAESI Rules must be interpreted keeping
in mind the economic object which is sought to be achieved by the
legislature, the relevant observations read as under: -
“34. Some facts which need to be taken note of are
that the banks and the financial institutions have heavily
financed the petitioners and other industries. It is also a
fact that a large sum of amount remains unrecovered.
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Normal process of recovery of debts through courts is
lengthy and time taken is not suited for recovery of such
dues. For financial assistance rendered to the industries
by the financial institutions, financial liquidity is essential
failing which there is a blockade of large sums of amounts
creating circumstances which retard the economic progress
followed by a large number of other consequential ill effects.
Considering all these circumstances, the Recovery of Debts
Due to Banks and Financial Institutions Act was enacted
in 1993 but as the figures show it also did not bring the
desired results. Though it is submitted on behalf of the
petitioners that it so happened due to inaction on the part
of the Governments in creating Debts Recovery Tribunals
and appointing presiding officers, for a long time. Even
after leaving that margin, it is to be noted that things in
the spheres concerned are desired to move faster. In the
present day global economy it may be difficult to stick to
old and conventional methods of financing and recovery
of dues. Hence, in our view, it cannot be said that a step
taken towards securitisation of the debts and to evolve
means for faster recovery of NPAs was not called for or
that it was superimposition of undesired law since one
legislation was already operating in the field, namely, the
Recovery of Debts Due to Banks and Financial Institutions
Act. It is also to be noted that the idea has not erupted
abruptly to resort to such a legislation. It appears that a
thought was given to the problems and the Narasimham
Committee was constituted which recommended for
such a legislation keeping in view the changing times
and economic situation whereafter yet another Expert
Committee was constituted, then alone the impugned law
was enacted. Liquidity of finances and flow of money is
essential for any healthy and growth-oriented economy. But
certainly, what must be kept in mind is that the law should
not be in derogation of the rights which are guaranteed to
the people under the Constitution. The procedure should
also be fair, reasonable and valid, though it may vary
looking to the different situations needed to be tackled
and object sought to be achieved.”
(Emphasis supplied)
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104. Thus, the High Court committed an egregious error by proceeding
to read down Rule 9(5) of the SARFAESI Rules in the absence of
the said provision being otherwise invalid or unworkable in terms
of its plain and ordinary meaning without appreciating the purpose
and object of the said provision.

iii) Whether, the forfeiture of the entire earnest-money deposit
amounts to Unjust Enrichment?
105. The High Court whilst passing the impugned order thought fit to
reduce the extent of amount forfeited in view of the subsequent sale
of the Secured Asset by the appellant bank at much higher price
than the previous auction. This in the High Court’s opinion meant
that no loss had been caused to the appellant bank, as it had duly
recovered more than its dues from the subsequent sale and as such
was not entitled to forfeit the entire amount of deposit as doing so
would amount to unjust enrichment, which is not permissible by the
SARFAESI Act.
106. However, we are not in agreement with the aforesaid observations
of the High Court. When an auction fails and a fresh auction is
required to be conducted in respect of the Secured Asset, there
looms a degree of uncertainty as to the extent of bids that may be
received in the future auction or whether the fresh auction would
even be successful or not. More often than not, with the efflux of
time, the value of the Secured Asset erodes. In such a case it would
be preposterous to tie or limit the forfeiture under Rule 9(5) of the
SARFAESI Rules on an eventuality or a contingency of a subsequent
sale of the secured asset if any.
107. As regards whether, the forfeiture of the entire amount of deposit even
after having recovered the entire debt amounts to unjust enrichment
or not? It would be apposite to understand what is meant by ‘unjust
enrichment’.
108. In Sahakari Khand Udyog Mandal Ltd. v. Commissioner of Central
Excise & Customs reported in (2005) 3 SCC 738, the Court observed
that the doctrine of unjust enrichment is based on equity and refers
to the inequitable retention of a benefit. The relevant observations
are reproduced below: -
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“31. Stated simply, “unjust enrichment” means retention
of a benefit by a person that is unjust or inequitable.
“Unjust enrichment” occurs when a person retains money
or benefits which in justice, equity and good conscience,
belong to someone else.
