The Supreme Court upheld the validity of Rule 9(5) of SARFAESI Rules which enables forfeiture of earnest-money deposit by the secured creditor.

The Court held that the Madras High Court erred in law by holding that forfeiture of the entire deposit under Rule 9 by the bank after having already recovered its dues from the subsequent sale amounts to unjust enrichment. It also held that Section(s) 73 and 74 of the Indian Contract 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.

The bench said that if a provision's plain meaning is unambiguous and valid, its harshness is no reason to read it down. It was also stressed that the Courts must always endeavour to uphold the validity of a legislation, and striking it down should always be the last resort.

In that context, the Bench of Chief Justice Dr DY Chandrachud, Justice JB Pardiwala and Justice Manoj Misra observed that, "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 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."

In that context, it was further observed that, "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."

Senior Counsel Dhruv Mehta appeared for the appellants, while Senior Counsel S Muralidhar appeared for the respondent.

In this case, the appeals arose from a Nationalized Bank's challenge against a Madras High Court judgment favouring a respondent in a case involving the forfeiture of earnest money. The bank sanctioned credit facilities to 'Best and Crompton Engineering Projects,' securing it against a parcel of land in Chennai. After default, the bank, under the SARFAESI Act, seized the property for auction. The respondent emerged as the highest bidder at Rs. 12.27 crore. The bank confirmed the sale, but the respondent failed to pay the balance within the stipulated time, leading to forfeiture. Despite legal proceedings, the property was re-auctioned at a higher price.

The Debt Recovery Tribunal initially ordered the return of earnest money, and the Debt Recovery Appellate Tribunal increased the forfeiture. The High Court declared that Rule 9(5) of the SARFAESI Rules is essentially an enabling provision allowing forfeiture but cannot override the fundamental principles of Section 73 of the Indian Contract Act. It observed that Rule 9(5) of the SARFAESI Rules should be subordinated to or modified by Section 73 of the Indian Contract Act. The bank appealed to the Supreme Court, challenging the High Court's decision.

The Apex Court noted that 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.

With that background, it was observed that, "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."

In light of the same, it was held that 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.


Appellants: Senior Counsel Dhruv Mehta

Respondent: Senior Counsel S Muralidhar

Cause Title: The Authorised Officer, Central Bank of India vs Shanmugavelu

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