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The Authorised Officer, Central Bank of India vs. Shanmugavelu

Not available · 2024 INSC 80Decided 2 Feb 2024
Not available
Chief Justice Dr. Dhananjaya Y. Chandrachud · Justice J.B. Pardiwala · Justice Manoj Misra

Background

Central Bank of India had financed a business against a mortgaged property in Chennai. When the loan turned into a non-performing asset, the bank took possession of the property under the SARFAESI Act and put it up for e-auction. The respondent was declared the highest bidder at over Rs. 9.62 crore and paid the initial deposit, but failed to pay the balance sale price within the stipulated 90 days. The bank forfeited his entire earnest money deposit under the SARFAESI Rules. The Madras High Court held that the bank could only forfeit an amount equal to its actual loss, not the whole deposit, and the bank appealed to the Supreme Court.

Decision Breakdown

The Supreme Court set aside the High Court's judgment and restored the bank's forfeiture of the entire deposit. It held that the forfeiture provisions under the SARFAESI Rules are a form of pre-estimated/liquidated compensation (akin to "earnest money" principles), not a penalty requiring proof of actual loss under Sections 73-74 of the Contract Act, and that a defaulting auction-purchaser who knowingly took the risk of the e-auction cannot later invoke equity to recover the money. The Court clarified that courts/tribunals should be very reluctant to interfere with an authorised officer's forfeiture order unless an exceptional case is made out, and laid down the applicable legal test for when such interference is warranted.

Lesson Learnt

If you bid in a bank e-auction and are declared the highest bidder, you must be certain of your financial capacity to pay the full balance within the deadline. Courts will not ordinarily protect a defaulting bidder's earnest money merely because forfeiting the whole amount seems harsh compared to the bank's actual loss.

Official source (sci.gov.in)View Judgment (PDF)

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