32. The doctrine of “unjust enrichment”, therefore, is that
no person can be allowed to enrich inequitably at the
expense of another. A right of recovery under the doctrine
of “unjust enrichment” arises where retention of a benefit
is considered contrary to justice or against equity.
xxx xxx xxx
45. From the above discussion, it is clear that the doctrine
of “unjust enrichment” is based on equity and has been
accepted and applied in several cases. ...”
(Emphasis supplied)
109. Thus, from the aforesaid, it is clear that the concept of ‘Unjust
Enrichment’ is a by-product of the doctrine of equity and it is an
equally well settled cannon of law that equity always follows the law.
In other words, equity cannot supplant the law, equity has to follow
the law if the law is clear and unambiguous.
110. This Court in C. Natarajan (supra) had held that forfeiture of 25%
of the deposit does not constitute as an unjust enrichment with the
following relevant observations being reproduced below: -
“35. In the light of guidance provided by the above
decisions, what needs to be ascertained first is whether
the Bank received or derived any benefit or advantage
by forfeiture of 25% of the sale price. We do not think
that the Bank has been enriched, much less unjustly
enriched, by reason of the impugned forfeiture. Receipt
of 25% of the sale price by the Bank from the contesting
respondent was not the outcome of any private negotiation
or arrangement between them. It was pursuant to a public
auction, involving a process of offer and acceptance, and
it was in terms of statutory provisions contained in the
Rules, particularly rule 9(3), that money changed hands
for a definite purpose. Receipt of 25% of the sale price
does not constitute a benefit, a fortiori, retention thereof by
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forfeiture cannot be termed unjust or inequitable, so as to
attract the doctrine of unjust enrichment. The Bank, as a
secured creditor, is entitled in law to enforce the security
interest and in the process to initiate all such steps and
take all such measures for protection of public interest
by recovering the public money, lent to a borrower and
who has squandered it, in a manner authorized by law.
The contesting respondent participated in the auction
well and truly aware of the risk of having 25% of the sale
price forfeited in case of any default or failure on his part
to make payment of the balance amount of the sale price.
Question of the Bank being enriched by a forfeiture, which
is in the nature of a statutory penalty, does not and cannot
therefore arise in the circumstances.”
(Emphasis supplied)
111. The consequence of forfeiture of 25% of the deposit under Rule 9(5) of
the SARFAESI Rules is a legal consequence that has been statutorily
provided in the event of default in payment of the balance amount.
The consequence envisaged under Rule 9(5) follows irrespective
of whether a subsequent sale takes place at a higher price or not,
and this forfeiture is not subject to any recovery already made or to
the extent of the debt owed. In such cases, no extent of equity can
either substitute or dilute the statutory consequence of forfeiture of
25% of deposit under Rule 9(5) of the SARFAESI Rules.
112. This Court in National Spot Exchange Ltd. v. Anil Kohli, Resolution
Professional for Dunar Foods Ltd. reported in (2022) 11 SCC 761
after referring to a catena of its other judgments, had held that where
the law is clear the consequence thereof must follow. The High Court
has no option but to implement the law. The relevant observations
made in it are being reproduced below: -
“15.1. In Mishri Lal [BSNL v. Mishri Lal, (2011) 14 SCC 739 :
(2014) 1 SCC (L&S) 387], it is observed that the law prevails
over equity if there is a conflict. It is observed further that equity
can only supplement the law and not supplant it.
15.2. In Raghunath Rai Bareja [Raghunath Rai Bareja v. Punjab
National Bank, (2007) 2 SCC 230], in paras 30 to 37, this Court
observed and held as under : (SCC pp. 242-43)
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“30. Thus, in Madamanchi Ramappa v. Muthaluru Bojjappa
[AIR 1963 SC 1633] (vide para 12) this Court observed:
(AIR p. 1637)
‘12. … [W]hat is administered in Courts is justice
according to law, and considerations of fair play and
equity however important they may be, must yield to
clear and express provisions of the law.’
31. In Council for Indian School Certificate Examination
v. Isha Mittal [(2000) 7 SCC 521] (vide para 4) this Court
observed: (SCC p. 522)
‘4. … Considerations of equity cannot prevail and do
not permit a High Court to pass an order contrary
to the law.’
32. Similarly, in P.M. Latha v. State of Kerala [(2003) 3
SCC 541 : 2003 SCC (L&S) 339] (vide para 13) this Court
observed: (SCC p. 546)
‘13. Equity and law are twin brothers and law should
be applied and interpreted equitably but equity cannot
override written or settled law.’
33. In Laxminarayan R. Bhattad v. State of Maharashtra
[(2003) 5 SCC 413] (vide para 73) this Court observed:
(SCC p. 436)
‘73. It is now well settled that when there is a conflict
between law and equity the former shall prevail.’
34. Similarly, in Nasiruddin v. Sita Ram Agarwal [(2003) 2
SCC 577] (vide para 35) this Court observed: (SCC p. 588)
‘35. In a case where the statutory provision is plain
and unambiguous, the court shall not interpret the
same in a different manner, only because of harsh
consequences arising therefrom.’
35. Similarly, in E. Palanisamy v. Palanisamy [(2003) 1
SCC 123] (vide para 5) this Court observed: (SCC p. 127)
‘5. Equitable considerations have no place where the
statute contained express provisions.’
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36. In India House v. Kishan N. Lalwani [(2003) 9 SCC
393] (vide para 7) this Court held that: (SCC p. 398)
‘7. … The period of limitation statutorily prescribed
has to be strictly adhered to and cannot be relaxed
or departed from for equitable considerations.’…”
113. Thus, the High Court erred in law by holding that forfeiture of the
entire deposit under Rule 9 sub-rule (5) of the SARFAESI Rules by
the appellant bank after having already recovered its dues from the
subsequent sale amounts to unjust enrichment.

iv) Whether Any Exceptional Circumstances exist to set aside
the forfeiture of the earnest money deposit?
114. The last aspect which remains to be determined is whether any
exceptional circumstances exist to set aside the forfeiture of the
respondent’s earnest money deposit?
115. This Court in its decision in Alisha Khan v. Indian Bank (Allahabad
Bank) & Ors. reported in 2021 SCC OnLine SC 3340 had directed
the refund of the earnest-money deposit after forfeiture to the
successful auction purchaser who was unable to pay the balance
amount on account of the Pandemic. The relevant observations are
being reproduced below:
“3. Having gone through the impugned judgment and
orders passed by the High Court, we are of the opinion
that the High Court ought to have allowed the refund
of the amount deposited being 25% of the auction sale
consideration. Considering the fact that though initially the
appellant deposited 25% of the auction sale consideration,
however, subsequently she could not deposit balance
75% due to COVID-19 pandemic. It is required to be
noted that subsequently the fresh auction has taken place
and the property has been sold. It is not the case of the
respondents that in the subsequent sale, lesser amount
is received. Thus, as such, there is no loss caused to the
respondents.
4. Considering the aforesaid facts and circumstances, we
allow these appeals and set aside the order of forfeiture
of 25% of the amount of auction sale consideration and
direct the respondent Bank to refund/return the amount
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earlier deposited by the appellant, deposited as the part
auction sale consideration (minus 50,000/- towards the
expenditure which were required to be incurred by the
respondent Bank for conducting the fresh auction) within
a period of four weeks from today.”
116. In C. Natarajan (supra), this Court while affirming the decision of
Alisha Khan (supra) observed that after the earnest-money deposit
is forfeited, the courts should ordinarily refrain from interfering unless
the existence of very rare and exceptional circumstances are shown.
The relevant observations read as under: -
“13. ... If, however, circumstances are shown to exist where
a bidder is faced with such a grave disability that he has
no other option but to seek extension of time on genuine
grounds so as not to exceed the stipulated period of ninety
days and the prayer is rejected without due consideration
of all facts and circumstances, refusal of the prayer for
extension could afford a ground for a judicial review of the
decision-making process on valid ground(s). One such
exceptional circumstance led to the decision in Alisha
Khan v. Indian Bank (Allahabad Bank) [2021 SCC OnLine
SC 3340], where this Court intervened and granted relief
because, due to COVID complications, the appellant had
failed to pay the balance amount.
xxx xxx xxx
24. The up-shot of the aforesaid discussion is that whenever
a challenge is laid to an order of forfeiture made by an
authorized officer under sub-rule (5) of rule 9 of the Rules
by a bidder, who has failed to deposit the entire sale
price within ninety days, the tribunals/courts ought to be
extremely reluctant to interfere unless, of course, a very
exceptional case for interference is set up. What would
constitute a very exceptional case, however, must be
determined by the tribunals/courts on the facts of each
case and by recording cogent reasons for the conclusion
reached. Insofar as challenge to an order of forfeiture that
is made upon rejection of an application for extension of
time prior to expiry of ninety days and within the stipulated
period is concerned, the scrutiny could be a bit more
intrusive for ascertaining whether any patent arbitrariness
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or unreasonableness in the decision-making process
has had the effect of vitiating the order under challenge.
However, in course of such scrutiny, the tribunals/courts
must be careful and cautious and direct their attention
to examine each case in some depth to locate whether
there is likelihood of any hidden interest of the bidder to
stall the sale to benefit the defaulting borrower and must,
as of necessity, weed out claims of bidders who instead
of genuine interest to participate in the auctions do so
to rig prices with an agenda to withdraw from the fray
post conclusion of the bidding process. In course of such
determination, the tribunals/courts ought not to be swayed
only by supervening events like a subsequent sale at a
higher price or at the same price offered by the defaulting
bidder or that the secured creditor has not in the bargain
suffered any loss or by sentiments and should stay at a
distance since extending sympathy, grace or compassion
are outside the scope of the relevant legislation. In any
event, the underlying principle of least intervention by
tribunals/courts and the overarching objective of the
SARFAESI Act duly complimented by the Rules, which are
geared towards efficient and speedy recovery of debts,
together with the interpretation of the relevant laws by this
Court should not be lost sight of. Losing sight thereof may
not be in the larger interest of the nation and susceptible
to interference.”
(Emphasis supplied)
117. Thus, this Court held that where extraneous conditions exist that
might have led to the inability of the successful auction purchaser
despite best efforts from depositing the balance amount to no fault
of its own, in such cases the earnest-money deposited by such
innocent successful auction purchaser could certainly be asked to
be refunded.
118. In the case at hand, it is the respondent’s case that he was unable to
make the balance payment owing to the advent of the demonetisation.
The same led to a delay in raising the necessary finance. It has been
pleaded by the respondent that the appellant bank failed to provide
certain documents to him in time as a result of which he was not
able to secure a term loan.
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119. However, the aforesaid by no stretch can be said to be an
exceptional circumstance warranting judicial interference. We say
so because demonetization had occurred much before the e-auction
was conducted by the appellant bank. As regards the requisition
of documents, the sale was confirmed on 07.12.2016, and the
respondent first requested for the documents only on 20.12.2016,
and the said documents were provided to him by the appellant within
a month’s time i.e., on 21.01.2017. It may also not be out of place to
mention that the respondent was granted an extension of 90-days’
time period to make the balance payment, and was specifically
reminded that no further extension would be granted, in-spite of this
the respondent failed to make the balance payment.
120. The e-auction notice inviting bids along with the correspondence
between the appellant bank and the respondent are unambiguous
and clearly spelt out the consequences of not paying the balance
amount within the specified period.
121. Thus, what could be said is that the respondent being aware of his
financial capacity, willingly participated in the e-auction and offered
his bid fully knowing the reserve price of the Secured Asset and the
consequences of its failure in depositing the balance amount.
F. CONCLUSION
122. For all the foregoing reasons, we have reached to the conclusion
that the High Court committed an egregious error in passing the
impugned judgment and order. We are left with no other option but
to set aside the impugned judgment and order passed by the High
Court.
123. In the result, the appeals filed by the bank succeed and are hereby
allowed. The impugned judgment and order passed by the High
Court dated 27.10.2021 is hereby set aside. As a result, the SA No.
143 of 2018 filed by the respondent before the DRT-II also stands
dismissed.
124. The parties shall bear their own costs.
125. Pending application(s), if any, also stand disposed of.

Headnotes prepared by: Ankit Gyan Result of the case:
Appeals disposed of.